The prosecution of trustees who have acted in good faith is a rare event. Hundreds of thousands of people have acted as trustees to charities and other civil society organisations for many decades without incident and where something has gone wrong, the law generally seeks to protect individual trustees from personal risk where they have acted in good faith and complied with their trustees’ duties. The table of liabilities that follows is intended to inform, reduce risk and help trustees to decide on the best course of action with regard to the legal form of their organisation and the insurance cover required.
Charity trustees are the people who have the general control and management of a charity’s administration: in short, they are ultimately responsible for the charity. Charity trustees can have a number of names including governors, board members, directors and members of the management committee. Some charities may make a false distinction between trustees and other committee members but any individual engaged in the governance of the charity is de-facto a trustee, whether or not the Charity Commission has been notified of their appointment. Becoming a charity trustee for the first time can be both an exciting opportunity and a daunting prospect when it comes to understanding your duties and responsibilities. This guide is intended to be an illustrative summary of the potential personal liabilities associated with becoming the trustee of a charity, and the extent to which such liabilities might be covered by company incorporation and insurance. This is only a summary, and it deals with complex issues. If you have queries, we have signposted you to further reading or you could seek professional advice. There will be other organisational liabilities to consider when you are a trustee, but this guide does not consider these.
Types of personal liability
There are the following types of potential personal liability for the trustees of charities:
- Liabilities to third parties that occur in the course of running the charity. Most charities will have legal relationships with third parties, such as funders, staff or suppliers and all legal relationships carry the risk of legal liability. The extent to which the trustees are personally liable in these circumstances will depend on the legal form of the charity;
- All charity trustees are, in principle, also vulnerable to legal action instigated by the Charity Commission or the Attorney General (or the other trustees) in the case of a breach of trust. This action is not affected by the legal form of the charity;
- Liabilities associated with the charity trading while it is insolvent or close to insolvency; and
- There are a limited number of specific circumstances where a trustee could be found criminally liable.
The potential liabilities of charity trustees to third parties depend to a great extent on the legal form of the charity. If you are thinking about becoming the trustee of a charity, one of the first questions you should be asking is “what is the charity’s legal form?”. All charities incur liabilities: they are referred to above as organisational liabilities.
Liabilities which might be expected to arise in the course of a charity’s everyday work might include debts to suppliers, staff wages, utility bills and so on. Some liabilities are unexpected: a claim from someone who has been injured on charity premises, for example, or a fine because the health and safety rules have been breached. What trustees will want to know is whether they can be made personally liable for those liabilities. The 3 answer depends to a very great extent on the legal form of the charity:
- Incorporated legal forms A charitable company limited by guarantee, Charitable Incorporated Organisation, Royal Charter body or a community benefit society (Industrial and Provident Society, IPS) are all incorporated legal forms. This means that the charity has a “legal personality”. The charity can enter into legal relationships, such as relationships with staff, suppliers and the general public, in its own name. In most situations, if the charity is incorporated, it is the charity itself, rather than the members or the trustees, which is responsible for the charity’s debts or for any other liabilities which might arise from its legal relationships. This will generally be the case even if the charity has no funds to meet the liabilities: the charity will become insolvent but the trustees are usually protected from personal liability. There are some exceptions. First, where an incorporated charity is insolvent, the courts can, in principle, impose liability on the trustees in some circumstances. See more on this under “insolvency” below. It would be very rare indeed for a trustee to be made liable in this way. Second, in some specific situations trustees can be held responsible for some liabilities alongside the charity. These are outlined below: they are also rare and generally involve an element of fault on the part of the trustee concerned.
- Unincorporated legal forms A trust or an unincorporated association are unincorporated legal forms. This means that the charity does not have its own legal personality. It is the trustees personally who enter into any legal relationships with third parties. The trustees are able to meet the charity’s liabilities using charity funds, so this is not usually a problem. The difficulty arises if the charity runs out of funds and is unable to meet its liabilities. Here the trustees are potentially exposed to personal liability for any outstanding liabilities. (It is possible for the trustees of an unincorporated charity to try to agree, when entering into a contract, that their liability will be limited to the level of the charity’s assets, but this is not always possible.) For this reason, many unincorporated charities often consider changing their legal status and become incorporated. If the charity is entering into contracts, employs staff or has premises then its trustees should seriously consider incorporation as an option. It is worth saying that if a community group is established relatively informally, and has not made an active application to register as an incorporated body of the kind described above, it will be unincorporated.
Many of a charity’s unexpected liabilities can be met by insurance, taken out in the name of the charity. It is appropriate for any charity to consider what sort of insurance policies it needs: insurance against liability for damage to premises and equipment for example, or insurance against liability from members of the public using its premises. This type of insurance protects the charity. There is another type of insurance which can protect charity trustees personally. This is called trustee indemnity insurance. It is important to understand what this is. While the scope of the cover will depend on the terms of the individual policy, generally speaking, this type of insurance will cover breach of trust claims and wrongful trading and covers associated legal costs. It is very important for trustees of charitable trusts and unincorporated associations to note that this type of insurance does not cover their potential liability for debts to third parties, as described above. TI policies should cover trustees where they have acted wrongfully but not recklessly or dishonestly. Most Trustee Indemnity policies will also cover the legal fees of trustees who are under investigation or who have actions brought against them that are later dropped or ultimately unproven. Trustee indemnity insurance is regarded as a benefit to you, since it protects you personally rather than the charity. However it can usually be funded from charity resources, subject to certain safeguards.
Most charities are permitted to indemnify its trustees who have acted in good faith and in accordance with their duties. The indemnity can cover proceedings brought by third parties. In charitable companies, for example, under company law this indemnity will cover both legal costs and the financial costs of any adverse judgment. However it would not extend to the legal costs of unsuccessful defence of criminal proceedings, fines imposed in criminal proceedings, penalties imposed by regulatory bodies or situations where they have knowingly or deliberately acted wrongfully. Trustees may still be personally liable if the assets of the charity are not sufficient to meet the indemnity.