The final part of this article intends to look at the potential personal liabilities of the trustees of a charity, whether the charity is operating as an incorporated charitable company or otherwise.
If you’ve read parts 1 and 2 of this article already, then thank you!
If not, but you’d like to, then you can go back to part 1 (an overview of trustee responsibilities) by clicking here and part 2 (charitable reserves) by clicking here.
In general, the overall responsibility for the effective management of a charity rests with its trustees, who are the people responsible for the overall control and management of a charity, by whatever name or title they act under (e.g. trustee boards, directors, governors).
To quickly recap, all trustees have duties imposed upon them, including a duty to act prudently and reasonably in administrating the financial affairs of the charity. Trustees are usually keen, therefore, to identify and manage risks from an early stage. Ensuring that there’s proper financial controls in place is often enough to do this. Sometimes, however, charities can lose income at short notice and find they’re unable to secure alternative funding, putting the charity under increased financial pressure. This can be particularly damaging to charities that rely wholly or mainly on a limited income stream.
Do you act as a trustee for a charity, whether on a part-time or full-time basis? Presumably the answer is ‘yes’ if you’ve made it through the article this far!
Importantly, you should know that the actions of trustees are not measured subjectively (i.e. judging your performance against the best of your abilities), but rather objectively (i.e. judging your actions against those of an ordinary prudent man of business). This test also takes into account a moral obligation towards others and the standard can be further increased by your actual expertise, particularly if you’re being paid to act as a trustee.
As trustees are under a duty to act with reasonable care and skill, the standard can again be increased by any specialist knowledge that you have, or claim to have, as well as any specialist knowledge that it would be reasonable to expect you to have if you’re acting in a professional capacity.
Moving on to look at the crux of the issue; what’s your potential personal liability as a trustee?
Well, there’s various factors to consider, but in general it depends on how the charity has been set up. There are many different ways a charity can be set up, but to try and keep it brief, let’s look at three of the options:
The trustees (e.g. directors) aren’t normally personally liable because a company is a legal entity in its own right, meaning it can be liable for its own debts. In practice, trustees will only become personally liable if they’ve acted improperly (e.g. by acting fraudulently, trading wrongfully or committing a breach of trust) or given personal guarantees in respect of the company’s debts. Trustees may also be members of the company. Typically, charitable companies are incorporated ‘by guarantee’, meaning that the liability of its members is limited to the amount guaranteed and this is often limited to a minimal amount.
If a company is unable to pay its debts, then the courts may order the trustees to contribute personally if it appears they knew, or ought to have known, that there was no reasonable prospect of avoiding the situation and continued to do business without seeking to minimise losses.
2. Charitable incorporated organisations
Similar to a company, a charitable incorporated organisation is a separate legal personality, meaning it can be liable for its own debts. Again, trustees may become personally liable if they’ve acted improperly or given personal guarantees. Trustees may also be members, who have either no liability or a limited liability to contribute up to a specified amount toward the assets in the event of the charity being wound up.
3. Unincorporated charities, such as trusts and unincorporated associations
An unincorporated charity has no separate legal personality from its trustees. A trustee’s personal liability is potentially unlimited, unless the charity’s governing document or any contractual terms seek to limit their liability, usually to the amount of the charity’s assets. Importantly, the trustees are liable jointly and severally, meaning the trustees could be pursued collectively or individually for any shortfalls.
Unincorporated charities may incorporate their trustee body, so that it becomes a legal entity. While this allows the trustee body to enter into contracts, it does not change the position in respect of the personal liabilities of the trustees.
What options might there be if you do become personally liable? Well, the courts and the Charity Commission can relieve your liability providing you’ve acted honestly and reasonably, and haven’t benefited from your actions. You may also be entitled to an indemnity allowing you to recover funds out of the trust assets or benefit from insurance cover, although it should be borne in mind that these may not necessarily cover all of your personal liabilities.
Remember, a charity trustee will always have a duty to repay any unauthorised payments or benefits that they’ve received from their charity!
So, if you’re already a trustee, or just thinking about becoming involved, now is a good time to read through your governing document to remind yourself of your responsibilities and your potential liabilities too. Check too whether there’s any insurance and/or indemnities in place to help cover any personal liabilities you may be exposed to. Finally, remember you’re doing a good deed for your community and the rules are often tolerant for those acting honestly and reasonably!