Useful Lessons from the Charity Commission

We round up some recent lessons from the Commission, including financial resilience, an almshouse charity's success in updating its objects by scheme and the importance of careful management of conflicts of interests.

Financial Resilience in the Charitable Sector

The Charity Commission is focusing on financial resilience in the sector, and has released two case new reports on charities that were showing signs of financial distress. Both of these case reports emphasise the importance of trustees being alert to changes in their charity's funding and taking steps as soon as possible after a shortfall or any risk of financial distress has been identified.

The Commission comments that 'where charities do face financial difficulties, trustees can discharge their duty to act in the charity's best interest by identifying at an early stage the options and pursuing those that stand some chance of success'. The reports highlight that charities need to regularly review the financial health of their charities and put in place 'robust' procedures for managing their charity's finances.

The cases also indicate that the Commission is proactively analysing charities' accounts to identify charities at risk and then approaching these charities.  .

Success for All Foundation showed signs of having lost control of its costs, creating an overspend of roughly a third of its income and bringing it close to insolvency. However, the Commission found that the trustees had acted quickly to salvage the charity's finances, including:

• Recognising the risk of insolvency, and appointing a new chief executive to address the issue
• Altering the charity's business model to minimise reliance on government funding and generate more money through sales of its educational programme
• Reviewing expenditure and implementing changes such as outsourcing HR and payroll, and changing mobile phone suppliers
• Reviewing costs spent on premises and identifying savings in this area

Gosling Sports Park's accounts indicated a net loss of £191,827 during  the previous financial year and a debt of £7 million. The Commission established that a bank loan at a rate of more than 5% had been used to fund a property development, which lead to mounting debt after the 2008 recession. However, the case report  found that the trustees had taken 'significant steps' over the last two years to try and protect the charity's assets and improve its financial position. The trustees had explored several options, including:

• The sale of unused land
• Attempts to change the terms of the loan
• A transfer of operations

After exploring these (unsuccessful) avenues, the trustees successfully completed a partial transfer to another charity with similar purposes, which covered its outstanding debts and secured its recreational facilities for its beneficiaries.

Amending Charity Objects by Scheme

St Nicholas Hospital was set up to provide almshouse accommodation to those in need of assistance. However, the charity's objects did not extend to assisting former residents of the almshouses. The trustees recognised that this was a real cause of anxiety for elderly residents who regularly worried about how they would fund their nursing care when they could no longer live independently in the almshouses.

In June 2015, as the trustees did not have the power to change the objects themselves, they applied to the Charity Commission for a scheme to widen the charity's objects to enable it to provide financial assistance to beneficiaries no longer living in the almshouses.

The Commission queried why the trustees wanted to make the change to the objects and asked whether the charity had consulted about it. The Commission assessed the trustees' responses and concluded that a scheme could be made because the trustees had successfully shown the following:

• the charity had sufficient funds to provide the additional support
• the change requested was in the spirit of the existing purposes, was close to the charity’s original objects and fitted with the charity’s need to have purposes which are suitable and effective in the light of current social and economic circumstances
• there was a legal case for widening the charity’s objects, for example that beneficiaries were living longer and as a result, or combined with their health needs, had to move into care.

The case report highlights that it is the duty of trustees to change a charity's objects, should they become outdated. Where trustees do not have the power to change the charity's objects, the report refers to the schemes guidance  which sets what the trustees should provide to the Charity Commission when applying for a scheme, including the following:

• be able to clearly show the grounds for changing the objects and how the requested change is the most appropriate for their charity and the circumstances that apply
• include as much relevant information as possible in the application
• describe what the trustees have done to consult with the people who will be affected by the proposed changes and what the result of that consultation was.

Appointment of Interim Manager to Investigate Serious Mismanagement

In 2006, the Society for Promoting Christian Knowledge (SPCK) agreed to transfer 22 Christian bookshops to Saint Stephen the Great Charitable Trust (the Trust), on the understanding that the Trust would keep the shops operational as Christian bookshops and not bring SPCK’s reputation into disrepute.

The intention was that the interests in the properties would be transferred to Saint Stephen the Great (the Company), which would manage the ongoing operation of the shops.

In April 2009, the Commission appointed an interim manager to manage and administer the Trust following a number of complaints received from members of the public, including:

• the Company or Trust appeared to have transferred £31,800 to a company in the USA, of which some of the trustees were directors
• the company in the USA had filed for bankruptcy, leaving staff and creditors of the Trust and the Company with concerns that they would not be paid
• the Trust had transferred management of the shops from the Company to 3 separate management companies which led to former employees bringing claims against the Trust and the Company for unfair dismissal
• the Trust had sold some of the shops in breach of the agreement with SPCK
• there were allegations that the churches owned by the Trust were not operating and the shops were failing

The interim manager concluded that there had been serious mismanagement and misconduct of the Trust and the Company by the trustees, as there were unmanaged conflicts of interest relating to directorships of associated companies and contracts entered into by some of the trustees.

The inquiry report  highlighted poor governance, a lack of due diligence and inadequate record keeping on the part of the Trust and the Company. It was considered to be in the Trust’s best interest for it to be wound up with surplus assets transferred to charities with similar objectives.

The inquiry made clear that trustees must act only in the best interests of the charity and actively manage any conflicts of interest. Trustees should avoid any situation where a conflict exists or is likely to arise if it is clear the conflict cannot be adequately managed, even if this means that additional trustees are appointed or conflicted trustees resign. The inquiry also highlighted that it is good practice for trustees to obtain professional advice when considering certain complex, significant or high risk decisions.

For more information, please contact Laura Chesham in our Charity Law Team on 0117 314 5314.