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Company Law

Q: Charities: director liabilities

Reading the recent reports regarding the Royal Opera House, I am anxious to know what liabilities would the directors of a charitable organisation face in the event of its liquidation?

A: If they have acted properly and responsibly without violating their legal obligations as directors and charity trustees, they will have no personal liability at all, but that obviously begs the question. A charity may be set up either as a trust, or an unincorporated association, or a company limited by guarantee. The commonest form for large charities is a company limited by guarantee, which does not have shares or shareholders and the liability of whose members is limited by a specified sum of money guaranteed by them, usually a nominal £1 each. For present purposes, I will assume we are concerned with a company limited by guarantee, which is registered as a charity with the Charity Commissioners of England and Wales.

Such a charitable organisation is subject to three separate regulatory regimes, namely those relating to trusts, to charities and to limited companies. Directors of companies which are registered charities are also treated in law as trustees, whether called by that name or not. The responsibilities of charity trustees are thus very considerable indeed, almost to the point of being awesome in scope, and their unenviable position is compounded by the fact that, with very few exceptions (such as lawyers and accountants who are entitled to charge for their professional services if the charity's constitution permits), they are not allowed to be paid for their services as trustees or derive any benefit from holding such office.

The trustees may be personally liable to the full extent of their personal financial resources if they commit any breach of trust or breach of any of their many statutory obligations. They are responsible for ensuring that there are proper financial controls in place and their responsibilities extend to a whole range of matters.

They may be personally responsible, like directors of any other limited company, if they allow the company to continue to carry on business when they know or should know that it is insolvent. Also, there are a number of statutory criminal offences relating to charity trustees, including matters arising out of neglect.

However, all charity trustees have the facility of being able to refer at any time to the Charity Commissioners for guidance on any matters relating to their responsibilities and the way in which their powers are to be exercised. Indeed, the Charity Commissioners positively encourage requests for guidance and publish a large number of booklets which are designed to give practical assistance to charity trustees on a wide variety of matters. The commissioners are empowered by statute to give advice and, provided such advice is given in response to full disclosure of relevant information on the matter concerned, trustees who act in good faith in accordance with that advice are protected by statute against allegations of breach of trust, which may be a great comfort to trustees who are faced with difficult problems, of the kind recently reported. On the other hand, the Charity Commissioners and the courts have very wide powers of investigation into mismanagement, removal of offending trustees, cancellation of registration and so forth.

Consequently, any charity trustee who is seriously concerned about the propriety or otherwise of decisions he is called upon to make in his capacity as a trustee should not hesitate to seek professional advice, and/or guidance from the Charity Commissioners, before it is too late and they find that they have unwittingly incurred personal liability, or possibly even committed some statutory offence without realising it. Obviously there is a great deal of public sympathy for charity trustees who devote their unpaid time and energy to good causes and act in good faith but who, whether out of ignorance or carelessness, fail to carry out their legal responsibilities. Sympathy, however, will not necessarily get them off the hook in case of serious default.

First published November 1997