Joint Committee on the Draft Charities Bill

Joint Committee on the Draft Charities Bill First Report

7 Trustees

Current position

252. The role of charity trustee is a voluntary one. The general, or default, rule is that a trustee should not receive any financial benefit from acting as a trustee. A trustee is not only barred from being remunerated for acting as a trustee; but the default rule is that he or she cannot be paid for goods or services rendered to a charity. There must be specific authority in a charity's governing instrument or permission from the Charity Commission before a trustee can be paid. The Commission will only authorise payment where there is a clear benefit to the charity and the amount paid is reasonable.[275] A trustee is, however, entitled to be reimbursed from charity funds for expenses properly incurred in carrying out his or her duties.

253. Individuals can become personally liable when acting as a charity trustee in two ways. First, they can become liable for breach of trust, i.e. for acting in contravention of the duties imposed on them as trustees. Secondly, they can become subject to third party liabilities such as breach of contract.

254. The duty of care imposed on trustees is generally to act with such skill and care as is reasonable in the circumstances. Trustees who act reasonably and prudently and have primary regard to the interests of the charity are highly unlikely to incur personal liability for breach of trust. As a long stop, the court has power under section 61 of the Trustee Act 1925 to relieve a trustee from liability who is technically in breach of trust but who has acted honestly and reasonably. Trustee indemnity insurance against liability for breach of trust can only be purchased by a charity if there is explicit power in the charity's governing instrument or the Charity Commission gives permission as it amounts to a personal benefit for a trustee. Whilst the Charity Commission has recently made obtaining permission easier, it is still a process which has to be gone through.[276]

255. Charity trustees can purchase insurance in the usual way to protect themselves from liability to third parties. Charities which have more than occasional dealings with third parties often adopt the structure of a company to limit liability.

Draft Bill changes

256. Clause 27 of the Bill will allow trustees to be remunerated for providing goods and services to a charity if four conditions are satisfied:

a) First, the amount of the remuneration must be reasonable and be set out in a written agreement.

b) Secondly, the trustees must be satisfied that it is in the best interests of the charity for that trustee to provide the relevant services and at that cost.

c) Thirdly, if more than one trustee is being remunerated, such trustees must be in a minority.

d) Fourthly, the governing instrument must not contain an express prohibition against the relevant trustee being paid.

In addition, by new section 73B, before entering into any remuneration agreement the trustees must have had regard to any guidance issued by the Charity Commission and exercise the statutory duty of care in section 1(1) of the Trustee Act 2000.

257. Clause 28 provides that a trustee who would be entitled to remuneration under an agreement is disqualified from taking part in any decision made by the trustees in relation to that agreement. If a trustee does take part in a decision about his own remuneration he is made liable to a criminal penalty and can also be directed by the Charity Commission to repay any such remuneration.

258. The Charity Commission will have power to relieve trustees from personal liability for breach of trust by clause 29. The power applies to a trustee who has acted honestly and reasonably and ought fairly to be excused. The Charity Commission is, in effect, given the power of the court under section 61 of the 1925 Act.

Remuneration of trustees

Evidence

259. A number of organisations that submitted written evidence, including the NCVO,[277] were concerned to stress the importance of the voluntary nature of trusteeship and some considered honorary appointment to be essential for the maintenance of confidence in a charity.[278] Other charities reported increasing difficulty in getting people to act in a voluntary capacity[279] and suggested that a charity should be able to pay a trustee for acting as such.[280] There was almost unanimous welcome however, for the power to permit charities to pay trustees for providing goods and services, even from those organisations which supported the voluntary principle.[281] The Society of London Theatre considered that it would enable charitable theatres to attract eminent individuals with a high level of knowledge and experience to their boards.[282] The possibility of abuse was recognised and the need for the conditions set out in clause 27 to be complied with before payment could be made were considered appropriate.[283]

260. The solicitors Bates, Wells and Braithwaite, told us:

"We think it would be useful to state that any provision in the trusts of a charity permitting remuneration for professional services rendered to the charity is to be taken as including remuneration for services provided by any person within the proposed new Section 73 A. Otherwise, we think that constitutions will need to be amended unnecessarily where they contain a general provision prohibiting remuneration and then permission for professional charging. There has of course been great confusion as to what 'professional' means in this context and it has been narrowly interpreted by the Courts".[284]

"In Section 73B (3) it should be made clear that the Trustee Act in this context applies to all charities, however established (the Trustee Act does not normally apply to companies, for example, unless they are themselves trustees)".[285]

261. The Committee commissioned research from one of our specialist advisers, Margaret Bolton, into payment of trustees in the United States.[286] In the US, there are no general restrictions on the payment of trustees for their duties as trustees, for other services provided to the charity or to meet their expenses. Payments can be made provided they are reasonable. However, there are complex legal rules designed to prevent trustees benefiting from their trusteeship to the detriment of the charity. Different rules apply to 'public charities'[287] and private foundations.[288] But media attention in the US has recently focused on excessive trustee payment by private foundations and other issues including conflicts of interest, fund-raising practices, charities being set up as tax shelters and charities serving as a conduit to finance terrorist activities.

