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Why charity trustees face unseen hazards

25 August 2017 by Jimmy Nicholls

Why charity trustees face unseen hazards - Read more

Potential disqualification for Kids Company directors shows charity trustees must be aware of their liabilities.

The secretary of state’s decision to bring disqualification proceedings against the former leaders of Kids Company is feeding hope that long-term governance concerns around charities that are also companies may attract deserved attention.

Nine former directors of the charity, who are also trustees, are facing possible bans from running or controlling companies for two-and-a-half to six years, following an investigation by the Insolvency Service.

Also targeted for possible disqualification is Camila Batmanghelidjh, the founder of the charity and former chief executive, who is accused by the government of being a ‘de facto director’, despite not sitting on the board.

The proceedings will be brought under the Companies Act and insolvency legislation, despite the fact that under the Charities (Protection and Social Investments) Act 2016 the Charities Commission has enhanced powers to disqualify trustees for mismanagement rather than simply for a breach of trust.

“In short, you can be held directly accountable where financial failings by the organisation are exposed”

Stephen Bubb, the chief executive of Charity Futures, which advocates for charity governance, told Governance and Compliance: ‘It does serve as a welcome warning to trustees of charities that they have responsibilities and they need to take the job seriously.

‘If you take on a charity role, you have to read the [board] papers, turn up to meetings and so on. It is right that people realise they have important responsibilities.’

Similar liability

The Kids Company case flags the fact that charity trustees can face similar liabilities to those of company directors.

Louise Hebborn, partner and commercial solicitor at law firm Stephensons, said: ‘The risks of becoming a voluntary director of a charitable organisation that is also a company limited by guarantee are very much the same as becoming a director of a PLC or limited company.

‘In short, you can be held directly accountable where financial failings by the organisation are exposed.

‘And should investigation deem your conduct as a director to have been “unfit”, you could be disqualified from holding the position of director for up to 15 years. This would also affect any directorships you currently hold outside the organisation under investigation.’

Disqualification as a director will also disqualify a person from acting in similar roles, such as a charity or academy trustee or as a non-executive director of a NHS Foundation Trust.

Personal financial risk

Other commentators noted that in the case of insolvency, charity directors can face a personal financial liability, even if they are not being paid for their work.

‘Many trustees assume that if they are not being remunerated they are immune, which is not the case,’ said Ed Husband, the head of litigation and recovery at the law firm Veale Wasbrough Vizards.

‘It is also worth remembering that if a charitable company goes into an insolvency process and it has not been run properly by its trustees and management team, the liquidator or administrator can bring personal proceedings against them seeking financial compensation.’

“Historically insolvency practitioners have been reluctant to seek financial compensation”

Husband added that difficulties relating to previous British governments’ public funding cuts had lent weight to such concerns. ‘We have seen a lot of situations where trustees have come to us concerned with the viability of their charity, but also concerned over their potential personal exposure,’ he said.

‘But historically insolvency practitioners have been reluctant to [seek financial compensation], not least because trustees are usually volunteers.’

According to Hebborn: ‘Where a company is insolvent and it continues to trade, the directors can become personally liable for the company’s debts as well as face disqualification in the most serious of instances after an investigation by the Insolvency Service.’

Discouraging charity

In the wake of the case, some are asking whether potential charity trustees will be reluctant to take up the role – particularly given the level of risk and liability for a traditionally unpaid position.

‘I would continue to expect an initial reluctance to get involved from charity trustees that understand the implications of being a charity trustee,’ said Eric Baijal, managing director of BBM Solicitors.

‘But if there are appropriate governance procedures in place and they are carrying out their duties as they should, they should not have anything to worry about.’

Some welcome the idea that legal fears might discourage a few people from becoming charity trustees. ‘If it is putting people off, it is putting off people who are not going to be good trustees anyway,’ said Bubb. He added that many who struggle to recruit lack good processes for finding suitable candidates.

Baijal added that the sector faces other problems concerning education about trustee duties, and many do not bother to take out insurance to protect against negligence.

‘We have a number of charities where the trustees have not been trained and do not know what their duties are, including where the charities are companies limited by guarantee,’ he said.

‘It ties into the amount of trustees generally that do not carry trustee insurance. You can often insure against your own negligence. Many trustees do not, but they should.’

ICSA advises trustees to check the terms of such cover to ensure it gives the protection expected.

Hidden directors

The government’s decision to bring the proceedings against Batmanghelidjh also highlights the risks of operating as a de facto or shadow director – acting as a director without sitting on the board.

Although the Kids Company founder was not a trustee or director when it collapsed, the Insolvency Service said in a statement: ‘The proceedings will allege that she acted as a de facto director and should therefore also be disqualified from running or controlling other companies.’

“The proceedings will allege that she acted as a de facto director and should therefore also be disqualified from running or controlling other companies”

Husband said: ‘As the Kids Company case reflects, it is possible for a trustee to face disqualification or personal liability, if he or she is acting as a director or if the other trustees act in accordance with that person’s directions or instructions.’

While directors are known publicly, shadow directors operate outside of the public sphere, according to BBM’s Baijal, who said: ‘They are somebody whose involvement is not known publicly.’

He added: ‘Again, they could find themselves in trouble.’

Do not panic

Despite some of the problems, Bubb did not advocate further regulation for charities. ‘I think there is enough regulation. I would not say the problem lies in lack of regulation,’ he said. ‘It is about the charities themselves out there being prepared to put enough support behind this.

‘I do not want government interfering in charities, frankly. The government should be providing enough underpinning and support.’

Husband also cautioned against an alarmist interpretation of the proceedings. ‘It is important to remember that proceedings against trustees are still rare and there are lots of things that charities and trustees can do to act appropriately, ensuring they are not affected by this sort of thing,’ he said.

‘There is some very clear guidance from the Charity Commission as to what charity trustees should and should not do, and professional advice should be taken at an early stage.’

Louise Thomson, head of policy, not-for-profit, at ICSA said: ‘This is a difficult subject. The duties relating to the trustees of charities and the directors of companies are similar, but different issues can arise where a charity is also a company. The board must ensure that they fully comply with both sets of duties.’

Jimmy Nicholls is deputy editor of Governance and Compliance

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