WELCOME to the spring edition of Third Sector Law covering issues affecting Charities, CIC’s, Trusts and Associations.
With many organisations having gone through restructuring, partnering arrangements and in some cases mergers, attention is now turning to consolidation and compliance. In this issue we will be focussing on Director’s Duties and whether trustees can be paid for providing goods and services.
Our next issue will be out in the summer so there if there is a particular article you would like to see or jargon you would like ‘busted’ then please email us at firstname.lastname@example.org.
We are regularly approached by charities asking whether their trustees can be paid for being trustees and for providing goods or services. For example a charity recently asked us whether an accountant, who was on their board, could quote for their annual accounts and payroll work.
As a general rule trustees cannot be paid for actually being trustees, that is they cannot be paid for the role they play in being a trustee. Any such arrangement requires the express authority of the Charity Commission and the situation is rare. However, whether a trustee, such as an accountant, can bid to provide services will depend entirely upon your Memorandum and Articles* or other governing document.
If your governing document does allow for such an arrangement then it will be subject to the Charities Acts. There are various conditions that need to be met in order to comply, for example:
- there is a written agreement between the charity and the trustee (or their company);
- the agreement sets out the exact or maximum amount to be paid;
- the trustee concerned may not take part in the decision about the making of the agreement or about the acceptability of the service provided;
- the payment is reasonable in relation to the service provided;
- the trustees are satisfied that the payment is in the best interests of the charity;
- the total number of trustees who are receiving payment or who are connected to someone receiving payment are in a minority.
Trustees must also have regard to all of the Charity Commission’s guidance and show that they have taken the guidance into account.
If the charity is also a company then the trustee will also have to take into account their director’s duties in respect of avoiding conflicts of interest and will also have a company law duty to declare an interest in the proposed transaction or arrangement with the company.
Charities should also assess their ability to maintain an arms length relationship with trustees who do provide goods and services to the charity.
(* Recently constituted limited companies will have all of their rules contained within their Articles)
There is a common misconception that when a member organisation nominates a director, that the director is elected to represent that organisation. This is becoming increasingly common with partnership arrangements and directors sitting on multiple boards. It is therefore crucial that a director understands that their duty is to the company on whose board they are sitting.
Whether you are an executive or non-executive director you are still subject to the same legal duties. Many of these duties were known in the past as common law duties but the Companies Act 2006 ‘codified’ many of these and they are set out in the act.
Duty to Act within Powers
This essentially means that a director can only act in accordance with the company’s constitution. It is therefore crucial that a director is familiar with their Memorandum and Articles*, the company’s objects and the powers that the company has.
Duty to Exercise Independent Judgment
A director must not blindly follow the judgment of those who nominated them but must act independently and follow their own judgement on a decision.
Duty to Avoid Conflicts of Interest
A director must avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. In particular this relates to the exploitation of any property, information or opportunity that a director may become privy too.
Duty to Exercise reasonable care, skill and diligence
Arguably one of the most important duties of a director. A director must exercise the care, skill and diligence that would be exercised by a “reasonably diligent person”. The duty takes into account both the general knowledge, skill and experience that may be reasonably expected and also the general knowledge, skill and experience that the director actually has.
Other duties contained in the act, along with common law duties, include the Duty to promote the success of the company; Duty not to accept benefits from third parties; Duty of confidentiality; and the Duty to declare an interest in existing or proposed transactions or arrangements.
(* Recently constituted limited companies will have all of their rules contained within their Articles).
JARGON BUSTER – What is a CIO?
With so many acronyms these days, clients are often confused about what different terms mean. In this issue we are giving the quick once over to CIO’s.
Currently many charities are company’s limited by guarantee and registered charities. This gives the trustees the benefits of being a company, such as limited liability, but also comes with the dual compliance requirements of both the Companies Act and the Charities Act.
The Charitable Incorporated Organisation (CIO) is a new legal structure that has been created in response to charities requesting a legal form that gives the benefit of a company without these dual regulations. Essentially a CIO will be approved and regulated by the Charity Commission alone.
The Charity Commission has now published the two models that will be available for use (subject to change). These are the Foundation Model where trustees and members are one and the same and the Association Model where the membership is wider than just the trustees.
There is still no definitive timetable for the implementation of CIO’s as final regulations still require parliamentary time.
JST are running a FREE breakfast seminar on Trustee’s Roles & Responsibilities on Thursday 10th May 2012 at their offices in Liverpool. Please visit our website or email email@example.com to book a place.
DDI: +44(0)151 282 2835
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DDI: +44(0)151 282 2869