262. The US experience carries warnings about the risk of loss of public confidence in charities generally through excessive payments to trustees. We are not satisfied that recruitment problems have reached such a level in this country that a power wider than that proposed in the draft Bill is necessary.[289]

263. Considerable concern was expressed about the possible imposition by clause 28 of a criminal penalty on a trustee who takes part in a decision about their own remuneration. Comments varied from "unacceptable"[290] at one end of the scale to "draconian"[291] at the other. We note that the Home Office has proposed to add the offence to the list in section 94(2) of the 1993 Act so that no prosecution could take place without the consent of the Director of Public Prosecutions (DPP). Bircham Dyson Bell considered that criminal sanctions would introduce a further deterrent to volunteering and make it more difficult to recruit trustees.[292]

264. The draft Bill already contains a number of protective provisions to guard against abuse for example, a new section 73B says that before entering into a remuneration agreement the trustees must have regard to any guidance issued by the Charity Commission. The Committee recommends that this guidance reflects best practice in procurement making it clear for example, that charities should test the market (for example, by undertaking research on prices or through competitive bidding for larger contracts) to ensure that contracting with a trustee is in the charity's best financial interest.

265. The Committee are concerned about a blanket imposition of a criminal penalty for breach of trust, particularly as the power is likely to be used by many small charities to enable basic work such as building maintenance to be done by trustees at cost. We conclude that cases should only be pursued where a trustee acts dishonestly or recklessly and recommend that a requirement of dishonesty or recklessness is added to the definition of the offence in 73 (c) 4.

266. We consider that the imposition of a criminal penalty would be counterproductive and recommend that the Bill should impose a civil penalty without leaving someone with the stigma of a criminal conviction.

Personal liability

267. Differing views were taken as to the effect of potential personal liability on discouraging people from becoming trustees. Ms Rhona Howarth of Governance Works stated that trustees either did not understand the risk, or, if they did, they found ways to manage the risk.[293] On the other hand, Simon Cramp, a trustee of two large charities, considered that lack of indemnity insurance for personal liability deterred people from being a trustee.[294] Bates Wells & Braithwaite regarded the present position, in relation to the ability of trustees to take out indemnity insurance, as unsatisfactory and suggested that the Bill should include a power for trustees to take out such insurance subject to safeguards similar to those in clause 27.[295] We note that the Charity Commission has recently simplified the procedure for charities to obtain their agreement to purchase trustee indemnity insurance.[296] The proposed power in clause 29 for the Charity Commission to be able to relieve a trustee from liability has been welcomed as a "laudable proposal"[297] and "long awaited".[298]

Other points on trustees

268. The following additional points were made by the Charity Law Association and Bates, Wells and Braithwaite, in relation to trustees:

"We would also like to see an obligation placed on the Charity Commission to permit the Trustees of the Charity concerned to add their comments to the face of any published report of an enquiry [under section 8 of the Charity Act 1993]."[299]

"There is an anomaly in the 1993 Act which allows the Charity Commission to remove by order charity trustees, officers or staff, but not members where the charity is incorporated. This can lead to the ludicrous situation, where the members are the same individuals as the removed trustees, that they can simply exercise their powers in general meeting to reinstate themselves."[300]

"We believe that anyone who is barred from being a trustee under section 72 Charities Act 1993 should be disqualified for a maximum period of 5 years unless he or she has been convicted of an offence involving dishonesty. In the latter case it should be in the Charity Commission's discretion to allow someone back to serve as a trustee on application after 5 years. A lifetime disqualification is entirely disproportionate bearing in mind the Rehabilitation of Offenders Act."[301]

269. We recommend that the Home Office review the proposed legislation to ensure these additional points on trustees are covered in the real Bill.

275 Payment of Charity Trustees, CC 11, Charity Commission, http://www.charity-commission.gov.uk/publications/cc11.asp Back

276 Charities and Insurance, OG 100, Charity Commission, http://charity-commission.gov.uk/publications/cc49.asp; Trustee Indemnity Insurance, OG 100, Charity Commission, http://www.charity-commission.gov.uk/supportingcharities/ogs/index100.asp Back

277 Ev 4, para 2.21 Back

278 Ev 259 Back

279 Q53 (Ms Marsh) Back

280 Ev 361, para 8 Back

281 Ev 238, para 7 Back

282 Ev 584, para 2 Back

283 Ev 80, para 73;Ev 607, para 9 Back

284 Ev 535, clause 27 Back

285 Ev 535, clause 27 Back

286 Ev 660-664 Back