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Charities: The importance of good governance

Multiethnic business people working together in the office

The recent publication of the decision of the Charity Commission’s Inquiry into Newham Community Leisure Trust (“the Charity”) (published 12 April 2023) (“the Inquiry”), highlights the importance of effective management and good governance and in charities.

The background to the Inquiry into the Charity (including reference to the first statutory Inquiry in 2002 to 2003) is detailed in the Commission’s report. The primary concerns of the Inquiry were to examine

  • transactions between the charity and a connected party:
  • the administration, governance and management of the charity by the trustees:
  • the financial controls and management of the Charity; and
  • whether the trustees had complied with their duties and responsibilities as charity trustees.

The Commission highlighted a number of actions that amounted to serious misconduct and/or mismanagement within the Charity and concluded that the Charity was poorly governed, poorly managed and had poor financial management since 2009. The Charity (which was formed as a charitable company limited by guarantee) is currently in liquidation and the Commission has disqualified one of the central trustees from being a charity trustee for 12 years.

The Inquiry highlights several governance issues which can serve as useful lessons and reminders for the sector in the importance of good management and governance. We have set out below details of the key issues identified as part of the Inquiry together with guidance on good practice and requirements on how to avoid falling foul of these issues.

Issue: Failure to register with the Commission

The Charity was dissolved at Companies House in 2003 and subsequently removed from the Charity Commission’s Register. The charity was later restored at Companies House in 2009, however the trustees at the time failed to make an application to the Commission to reinstate the Charity on the Register.

Any charity that meets the registration requirements, which includes having an annual income exceeding £5,000 per annum, must be registered with the Charity Commission and included on the Commission’s Register, unless they are otherwise exempt from registration (section 30(2) Charities Act 2011).

If a charity is not registered with the Commission, the trustees should check that they fall within one of the exemptions from registration and seek advice if they are not sure. If their exemption was based on income, they should ensure that they have not subsequently exceeded the £5,000 threshold. If they are not exempt or an exemption no longer applies, the trustees should take steps to register with the Commission promptly.

Issue: Allowing a disqualified trustee to act

One of the trustees of the Charity was removed as a charity trustee of another charity by the Commission in 2005. As such he was ineligible to be a trustee of the Charity and should have been removed from the Charity at that date, however he continued to act until 2015.

Before a new trustee is appointed, the charity trustees should undertake appropriate checks to ensure they are eligible to act and, where appropriate, obtain DBS checks. Each trustee should sign a declaration of willingness to be a trustee, confirming they are not disqualified from action as a charity trustee and can legally accept the appointment. You can use the template form available on the Charity Commission’s website if you don’t have your own form of declaration.

You should also request that trustees confirm that they will provide an update if they are no longer eligible to act as a charity trustee.

Issue: Inquorate decisions

The Charity had a quorum of 3 (or such greater number as the trustees may determine), and a minimum number of 9 trustees. The Inquiry found that many meetings were inquorate due to the disqualified director being incorrectly counted as part of the quorum. Further, there were only 3 or 4 trustees in office meaning they had failed to comply with their governing document’s minimum number of trustees.

A charity’s governing document (which may be Articles of Association, Constitution, Trust Deed etc.) will contain details of the quorum requirements for trustees’ decisions. You must ensure that when any meetings are held, it is quorate otherwise any decisions taken during that meeting would not be valid. Any trustees who have declared a conflict of interest (or anyone who is not eligible to be a trustee) will not be included when counting the number of trustees for quorum purposes.

If you find yourself in a situation where you cannot comply with your governing document due to the minimum number of trustees and/or quorum requirements, you should review whether these can be amended (for example, if the Charity had reduced their minimum number of trustees to 3, they would have been able to comply with their governing document in this regard). Any changes to a charity’s governing document would need to be made in accordance with the provisions contained therein. If there are insufficient trustees to put that change into effect, Charity Commission input may be required.

Issue: Failure to submit accurate financial information

The Charity filed accounts with Companies House but failed to file these with the Charity Commission despite having a gross income of greater than £10,000.

Trustees must comply with their statutory duties to prepare accounts and annual reports and where appropriate audit their accounts. If a charity has a gross income of over £10,000 they must submit an annual return to the Charity Commission within 10 months from the end of the charity’s financial year. Depending on your structure, you may also have to undertake filings with other regulators (for example Companies House).

Issue: Failure to manage conflicts of interest appropriately

The Charity was closely connected to the Football Club who operated from the Charity’s property. The CEO of the Football Club was also a trustee of the Charity.

A conflict of interest may arise where a trustee (or person or organisation connected with a trustee) has, or could be seen to have, a personal interest in a transaction involving the charity, or has a duty of loyalty to another person or organisation that may conflict with their duty as a charity trustee and prevent the trustee from making a decision in the best interests of the charity.

If any trustee has a conflict of interest they need to declare this, absent themselves from any decision making in connection with that matter and ensure compliance with the charity’s governing document in connection with conflicts of interest. Any conflicts of interest should be declared, recorded and appropriately managed.

Charities should have a conflicts of interest policy in place and maintain a register of trustees’ interests, both of which should be reviewed regularly and updated as appropriate.

Issue: Failure to separate activities of the Charity and the Club

The Charity did not take appropriate action to ensure that any transactions between the Charity and the Football Club were at ‘arm’s length’.

If a charity is connected to another organisation, it is important to ensure that the charity is not subsidising the other organisation. If any of the charity’s funds are being spent in connection with the organisation they should either be justifiably in advancement of the charity’s purposes or as an investment, which should be properly recorded and managed. If any resources are being shared or money loaned, these need to be documented in a suitable agreement and where appropriate payment made to the charity (e.g. if they are providing services to the non-charity). All decisions should be made at arm’s length and any conflicts of interest declared and managed appropriately. This would be the same for a relationship with a charity’s non-charitable trading subsidiary.

Issue: Incorrect management of loans

The Charity had a number of loans received from a trustee and other individuals. Whilst some were documented, not all were and there was insufficient evidence that the trustees considered the loans appropriately.

As previously mentioned, any transactions should be appropriately documented. This would include loans to the charity. This is important to show a clear intention and purpose and what has been agreed, i.e. if interest is payable, what events may trigger repayment etc., confirmation that it is in fact a loan and not a grant or gift. Trustees need to ensure when considering and entering into a loan, they take into account all the relevant circumstances and risks, including the ability of the charity to repay the loan, and be satisfied that any such arrangement is being made in the best interests of the charity. In addition, where applicable, they need to ensure compliance with the Charities Act.

The Commission’s lessons for the wider sector within the report summarises some of the key points and concludes with “Charities must never lose sight of why they exist and must demonstrate how their charitable purpose drives everything they do.” This is integral to a charity’s governance and should be at the forefront of key decisions.

Whilst the exact circumstances of this case are unlikely to apply to many charities, the issues identified are reminders of core good governance requirements applicable to charities and can act as a useful reminder and discussion point for trustees.

If you have any queries or would like to speak to a member of our Charities team, please do get in contact with Kirsteen Hook ([email protected]).

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