On 12 April 2016 the Charity Commission opened a Statutory Inquiry into the Charity.
The inquiry established that a lack of financial oversight by the trustees had caused the Charity to experience severe financial problems. Of additional concern was the inquiry’s finding that the trustees had initially been slow to engage with its lenders when it was clear that the Charity was in financial difficulties and unable to meet all of its financial obligations to them. Whilst the school was transferred to GNSA during the inquiry, thus protecting the interests of the Charity’s beneficiaries, the assets had been placed at risk by the actions of the trustees in taking out loans that it was unable to repay and failing to tackle this at the earliest opportunity.
The broader issues arising from the Commission’s assessment of the issues have wider applicability and interest to the charity sector.
Trustees of charities are under a legal duty as charity trustees to submit annual updates, returns, annual reports and accounting documents to the Commission as the regulator of charities depending upon the level of the charity’s income. Failure to do so is a criminal offence. The Commission also regards it as mismanagement and misconduct in the administration of the charity.
Every charity’s accounting records must be sufficient to show and explain its transactions and disclose with reasonable accuracy its financial position. The report and accounts, when read together, should help users of the information to understand what the charity is set up to do, the resources available to it, how these resources have been used and what has been achieved as a result of its activities.
All charities must have an effective trustee body to control and administer the charity in accordance with charity law and Commission guidance. Public trust and confidence depend on the conduct of trustees and how they safeguard charity funds and undertake the objects and activities of the charity.
Trustees must be aware of and act in accordance with their legal duties. Trustees must actively understand the risks to their charity and make sure those risks are properly managed. Holding the position of trustee in name but failing to fulfil the legal duties and responsibilities of a trustee may amount to misconduct and mismanagement in the administration of a charity.
If a loan has been made to a charity, the charity commission would expect the charity to have some form of agreement in place to cover this arrangement. This should, as a minimum, set out the terms of the loan, when it is to be repaid and any interest to be added. This helps to protect charitable funds from potential abuse. As such, any failure by the trustees to take this action potentially puts charitable funds at risk and so would be a breach of a trustee’s duty to safeguard the charity’s assets.
Charity trustees have a general duty to manage their charity’s resources responsibly, reasonably and honestly. This means not exposing their charity’s assets, beneficiaries or reputation to undue risk. It is about exercising sound judgement and then taking decisions that a reasonable body of trustees would do. Trustees have a legal duty to protect charity property and funds with the necessary care and properly assess risk. Trustees must actively understand the risks to their charity and make sure those risks are properly managed.
Making decisions is one of the most important parts of the trustees’ role. Trustees can be confident about decision making if they understand their role and responsibilities, know how to make decisions effectively, are ready to be accountable to people with an interest in their charity, and follow the 7 principles that the courts have developed for reviewing decisions made by trustees. Trustees must:
- Act within their powers
- Act in good faith and only in the interests of the charity
- Make sure they are sufficiently informed
- Take account of all relevant factors
- Ignore any irrelevant factors
- Manage conflicts of interest
- Make decisions that are within the range of decisions that a reasonable trustee body could make
It is important that charity trustees apply these 7 principles when making significant or strategic decisions, such as those affecting the charity’s beneficiaries, assets or future direction. Trustees must take decisions in a way that meets the requirements of charity law and their governing documents. This includes recording decisions properly, so there is no doubt about what was decided and why. Written records should be sufficient to allow someone to understand the issues involved, decisions made and the reasons for them, particularly for important or controversial decisions.
The Commission recognises that it is inevitable that conflicts of interest will occur. The issue is not the integrity of the trustee concerned, but the management of any potential to profit from a person’s position as a trustee, or for a trustee to be influenced by conflicting loyalties. Even the appearance of a conflict of interest can damage the public’s trust and confidence in the charity, so conflicts need to be managed carefully.
For example, if you are a trustee, you would have a conflict of interest if the charity is thinking of making a decision that would mean your duty to your charity competes with a duty or loyalty you have to another organisation or person. Trustees have a legal duty to act only in the best interests of their charity and must prevent any conflict of interest from affecting the decision making.
The full charity inquiry can be accessed here.
Local charities may want to review this inquiry to check that their procedures are complying with charity commission guidance and if not consider how to arise the issue.