OSCR report issued following investigation of benefits to employee on wind-up

On 15 January 2013, OSCR published a report following its investigation into the winding up of a regeneration charity, Glasgow East Regeneration Agency Limited.

OSCR's investigation concerned the Chief Executive's severance package in light of the charity's activities ceasing and, in particular, a discretionary pension augmentation of 6 and 2/3 years’ service, approved by the Trustees, amounting to £232,708. 

OSCR concluded that the actions of the Trustees breached Trustee Duties under section 66 of the Charities and Trustee Investment (Scotland) Act 2005.  It highlighted:

  • The actions resulted in a very considerable sum of the charity's assets being applied to the private benefit of a former employee and not to further the charity's purposes;
  • The Trustees did not first obtain external professional advice (though they did carry out a comparison against practice in the public sector). 

OSCR noted learning points for charities:

  • Where charity trustees are also elected members of a local authority, they should be aware that a range of comparators ought to be obtained relevant to conditions of service, pensions and/or redundancy;
  • It is best practice to seek professional advice from an external source such as the Third Sector Interface or other specialist in charity law.

In relation to charity trustees who had not been actively involved in the decision, OSCR's report also reinforced that charity trustees are collectively accountable for their organisation and decisions taken in running it.

Separately, OSCR accepted that the investigation has raised issues for how it deals with charity wind-up consent procedures, both in terms of the information that OSCR seeks and the subsequent checks it carries out. 

In addition to the above points, there are many other issues that charities contemplating winding up (or  are generally trying to manage costs in these tough times) should think carefully about, including:

  • Monitoring financial performance and reserves so that steps are taken at an appropriate time to wind-up.
  • Taking "every step" to minimise loss to creditors in the event that a charitable company becomes insolvent. Broadly speaking, personal liability can arise where the trustees of charitable companies fail to act early enough to protect creditors from suffering greater losses than might otherwise have been the case. 
  • Considering employment law implications, including collective redundancy or, if assets are transferring to another body, TUPE transfer consultation obligations.
  • Considering the potentially substantial pension cost implications for a charity when providing "final salary" pension benefits. These costs could include redundancy, voluntary severance or discretionary benefits, as well as addressing past service deficit liabilities.