Unauthorised benefits and conflicts of interest in charities

Charity trustees repaid charity £650,000 of unauthorised payments: a case study on the importance of managing conflicts of interest.

A recent statutory inquiry by the Charity Commission into a grant-making charity, which resulted in three former trustees being required to repay a total of £650,000 to the charity, highlights the importance of ensuring that all charity trustees understand their governing documents and the law on conflicts of interest and ensure that they have appropriate procedures in place to enable conflicts to be identified and properly managed.

On 20 February 2018 the Charity Commission published a report setting out its decision in relation to a year-long statutory inquiry into a charitable company that fulfilled its objects by providing grants to various other charities. Grant-making charities are, as a result of their limited activities, generally at a lower risk of financial loss than operational charities, which fulfil their purposes by delivering services, and which tend to employ staff, own land and enter into a large number of contracts. However, regardless of the size and operations of a charity, its trustees are required to comply with the same legal duties and, as this inquiry shows, can be liable to repay losses suffered by the charity if they fail to do so.

The charity was the sole shareholder of a company that ran an entirely unrelated non-charitable business. Neither the charity nor the subsidiary are named in the report, so it is unclear whether the subsidiary was established by the charity to generate a regular income for the charity, or whether the shares were gifted to the charity by its founder or some other benefactor. However, the business appears to have generated reasonable profits, as three of the charity’s trustees were engaged to provide the subsidiary company with consultancy services, for which they received payments totalling £650,000 in a period of nine months.

Although it was the subsidiary company, and not the charity itself, that was engaging the trustees and paying them for their services, and notwithstanding that the subsidiary company considered that the payments were ‘market rate’, the payments effectively constituted unauthorised payments from the charity to three of its trustees.

The duties of charity trustees include the duty to act in accordance with the charity’s governing document and to avoid conflicts of interest unless they are authorised (in accordance with the charity’s governing document or by the Charity Commission or court). In addition, where a conflict gives rise to a personal benefit to a trustee (or a person connected to a trustee), that benefit may only be received if it is authorised by the charity’s governing document, the Charity Commission or the court. In this case, the governing document of charity did not authorise the payments in question. Payments by a wholly-owned subsidiary of a charity are effectively seen as payments by the charity, and if those payments are not authorised by the charity’s governing document, they cannot be made without the prior consent of the Charity Commission or court.

During the inquiry, the trustees informed the Commission that they “had a reasonable expectation that their advisors in relation to other aspects of the proposed transaction would include an analysis and advice on the Charity’s relationship with [the subsidiary company] and that the trustees honestly believed that [the subsidiary company] was sufficiently separate from the charity for the trustees (acting as consultants to [the subsidiary company]) to be legitimately paid for services provided by them”.

Despite the fact that this appears to have been an honest mistake, which arose (in part) because the trustees were not being advised by solicitors with any expertise in charity law, the three trustees were required to repay the £650,000 of unauthorised payments to the charity.

There is a strict rule that a trustee must account for any benefit received from the charity if that benefit was not properly authorised by the charity’s governing document or by the Commission or court. The inquiry report comments that in those circumstances, a trustee “must hand over to the charity any financial or other profit gained, and the other trustees when on notice of a breach have a responsibility to regularise the matter.” Additionally, the equitable relief principle cannot be applied if there is a strict prohibition against trustee benefits in the governing document (as was the case here).

This inquiry report provides a sage reminder for all charity trustees of the importance of complying with your governing documents and, in particular, of ensuring that all conflicts of interest are identified and appropriately managed. The outcome of this inquiry highlights the potentially significant personal consequences for trustees arising out of a breach of trust involving unauthorised benefits to trustees, even as a result of an honest mistake.

We would recommend that all charity trustees attend training to ensure that they fully understand their legal duties and responsibilities, and that charities consider adopting a formal conflict of interest policy to help them to properly manage any conflicts of interest and avoid the sorts of issues seen in this particular inquiry.

Birketts offers a rolling programme of Charity Trustee Induction and Refresher Training, delivered four times per year rotating around our four office locations. For details of upcoming training sessions and to book your place, please visit the Events section of our website.

This article is for information only and does not constitute legal advice. If you require any advice on the management of conflicts within your charity, please contact Liz Brownsell or another member of our Charities Team. Law covered as at March 2018.

This article is from the May 2018 issue of Essential Trustee, our newsletter for charity trustees and senior management. To download the latest issue, please visit the newsletter section of our website.

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