Nick Burrows and Sophie Bird, in our Charities & Education team, explain the concept of personal liability in relation to Charity Trustees, when it might occur and how to protect against it.
Many people take on trustee roles within charities as a way to positively contribute to a cause that matters to them. Undoubtedly, the role of trustee is an exciting and rewarding endeavour. The potential personal liability involved with the role, however, may be daunting.
In this article, we will set out when charity trustees can be held personally liable and how trustees and charities can protect themselves.
What is a trustee?
It is firstly important to understand what a trustee is. A trustee is a person with the overall management and control of a charity, and who is ultimately responsible for the achievement of its purpose.
The main duties of trustees include:
- Ensuring the charity is carrying out its purpose for the public benefit;
- Complying with the charity’s governing document and the law;
- Acting in the charity’s best interests;
- Managing the charity’s resources responsibly;
- Acting with reasonable care and skill; and
- Ensuring the charity is accountable.
What the role entails on a practical basis will vary from charity to charity but will generally include a range of responsibilities from governance and legal compliance to financial oversight, risk management, strategic direction and more.
What is personal liability, and when does it occur?
In their role, trustees may face two types of personal liability:
- Liability to third parties (e.g. suppliers and funders) that occur whilst running a charity as a trustee.
- Liability for breach of trust (e.g. to the Charity Commission) as a trustee.
In the case of (1), the type of legal structure a charity has plays a significant role in determining whether trustees can be held personally liable.
Trustees of an unincorporated charity (e.g. trusts and associations) may have personal liability where the assets of the charity are not sufficient to meet any amount the charity owes. This is due to the charity not having its own ‘legal personality’, meaning that if something goes wrong (e.g. a contract is breached), it will be the trustees (who will have entered into that contract in their own names on behalf of the charity, because the charity cannot enter into such a contract itself) who will potentially have personal liability. Whilst the charities are entitled to an indemnity from the assets of the charity in such cases, if those assets are insufficient to meet that liability, the trustees are those ultimately responsible.
Trustees of an incorporated charity (e.g. Companies and Charitable Incorporated Organisations) have limited personal liability. This is due to the ‘legal personality’ of the charity, meaning that it enters into contracts in its own name (rather than the trustees having to do so), so that if something goes wrong it will be the charity which will be liable (with the exception of e.g. wrongful or fraudulent trading by the trustees).
In the case of (2), the type of legal structure a charity has plays no significance. Where a trustee breaches the trust (by breaching their duties by, for instance, misapplying or misappropriating charity funds), and this causes loss to the charity, a claim may be brought against them by e.g. the Charity Commission, for which the trustee will be personally liable.
The results of a claim by the Charity Commission may vary, as it has wide ranging powers including the power to launch a statutory inquiry into the charity (you can read our article on statutory inquiries here) and the power to suspend or remove a trustee.
How to protect against personal liability?
The best way for a trustee to protect themselves against personal liability is to act in good faith and comply with their duties. To assist with this, trustees should ensure they are familiar with the charity’s governing documents, policies, and other relevant laws and rules (e.g. on fundraising, campaigning and political activity, safeguarding, and reporting and accounting).
Charities may further consider the following options to protect trustees against personal liability:
- Incorporation – Along with other benefits, incorporation (as set out above) offers greater protection to trustees against personal liability (you can read our article on incorporating a charity here).
- Contracts - Unincorporated charities may limit trustees’ personal liability through carefully drafted contracts which can restrict the losses for which trustees may be responsible by limiting liability under the contract to the amount of the charity’s assets from time to time.
- Trustee indemnity insurance – this insurance will offer trustees financial protection against claims in the circumstances covered by the terms of the policy.
Conclusion
The role of trustee should be treated with respect and the appropriate level of caution, by both trustees and charities. Whilst the majority of trustees and charities will never face the risks of personal liability, this is a complex matter and should not be overlooked.
For further information or legal advice on the role of trustees and personal liability, or on another matter of charity law, please email charities@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
