Background to trustee duties/management of a charity
Trustees must use charity funds and assets for the advancement of their charity’s purposes. This means ensuring that charity funds are used in accordance with the terms of the charity’s governing document, as well as any requirements from any contractual obligations.
In addition, trustees have a legal duty to act in the best interests of the charity when making decisions as a trustee.
Statutory inquiry: The Ashley Foundation
A statutory inquiry is a legal power held by the Charity Commission to investigate regulatory matters within a charity.
On 20 March 2020, the Charity Commission launched a statutory inquiry into The Ashley Foundation (the “Charity”). Registered in 1997, the Charity operates hostels and flats for homeless people.
Several issues were investigated during the statutory enquiry, including:
- agreements with third parties for the sale and leaseback of properties belonging to the Charity;
- misuse of charity funds; and
- conflicts of interest.
a) Sale and leaseback agreements
The Charity Commission found that the Charity sold three properties to company X for £4m. The same properties were then sold on the same day to company Y for £6.4m. Company Y then leased the properties to a third party (Z) which subsequently entered into management agreements with the Charity. Under the terms of the agreements the Charity was to manage the properties on behalf of company Z which was the registered provider of social housing.
The Commission found that the management agreements were onerous and exposed the Charity to potentially significant liabilities. The Charity did not own or lease the properties it managed on behalf of the registered provider. Nevertheless, the agreements required the Charity to bear all costs relating to the provision of accommodation and support, irrespective of whether the costs could be fully recovered from the rents charged to residents, and subsequently reimbursed via housing benefit. The agreements did not contain any provision for the Charity to be able to cancel or withdraw from them save for significant material events such as insolvency or dissolution of the Charity.
The trustees who sold the properties claimed that entering into the management agreements was a good business decision given the price achieved in selling the properties. In its decision, the Commission commented that whilst a Charity should be run professionally, with good financial management and governance, the decisions must also comply with the provisions of the Charities Act 2011 and operate for the public benefit. Charities are not a vehicle simply to generate profits, but rather are created to serve their beneficiaries.
The newly appointed trustee board was able to renegotiate the unfavourable terms of the agreements, re-purchase the properties and terminate the cumbersome agreements.
b) Misuse of the Charity funds
The inquiry found further concerns with how the Charity’s funds had been used, in particular:
- carrying out repairs to properties belonging to certain trustees as well as to properties owned by a company of which one trustee was a director and shareholder; and
- reimbursing a trustee who had purchased ‘luxurious items’ such as Apple products and a large flat screen tv and who had incurred travel and subsistence expenses which the Commission considered to be excessive and not in the best interest of the Charity.
Employees and trustees of a charity are only entitled to be reimbursed for reasonably and properly incurred expenses.
c) Conflicts of interest
Trustees have a duty to manage any conflict of interest which may be present or which may arise.
The Commission found that one of the trustees had received remuneration from a third party for his involvement in the property transaction. This was in breach of his duties as director – (the Charity was a company) neither to accept benefits from third parties as a result of his position, nor to accept benefits which are intended to induce a director to act in a certain way.
The Charity Commission found that there had been serious misconduct and/or mismanagement in the administration of the Charity.
In order to protect the Charity’s property, at the outset of the inquiry, the Commission exercised its statutory powers to prevent particular trustees from entering into any transactions on behalf of the Charity and ordering the Charity’s bank not to part with any assets it held on behalf of the Charity.
The Commission disqualified two trustees for 15 years and one for 10 years both from being a trustee and from holding a senior management function in any charity in England & Wales.
This case demonstrates the need for charity trustees to use their charity’s funds in furtherance of its charitable purposes in accordance with the governing document. Effective financial controls and procedures for dealing with conflicts of interests must be in place.
For further advice on this please contact a member of our Charities Team.