Charity trustees in breach of duty
4 January 2017
On 21 December 2016 the Charity Commission published a report on its inquiry into Hospice Aid UK, after concerns were raised by members of the public and other charities regarding the charity’s fundraising practices. The findings included that the former charity trustees had breached their duties and not acted in the charity’s best interests by entering into a fundraising agreement on unfavourable and onerous terms.
After an initial consideration of the complaints made against the charity, the Commission found sufficient issues of concern to open a statutory inquiry. The scope of the inquiry was to “examine serious regulatory concerns over the governance and management of the charity and how the trustees were discharging their legal duties”. In particular, there were serious regulatory concerns about a fundraising agreement entered into by the charity, and the low proportion of charitable funds being applied towards the charity’s purposes.
The Commission found that from 1 April 2008 until 31 March 2012, the charity applied an average of only 15.6% of its gross income on grants to hospices. By way of example, in 2011 the charity raised £243,996 from public collections, but only £35,605 was granted to hospices. The rest of the money raised – representing 84.4% of the public donations – was spent on the administrative costs associated with the fundraising activities. In 2012 the charity suffered a serious drop in donations and the Commission’s view was that a “significant contributory factor to the dramatic 46% fall in the charity’s income recorded for 2011-12 was the reputational damage suffered because of the consistently low proportion of income applied directly in furtherance of the charity’s purposes over a sustained period”.
As a result of the deteriorating financial position, in 2012 Hospice Aid UK entered into an agreement with a specialist direct marketing and fundraising agency for direct mailing services. Direct mail fundraising is where charities send mailings to the public to try to generate donations. Mailings are sent to both existing donors (known as ‘warm’ mailings, or donor renewal mail) and to people who have not previously donated to the charity (known as ‘cold’ mailings, or donor acquisition mail). The Charity Commission comments that “direct mailing programmes require considerable initial investment and resources in order to work successfully”. This type of fundraising activity is therefore unlikely to result in financial returns in the short term.
Upon investigating the terms of the agreement and the circumstances surrounding the decision of the trustees to enter into the agreement, the Commission found that there was no evidence that the trustees had given adequate consideration to the risks, issues and potential liabilities arising from the terms of the agreement and they had also failed to consider a range of reasonable alternative avenues to address the financial position of the charity. In addition, the Commission found that there had been a breach of law in that the agreement did not comply with legal requirements for professional fundraising agreements.
The inquiry also found that the trustees had failed to take adequate independent professional advice and that the terms of the agreement were so unfavourable that “it is difficult to determine that entering into the agreement was in the charity’s best interests”. To make matters worse, because the fundraising agreement did not provide any immediate income, the charity also entered into formal loan agreements with the fundraising agency in order to bolster the charity’s income during the first two years, and it did so on terms that the loans were repayable on demand.
In conclusion, the inquiry “formed the view, based on the evidence gathered, that the terms of the original agreement and the terms on which the loans/advances had been made to the charity raised serious and continuing risks to the charity’s viability and public trust and confidence in the charity”. The Commission therefore found that the former trustees (those who had been in office when the agreement was entered into) had acted in breach of their duties and responsibilities as charity trustees. As a result, the inquiry report confirms that “the Commission will be considering, in light of the findings and evidence, the fitness of the former trustees to be charity trustees”. The Commission also exercised its statutory powers to require the current trustees to undertake a number of actions under both a ‘governance and management’ action plan and a ‘fundraising’ action plan.
If you are a charity trustee and your charity is engaged in any form of fundraising activity, it is important to remember that you are responsible for making decisions in the best interests of your charity, and you need to ensure that you maintain adequate oversight of the financial position and performance of any ongoing fundraising activities. You must also ensure that any fundraising agreements that the charity enters into are not unduly onerous and that they fully comply with all legal requirements. This is essential not only to protect you personally, but also to protect your charity’s reputation.
The Commission reminds trustees of its alert issued on 8 November 2016 about working with third-party fundraisers and that “where a charity is working with a third party to raise funds, compliance with trustee duties means having effective systems in place to keep control of the fundraising, and taking steps to properly protect the charity’s interests, assets and reputation. It also means compliance with relevant legal rules, including those designed to make third party fundraising arrangements transparent to donors, supporters and the public”. See also our article on the new fundraising rules for charities for an overview of the recent changes in law affecting fundraising agreements.
We offer regular training on the legal duties and responsibilities of trustees – visit the training area of our website to find out more and to sign up for one of our training workshops. We also have a team of specialist charity lawyers who can advise you on your fundraising activities and compliance with legal requirements. We offer cost effective, specialist services, including fixed fee contract reviews to provide you with advice on key risks and issues before your charity enters into a contract. Please get in touch with Liz Brownsell or another member of our Charities Team for more information about this or any other of our services for charities.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at January 2017.