Often trustees of charities have become trustees as they believe in the cause pursued by the charity in question. They often may not have any legal training that would allow them to fully understand what the obligations of a trustee are.
The Charity Commission helpfully published guidance, which sets out the factors that trustees of charities should have in mind when completing how to approach legal proceedings. The useful starting position set out confirms:
In some cases you will be unable to comply with your legal duties if you don’t follow the good practice.
For example: duty It’s vital that you
| Your legal duty | It’s vital that you |
| Act in your charity’s best interests | Deal with conflicts of interest |
| Manage your charity’s resources responsibly | Implement appropriate financial controls Manage risks |
| Act with reasonable care and skill |
Take appropriate advice when you need to, for example when buying or selling land, or investing (in some cases this is a legal requirement) |
The guidance further summarises the effect of getting it wrong as follows:
“Trustees who act in breach of their legal duties can be held responsible for consequences that flow from such a breach and for any loss the charity incurs as a result. When the commission looks into cases of potential breach of trust or duty or other misconduct or mismanagement, it may take account of evidence that trustees have exposed the charity, its assets or its beneficiaries to harm or undue risk by not following good practice.”
The starting position is to determine whether your charity has the power to litigate in the context in question. What is meant by this is whether the charity can pursue or defend a claim in its own name or whether it can only pursue or defend a claim in the name of its trustees. Incorporated charities such as charitable companies, corporations or Charitable Incorporated Organisations (CIOs) can litigate in their own name. Unincorporated charities usually litigate in the name of their trustees. Either way, if the trustees act unreasonably in the proceedings, they can be held personally responsible for the costs associated with any claim.
The Charity Commission has summarised the factors that trustees should take into account when considering whether to pursue or defend proceedings as set out below:
- “trustees have a duty to protect or secure their charity’s assets and, where, necessary, to recover, assets belonging to the charity; taking or defending legal action might be one way to fulfil this duty
- a charity’s funds must be spent on carrying out its aims and the trustees have a duty to act in the best interests of their charity – a decision to take or defend legal action must be made exclusively in the best interests of the charity, having considered whether or not another course of action is available
- in making their decision, the trustees should:
- take and consider legal advice
- consider and assess the economic prospects of success or failure and the impact on the charity
- consider whether their intended actions are proportionate in the circumstances
- decide whether it is necessary or appropriate to ask for the commission’s consent or advice
- whatever the outcome of legal action, the downsides are typically that it will cost the charity time and money and may have a negative impact on its reputation – even if the charity wins it may not recover all its legal costs
- unless time constraints for bringing or responding to an action prevent it, the commission will expect trustees to explore and, if appropriate, rule out all other reasonable options open to them to resolve the issue, such as alternative dispute resolution or agreeing a legal compromise unless a charity has the necessary in house expertise, in order to make a proper decision it will usually be appropriate to take and consider professional legal advice, as well as whatever other specialist advice they might need to inform their decision transparency about the reasons for taking legal action is very important in explaining why the trustees decided on this course of action – the trustees must be able to justify their decision because the charity’s actions may have an impact on the charity’s reputation and supporters
- in some circumstances, the trustees may be liable for pay any legal costs personally, for example if:
- the court considers that the costs have not been properly and reasonably incurred
- trustees are not able to demonstrate that they have considered all the relevant principles in making their decision
- in the case of unincorporated charities, the charity has insufficient funds to meet them”
Summary
In summary, the key to protecting yourself as a trustee really boils down to considering the issue in front of you, seeking appropriate advice and then documenting how and why the decision was reached. The fact that a decision reached turned out to be a bad decision would not of itself make a trustee liable for breach of trust. What would be required would be some recklessness and/or negligence and/or wilful disregard for what the best courses of action would be.
How Nelsons can help
Kevin Modiri is a Partner in our expert Charity team.
Should you have any queries, regarding your duties as a trustee of a charity in respect of impending proceedings, please contact Kevin or another member of the team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online form.