Stephen Claus: Charity Trustees – Am I personally financially safe?

A question close to everyone’s heart and one I have heard many time, usually only after something has gone wrong!

The answer truly is, it depends on many factors.   One must look to see what form your charity has been created in.  There are basically two, unincorporated and incorporated.  If you are incorporated you are far less likely to be personally held liable for debts, but please note you must run the charity properly for this to apply, but with an unincorporated form because you enter into contracts or liabilities personally, then it follows you may be held personally responsible.  This means if the Charity cannot pay the rent, then you may have to pay it instead.  Quite a shock?

Unincorporated charities take the form of associations for example they are usually managed by a constitution.  The charity itself has no legal personality and acts by trustees personally.  A trust is usually the same.

I have been told before “but we are volunteers and it is a charity, surely this cannot be correct” but I am afraid it is correct.  Consider if the charity cannot pay the rent and the lease has been entered into by the trustees, then the trustees must pay.

Incorporated Charities such as Charitable Incorporated Organisations (CIO’s), or Company’s Limited by Guarantee (CLG)  however enable trustees to enter into contracts in the name of the Charity and not personally, so in those cases if the Charity cannot pay, then it becomes insolvent.  Provided the Charity has been properly managed then usually not liability with attach to you personally.

So What Can I Do About this?

The good news is you can do something about it if you are concerned.  You cannot turn back the clock, but you can limit the liability by incorporating a new CIO or CLG.  A new charity is created and then by a legal process the assets and liabilities of the old charity are transferred to the new organization.  There are some complications for charities with a permanent endowment (money which cannot be spent, only the income arising from the money can be spent) and you should always take specialist legal advice before undertaking this process.

You may also purchase trustees indemnity insurance, or you may do both – which is what I strongly recommend.

Some responsibility cannot be escaped however.  You must for example manage the charity according to your duties as a trustee.  If you do not and there is a loss, then you may be held to account by the Charity Commission or others.

This is where an insurance policy can help considerably.  For example if there has been poor management in the charity which does not in the view of the regulator meet the minimum standard expected, they can instituted either a regulatory case or a formal Inquiry or both one after the other, and if you need legal advice in respect of your actions, then the Charity cannot pay for that.  However an insurance policy can help out significantly in such circumstances.  Do not forget it may not have been you who has made an error or acted negligently, but how you respond to such circumstances can implicate you also.

It is vitally important that you ensure you have the relevant skills to become a trustee, you should consider the management of the Charity properly, and only become a trustee if you consider you can attend to the obligations that come with the role properly.

Being held responsible for something that has gone wrong in the management of a charity is not usually something you can easily avoid.  The Charity Commission indicates it will not pursue an innocent trustee who has made an honest mistake.  However they determine if you are such a person, and you could be left having to defend yourself even if you did consider the error was an innocent mistake.

So the message is please consider if you wish to be a trustee very carefully and be aware of your duties, act diligently, and incorporated charities offer more protection than others.  Do have an insurance policy and act with appropriate care and skill always.

If in doubt see legal advice.

The contents of this article are not meant to be a definitive statement of the law and you should always seek legal advice particular to your own circumstances.

Stephen Claus.

These are the views of Stephen Claus, and therefore does not constitute individual legal or financial advice, this article is for information only. If you require guidance or advice, please get in touch.

Click here to go to our Charities and Trusts page to read about our approach when it comes to guiding and advising trustees.