Members of charitable companies owe fiduciary duties

In a landmark decision the Supreme Court has ruled that the members of a charitable company owe fiduciary duties to the charitable purposes of the charity. This decision will be of relevance to all charitable companies, including some independent schools and all academy trusts. It will be particularly relevant to academy trusts, given the increasing regulatory emphasis on the role of members in the governance of academy trusts.

The ruling is the conclusion of a long and complex series of cases, which began in 2017 when the High Court ruled that members of charitable companies owe fiduciary duties to the charity. The background and facts of the original case are complex and summarised in our previous article. The circumstances giving rise to the case were extremely unusual, and it is unlikely that any of the parties involved anticipated at the outset that the case would give rise to such a significant and far-reaching Supreme Court judgment.

The case revolves around a decision of the trustees of The Children’s Investment Fund Foundation (CIFF) to grant $360m to Big Win Philanthropy (BWP) in exchange for the resignation of a trustee. There were only three trustees of CIFF (who were also the only members), and two of them were conflicted in respect of the decision.

In 2018, the Court of Appeal agreed on appeal that members of charitable companies owe fiduciary duties to the charity, but cast some doubt as to the extent to which this applies, stating that there may be “scope for argument as to whether it is less reasonable to expect those belonging to mass-membership charities to act exclusively in the charities’ interests”. The Court of Appeal also declined to rule on the precise scope of the fiduciary duties owed, leaving the sector very unclear as to how to apply the decision in practice.

The Supreme Court ruling has now conclusively ruled that members of charitable companies do owe fiduciary duties. So, what does this mean in practice?

Who are the members of a charitable company?

The members of a charitable company have a role that is equivalent to the role of shareholders in trading companies. They are stakeholders in the charitable company and are the persons to whom the directors are accountable. They have important constitutional rights set out in the articles of association. In particular, they are entitled to attend and vote at general meetings (including, if relevant, the AGM each year) and it is necessary to pass a special resolution of the members in order to make any amendments to the articles of association of a charitable company.

It is important not to confuse this with informal members of charities – for example, individuals who pay fees for services, but have no right to attend the AGM and vote on any business relating to the governance and administration of the charity. In this context, when we refer to “members” we mean the company law members of the charitable company only.

What is a fiduciary?

A fiduciary is a person who is subject to a duty of ‘single-minded loyalty’ to a third party beneficiary, meaning that they must exercise their powers for the benefit of another and cannot at the same time act for themselves. In Bristol and West Building Society v Mothew [1998] Ch 1, 18 Millett LJ described the defining characteristics of a fiduciary as follows:

“A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal.”

What are the fiduciary duties of members?

There are four key fiduciary duties:

• The no-conflict principle: not to be in a position where their own interests conflict (or might conflict) with the beneficiary’s.
• The no-profit principle: not to profit from their position at the beneficiary’s expense.
• Duty of undivided loyalty: not to place themselves in a position where their duties to the beneficiary conflict with any other loyalties.
• Confidentiality: only to use information obtained in confidence from their position for the benefit of the beneficiary.

However, in her leading judgment, Lady Arden commented that “the duties of a member can be fiduciary even if the memorandum and articles of association impose restrictions which mean that he cannot discharge all the obligations which a fiduciary would have under the general law”.

She also suggested that members may resolve to amend the articles of association so as to diminish their fiduciary duties “so long as the duties of a fiduciary nature are not reduced below the ‘irreducible core’ of obligations”, which is the duty to perform their role honestly and in good faith for the benefit of the charitable purposes.

Importantly, the duty is subjective, meaning that “it is for the member to reach a conclusion on that matter in good faith provided that he does not do so improperly or unreasonably, the court will not seek to intervene or to hold him liable if his view turns out to have been wrong in fact”.

To whom is a member’s fiduciary duty owed?

The Supreme Court ruling is that members of charitable companies owe their duties to the charitable purposes (or objects) of the charity. This is consistent with the statutory duty of trustees under the Companies Act, which is to promote the success of the company for the achievement of its charitable purposes.

What about mass-membership charitable companies?

The decision of the Supreme Court applies “to all other members of charitable guarantee companies which, like CIFF, contain restrictions which in general prevent members receiving profits from the company”. Therefore the duty applies equally to mass-membership charitable companies.

What does this mean in practice?

Lady Arden’s statement that the “fiduciary duties take effect subject to the restrictions imposed by the nature of the corporate form which constitutes the charity” has important implications for how to apply this in practice.

Firstly, it means that it is necessary to consider how to apply the duties on a case by case basis, taking into account the terms of the memorandum and articles of association and the particular circumstances giving rise to the need for a members’ decision. It might also be necessary, in respect of certain transactions, to consider making amendments to the articles or seeking an order from the Charity Commission.

Secondly, the fiduciary nature of the relationship does not entitle members to access any more information than that to which they are entitled as a matter of company law. So, it is necessary to take into account how much information is available to the members and the extent to which this limits their duties in respect of any given decision.

Finally, the duty does not apply in all circumstances. For example, if a member pays a subscription fee in return for some benefit, and a resolution is proposed to the members relating to that benefit, it would be difficult to see why they should be obliged to exercise their vote with single-minded loyalty to the charitable purposes.

So, as Lady Arden stated: “The precise circumstances in which the member of a charitable company has fiduciary duties in relation to the charitable purposes and the content of those duties will have to be worked out when they arise.”

The content of this article is for general information only. If you have any concerns about the implications of this case for your charity, or you require advice on any aspect of your governance arrangements, please get in touch with Liz Brownsell on 01473 406383. Alternatively, please contact another member of Birketts’ Charities Team.