Trustees' Legal Duties Spotlight

Trustees are all volunteers who are driven by their passion for their charitable organisation.

The legal duties for charity trustees are at the heart of charity trusteeship but are often misunderstood or misinterpreted. For many trustees, they are aware of their legal duties, what these mean and have no problem in applying them on a day to day basis and when it comes to charitable decision making.

Whether you’re confident with the six legal duties of charity trustees or you are less familiar with the requirements and how they apply, it is a good idea to revisit the legal duties as a reminder of what these are to ensure that they remain at the centre of charity trusteeship.

1. Charitable Purposes for the Public Benefit

Understanding your charity’s purpose and that all charities operate for public benefit is essential to the role of trusteeship.

Yet, the legal meaning behind a charity’s operation is often left as a forgotten statement on the Charity Commission’s Register of Charities, a historic paragraph in a charity’s governing document or sometimes the charitable objects clause just seems to be “close enough” to a charity’s day to day operation.

Sometimes, trustees haven’t looked at the charitable objects statement for years and an ever-evolving innovative charity can inadvertently face difficulties where the trustees have acted outside the charitable objects.

Reminding oneself about the meaning of public benefit can be a useful tool for all trustees. The public benefit element sets the charity sector apart from the commercial profit-making world. Benefitting the public sector rather than a few private individuals is what drives the charity sector. Individuals who make a positive difference as trustees or volunteers and funders (whether private or organisational) who fund charitable organisations allow for the provision of services which otherwise would not be available to the public on the same scale (if at all).

What stops public benefit being achieved? Founder’s syndrome, failure for trustees to understand their legal duties, failure to manage conflicts of interest and poor decision-making practices.

What are some best practices to achieve this duty?

Understanding Conflicts of Interest

Conflicts of Interest often trip up charity trustees and the main reason being that trustees are not fully aware of the definition of a “connected person”.

Positive Decision-Making Practices

Ensuring all the trustees are aware of the charity’s objects would be a great starting point but some practical advice is to bring a statement of the charity’s objects to the trustee’s meeting particularly where big decisions are being taken. The trustees can assess whether a decision would be within the charity’s purposes.

Be wary of Founders’ Syndrome

A diverse board with appropriate skills could help.  Founders of Charities must remember that no one “owns” a charity. It is set up to benefit the public and its beneficiaries.

2. The Governing Document

How exciting is it when a new project is developed within a charity?

Perhaps, it is a huge development project and epic grant funding is available or the charity can apply for a loan at a fantastic interest rate. Maybe you’ve managed to recruit a trustee or consultant with a particular skill set to oversee a project. Or, the charity has the opportunity to merge with another charity with great resources.

The trustees and volunteers are full of enthusiasm, funders are available or lenders are accessible. Everyone is on board but unexpectedly, it grinds to a halt and the opportunity is missed. Why? An outdated governing document governs your charity.

You’ve realised that you lack a power you need to undertake that project or the charity’s objects don’t align with the plans. The disappointment sets in and it’s back to the drawing board.

Stay ahead with these helpful tips:

• Understand when Charity Commission consent is needed (for regulated clauses and third-party rights changes);
• Make administrative changes – Charity Commission consent is not needed provided those changes do not impact on any regulated clauses or third party rights;
• Review the objects clause;
• Do you have the power to borrow, merge, incorporate, accept or disclaim gifts?;
• It is a members’ decision rather than a decision of the trustees to amend the governing document;
• Adopt an appropriate Scheme of Delegation for committees; and
• Make sure conflicts of interest are managed.

What are some best practices to ensure the governing document is up to date?

• Periodic reviews – our recommendation is that trustees should review the governing document in depth every three years (although this can be longer or shorter depending on the charity), but certainty if the trustees are thinking of embarking on a new project – forward planning is key!
• Regularly review the Objects Clause – is your charity still achieving its stated charitable objects or has the charity evolved overtime?

3. Best Interests

Acting in the best interests of the charity is a key duty for charity trustees and it must be at the forefront of everyone’s mind when it comes to decision making within charities.

One way to act in the best interests of the charity is to avoid conflicts of interest.

When you realise you’re in a conflicted situation, it can feel personal. You practice the six duties of the trustees, you consistently act in the best interests of the charity, you’ve declared a conflict of interest or loyalty and now you’ve been asked to leave the meeting room and not vote in a decision. Occasionally, conflicts of interest can create an unpleasant and awkward atmosphere but it doesn’t have to be.

If your charity adopts a clear policy on dealing with conflicts of interest and that policy is provided to all trustees from the point of their appointment with a clear explanation that the policy applies across the board, a register of trustees’ interests is kept to ensure full and frank disclosure the potential interests, then all trustees are treated equally. Acting in the best interests of the charity means putting aside any personal interests and trustees of all charities have this duty.

Other tips:

• Be clear on the definition of “connected person” – this avoids conflicts inadvertently arising.
• Understand how conflicts should be dealt with – follow procedures in your governing document.
• Manage the conflict – can the conflict be removed or should the trustee absent themselves from key debate and decision making?
• Record how the conflict was handled.
• Remember that the handling of conflicts of interest is not personal!

4. Managing Resources

What would happen if your charity didn’t manage its resources effectively?

The charity would struggle to operate, attract funders and fail to achieve its mission. This makes the legal duty for trustees to manage its resources effectively a very important one.

Charities are organisations that are very good to responding to change and finding innovative solutions to complex challenges in pursuit of their mission – often with limited resources. This makes their ability to manage resources appropriately and effectively key for the success of the charity.

Steps should be taken to protect a charity’s resources and avoid putting the charity at risk of fraud or abuse.

Our recommendations:

• Take steps to identify risks to the charity;
• Have in place internal financial controls;
• Ensure you have clear financial records;
• Apply funds in the furtherance or in support of the charity’s purposes;
• Take appropriate advice when investing funds; and
• Take appropriate advice when selling charity property, borrowing funds and mortgaging land.

5. Reasonable Care and Skill

“As a general rule, a trustee sufficiently discharges his duty if he takes in managing trust affairs all those precautions which an ordinary prudent man of business would take in managing similar affairs of his own”

Speight v Gaunt  (1883) 9 App Case 1, 19 per Lord Blackburn. 2

The standard that has been applied to charity trustees in acting with reasonable care and skill was established many years ago. Obviously, we can modernise the standard by applying gender neutral wording - that all trustees should act with reasonable care and skill and take the precautions that an ordinary prudent person of business would take in managing their own affairs.

Anyone who would have specialist knowledge such as a legal advisor, accountant or auditor may be held to a higher standard in respect of any decisions or knowledge that they should have applied in their role as trustee.

Acting with reasonable care and skill does not necessarily mean that trustees need to know the answers to all the issues that arise in their role as trustee. It means knowing when to seek specialist expertise to allow the board to be sufficiently informed when it comes to decision making.

6. Accountability

The last of the six duties: ensuring your charity is accountable.

Who is your charity accountable to? Its beneficiaries, its members, its stakeholders, the public and the Charity Commission.

All charities must comply with the law and the requirements of the charities regulator, the Charity Commission.

How to ensure the charity is accountable?

• Ensure appropriate accounts or financial statements are produced.
• Make sure that accounts and reports are submitted on time.
• Comply with your governing document to ensure decisions are made correctly and that members take decisions where required.