The law’s benevolence towards the honest charity trustee
It perhaps goes without saying that charity trusteeship involves a significant though worthwhile personal commitment. This has partly to do with the sacrifice of time and energy, usually for no financial reward. However, a charity trustee also may risk their financial wellbeing and reputation by assuming the obligations of their office. The risk arises simply because we are all capable of making mistakes and thereby breaching those obligations.
If you are unlucky, a breach may lead to personal liability to pay the charity or others compensation, not to mention the stress and cost of a dispute. And, if you are even more unlucky, a breach may lead to damage to your reputation in management more generally, whether because of a public court judgment or a Charity Commission report. Stress, cost and reputational damage are of course possible even if you are in the end exonerated.
Financial and reputational risk is of course not unique in charity management to charity trustees, but may extend to those with responsibility for the management of charities such as chief executives who do not fall within the statutory definition of “charity trustee” (s.177, Charities Act 2011: see below).
We have seen in the news recently how Camila Batmanghelidjh, the former CEO of Keeping Kids Company and not one of its directors, has obtained permission to bring judicial review proceedings against the Charity Commission ([2022] EWHC 3261 (Admin)) to overturn the report with which it concluded its statutory inquiry into the charity.
She contends that the report is irrational in part because she argues that it is unfair when set against the High Court’s judgment in her and the charity trustees’ favour in Re Keeping Kids Co. [2021] EWHC 175 (Ch). In the latter judgment, Mrs Justice Falk (now Lady Justice Falk) dismissed the Official Receiver’s claim for an order disqualifying Ms Batmangelidjh and the former charity trustees of Keeping Kids Company as company directors.
To return to the wider picture, to a certain extent the personal liability of charity trustees can be excluded, for example, by an exemption clause in a charity’s trust deed, though this can never extend to dishonest or recklessly indifferent conduct, and cannot of course be consciously relied upon to justify an action.
Nor can the directors of charitable companies benefit from such exemption clauses (see s.232, Companies Act 2006). Further, under s.189, Charities Act 2011 it is open to charity trustees to use charity funds within certain parameters to purchase indemnity insurance against personal liability.
Court’s comparative restraint
Ultimately, if the matter reaches the Charity Commission or the court, there may nonetheless be some comfort to be found in the court’s comparative restraint or benevolence when charity trustees with the best intentions get things wrong. The court will avoid coming down harshly on honest breaches of duty, against the background of the public worth of the office of charity trustee and the personal sacrifices that individuals make, and risks they assume, by taking on usually unpaid trusteeship.
As Mrs Justice Falk explained in Re Keeping Kids Co. (see above), the court’s benevolence “reflects the real risk that any other approach would deter individuals who would otherwise be well suited to becoming charity trustees from doing so. It also reflects the court’s recognition of the public service that charity trustees provide.” (Para. 978.)
The term “charity trustee” is statutorily defined for the purposes of the Charities Act 2011 as meaning “the persons having the general control and management of the administration of a charity” (s.177, Charities Act 2011). As the definition reflects, both in the legislation and in practice, it is an umbrella term for different categories of fiduciary with responsibility for the management of different kinds of charity (the trustee, the company director etc.).
The law of charity trusteeship is therefore not unitary, and the particular legal structure of any charity is always the starting point for considering a charity trustee’s powers and duties. However, the court’s benevolent approach is common to all forms of charity trusteeship.
The Charity Commission’s own regulatory approach mirrors this comparative generosity to unpaid charity trustees (see, for example, its Policy on restitution and the recovery of charitable funds misappropriated or lost to charity in breach of trust, 23 May 2013). It is the Commission’s duty, in performing its functions, to act in a way which is compatible with the encouragement of voluntary participation in charity work (s.16(2)(b), Charities Act 2011).
The Commission also has the power relieve charity trustees (among others) of personal liability for breach of trust or duty where they have acted honestly, reasonably, and ought fairly to be excused for the breach: s.191, Charities Act 2011. This mirrors the powers of the court under s.61, Trustee Act 1925 in respect of trustees generally, and under s.1157, Companies Act 2006 in respect of company officers.
