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Supreme Court guidance for charities

In the CIFF case the Supreme Court confirmed a charitable company member’s fiduciary duty to its charitable purpose.

It also restated fundamental principles of trust law underpinning the governance of all charities, providing timely general guidance to charities having to make difficult decisions in these uncertain times.

Background

Sir Chris Hohn and Ms Jamie Cooper were founders of a charitable company, Children’s Investment Fund Foundation (CIFF). They were also charity trustees (company directors) and company members. To address difficulties managing the charity following their marriage breakdown Ms Cooper agreed to resign as trustee and member in exchange for a grant to be paid to another charity she had established.

The other, non-conflicted, CIFF trustees agreed to this solution subject to its approval by the Charity Commission or by the court. An application was made to the court which in 2017 approved the grant as being in CIFF’s best interests.

Under company law CIFF’s members had to approve the grant. There was only one, unconflicted member, Dr Lehtimäki, who the Chancellor of the High Court directed to vote in favour of approving the grant, holding that he was a fiduciary, in that his power as a member to vote on the issue was vested in him for the benefit of CIFF and not vested in him personally.

Dr Lehtimäki wanted to form his own view on the proposed grant. The Court of Appeal allowed his appeal, ruling that the court could not direct him on how he should exercise his powers as a company member. Ms Cooper appealed to the Supreme Court.

Supreme Court’s decision

In allowing Ms Cooper’s appeal and directing Dr Lehtimäki to vote in favour of a resolution approving the proposed grant, the Supreme Court has confirmed that voting members of charitable companies limited by guarantee do in principle owe fiduciary duties to the charitable purposes of those companies – unlike members of non-charitable companies who, generally speaking, do not owe fiduciary duties when exercising their proprietary rights.

However, those duties do not apply in all circumstances: they can be limited by the company’s articles of association and their scope should be defined more narrowly than the specific duty owed by each member of a charitable incorporated organisation (CIO), the other modern corporate structure commonly used by charities.

The court said the precise circumstances in which a member of a charitable company has fiduciary duties in relation to its charitable purposes and the content of those duties will have to be worked out when they arise.

This leaves much uncertainty and the court suggested that guidance from the Charity Commission for charitable companies would be helpful.

Wider lessons for charities in current times

Aside from a reminder of the “ancient” jurisdiction of the courts over charities, which goes wider than the jurisdiction of the Charity Commission and reflects the courts’ determination to give effect to charitable objects and not to allow technical matters to prevent a gift to charity taking effect, what wider lessons can charities take from this judgement?

Companies as charities

The Supreme Court reflected on the application of company law to charities over the last 150 years.  By the Charities Act 2011 Parliament has stapled onto the Companies Act 2006 the restrictions which it wished to impose on charitable companies, which are subject to a “mosaic” of statutory provisions.

One such requirement for charitable companies is to secure prior written Charity Commission approval to certain “regulated alterations” to their articles of association before any special resolution can be passed by company members, in particular changes to charitable objects or the alteration of any provision which would provide authorisation for any benefit to be obtained by directors (i.e. charity trustees) or members of the company or persons connected with them.

Another requirement is the need to secure the prior written approval of the Commission to certain corporate transactions involving directors which require members’ approval; here, Dr Lehtimäki’s approval was required because the proposed grant by CIFF to Ms Cooper’s charity would constitute a payment to a director for loss of office under section 217 of the Companies Act.

Charitable companies need to consider when other requirements for approval may come into play. For instance, Charity Commission consent may also be required when an unincorporated charity is to incorporate as a company, non-cash assets are to transfer across and there is some overlap on the trustee boards of both.

A re-statement of the essential duties of a fiduciary – here, of a charity trustee

Of more immediate importance to all charities – whether companies, CIOs or unincorporated – is the Supreme Court’s re-statement of the fundamental principles upon which charities operate.

The court reminds us of the essential duties of a charity trustee as a fiduciary – as someone who owes single-minded loyalty to the charitable purpose, who must not place himself in a position where his duty and his personal interest may conflict and who may not act for his own benefit or the benefit of a third party without the informed consent of his principal.

This re-statement of the “no conflict” and “no profit” rules is timely because they continue to be breached by trustees of some charities – often unintentionally – despite governing documents usually containing a framework within which conflicts of interest can be managed and where trustee benefits can in appropriate circumstances be authorised, ultimately by the Charity Commission or the court.

So charities should pause for thought and consider what steps they might need to take when, for example, paid employees are also put forward for trusteeship; or where it is proposed that trustees – or their close relatives - should act as paid directors of their charity’s trading subsidiary.

Renewed focus on any fiduciary duty being owed to a charity’s purpose and not to any entity is welcome and underlines a fundamental point in the Commission’s key guidance for charity trustees that acting in the charity’s best interests is not about the charity as an institution in itself, or preserving it for its own sake. As the Commission points out, focussing on a charity’s purposes may lead its trustees to conclude its interests would be best served by collaborating or merging with another charity, or even by spending all of a charity’s resources to advance its charitable purposes and bringing it to a close.

The “non-interventionist” principle

But perhaps the most relevant practical point for all charities to take away from this case is the Supreme Court’s affirmation of the breadth of the discretion charity trustees will usually exercise in discharging their fiduciary duties, ironically in a case - described as “extremely unusual” and “unique” - in which the court upheld its jurisdiction to direct members how to vote.

The role of the court is to ensure trustees of a charity exercise their discretion properly and not to interfere in the trustees’ exercise of a discretionary power unless the trustee is acting improperly or unreasonably.

Quoting previous authority, the court reminded us that “…the trustees’ duty does not extend to being right on every occasion”.

Instead, for a decision to be questioned, it has to fall outside the range of decisions that a reasonable trustee body could make in the circumstances.

So, despite media and public scrutiny and legal regulation to which charities are subject, this all means that charity trustees retain great freedom to act in what they consider to be the best interests of their charity’s purposes and confirms their mandate to make very difficult and potentially unpopular decisions that may be required.

To support those who work in the charity sector, on Wednesday 7 October 2020, Shoosmiths will be hosting a webinar to provide charity trustees and senior staff with an overview of the responsibilities and powers of trustees; to outline governance issues that commonly arise in practice; and to provide some simple strategies to help trustees run their charities as effectively as possible in these challenging times.

To register please click on this link.

For more details about the CIFF case, click here.

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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