Classic starting point
The classic starting point for the consideration of the court’s benevolence is the old case of Attorney General v Exeter Corporation (1826) 2 Russ. 45 where the trustees had honestly misapplied charitable funds in circumstances where the trust was difficult to interpret. Lord Eldon, the Lord Chancellor, refused to order them (by that time a corporation) to account for past mistakes, only giving directions to ensure the proper administration of the fund in the future.
He said: “If the administration of the funds, though mistaken, has been honest, and unconnected with any corrupt purpose, the court, while it directs for the future, refuses to visit with punishment what has been done in time past.”(P.54.)
At this time, claims for breach of charitable trust were frequently brought by the Attorney General – the Charity Commissioners were established later in the 19th century - and the court expected restraint on the Attorney’s part. It is not the duty of the Attorney General to contend strictly for the rights which the law may give the Attorney as the protector of charities, but to act considerately and with forbearance in all proper cases.
The same is probably true of the Charity Commission where it brings proceedings for breach of trust using its power under s.114, Charities Act 2011.
In modern times, the court’s discretion to mitigate the period or extent for which a charity trustee is compelled to account for mistakes remains relevant, and was exercised by the High Court in Re Freeston’s Charity [1978] 1 W.L.R. 120 in favour of University College, Oxford University where it had honestly misapplied charitable funds.
More recently, the Supreme Court referred to Lord Eldon’s judgment with approval in Children’s Investment Fund Foundation (UK) v Attorney General [2022] AC 155 at 221 per Lord Briggs JSC; 211-212 per Lady Arden JSC, in the context of a charitable company limited by guarantee.
Most recent example
The most recent example is the approach of the High Court in Re Keeping Kids Co. (see above). In holding that the charity trustees there were not unfit to be concerned in the management of a company, Mrs Justice Falk held that the fact that the company was a charity could be taken into account (para. 982).
She also held that the policy reasons for the court’s benevolent approach to charity trustees apply with the same force whether the charity is incorporated or not, and are not restricted to cases where the court is concerned with the potential personal liability of a charity trustee to account for losses of the charity (para. 984).
Removal of trustees
The scope of the court’s benevolence extends for example to the removal of charity trustees, as Mrs Justice Falk noted. In two unreported judgments of the 1990s, Mr Justice Neuberger (later Lord Neuberger) emphasised the need for comparative leniency on appeals from removal orders made by the then Charity Commissioners: Scargill v Charity Commissioners, 4 September 1998, pp.98-99 (considered by Mrs Justice Falk at para. 985); and subsequently Weth v Attorney General (29 April 1999, pp.142-143).
Mrs Justice Falk’s review of the authorities does in my respectful view need a minor, cautionary gloss. Her Ladyship quoted at para. 980 a distinguished judge (Sir Richard Scott, then Vice-Chancellor) in an earlier case (Stanway v Attorney General, 5 April 2000) as saying:
“I do think that individuals who have given long periods of their time to unpaid public service – and that is what becoming a trustee of a charity involves – do deserve to have their efforts recognised by not being sued for mismanagement unless the proposed action against them is one which anyone can see cannot be resisted.” (P.8, transcript.)
Mrs Justice Falk commented no further specifically on this passage, but it does risk misleading if taken out of context. It seems likely that Sir Richard Scott was remarking on the appropriate test only in the particular case before him. Elsewhere in his judgment, he said the case was “a long way from being the sort of case that can be recommended to be brought against honest, honourable trustees who have made errors of judgment.”(P.15.)
All this should not, however, lull charity trustees into a false sense of security. As is the case in all sectors of society, there are individuals in the charity sector who treat responsibility with a surprising insouciance, if not recklessness.
The court’s and the Commission’s benevolence is directed not at them but at the dedicated individual who makes an honest mistake despite their best efforts. It properly reflects the value of their work to society, if not the need to avoid charity money being frittered away on breach of trust litigation that risks oppressing the honest volunteer.
