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Duties of Members of Charitable Companies

on Thursday, 30 July 2020.

On 29 July 2020 the Supreme Court confirmed a long-standing view held by some lawyers and others within the sector that the members of charitable companies can owe a type of duty, known as a fiduciary duty, to the company's charitable objects or purposes.

This is an interesting and important decision, although to an extent it raises (rather than answers) a range of associated questions about the duty and its practical implication for charity governance.

It Is All About the Circumstances

It took fairly unique circumstances to bring the issue to the Supreme Court. The case relates to very specific legal and practical circumstances. The decision whether to authorise a very substantial donation to another charity fell to be decided by a member of the charity.

We learned too that circumstances are also at the heart of what duty, if any, is owed by members in other charities and in other situations. In an article earlier this week, before the judgment was handed-down, Andrew Wherrett said:

"The case does not reflect the typical engagement of members of mass-membership charities. It concerns a small membership, facing a special legal situation, with which it is highly and diligently engaged, performing an essential function in order to dispose of a matter of considerable importance for the charity."

Or, as Lord Reed put it in the final paragraph (236) of this 73 page judgment, "the facts of this case seem unlikely ever to be replicated".

In this case, applying a set of principles as to when the law imposes these fiduciary duties, the Supreme Court found that the member in question had a duty to exercise a particular power in the best interests of the objects of the charity. Whilst the Court confirmed that the same principles apply to all membership charities, whether the membership is large or small, what duties apply depend on the circumstances.

Key Points

The fiduciary duties in question are owed, not to the charity itself, but to its charitable objects. This adds a certain clarity. It is not open to members to envisage some interest of the charity separate from its charitable objects. But it also adds uncertainty in some circumstances. What duty would members owe where the objects themselves are the subject of the decision - where the objects are being changed or the charity is dissolving and deciding to distribute the charity's assets to other charities rather than continuing to pursue its own objects. 

Although it remains to be decided on a case by case basis, members might in some circumstances have duties to avoid exercising their powers if they have conflicts of interest, for example if they had a financial interest or in the matter of their own election.

The precise form of the duties in any case are shaped by the statutory and contractual framework - the Companies Act, Charities Act and Articles of the company. For example, a member will not usually have the same rights to access information as to the charity's trustees, so will not have equivalent duties to trustees about using information in decisions.

Although a case about charitable companies, we discovered that we knew less than we thought about the duties of members of Charitable Incorporated Organisations. We knew that they have a statutory duty to exercise their powers in good faith in the way they decide would be most likely to further its purposes. The Supreme Court has raised the spectre that this may not be a complete list of their duties; there may be more besides.

For all this talk of duties, the Court was keen that individuals should not be dissuaded from membership of charities. The circumstances for a member being joined to proceedings and the Court giving a direction to them are fairly exceptional. Typically the Court would not intervene unless there were a breach of the duty, which will be rare since usually the member will have their own discretion (reasonably and in good faith) in deciding the interests of the charity. The majority of the Court characterised their decision as encouraging to members in that the Court is there to lend assistance in exceptional cases.

Practical Effects

As charity lawyers, we are sometimes called on to advise charities on internal disputes involving members with strongly held views. Whether they are choosing new trustees, approving a contentious constitutional change or changing a longstanding policy, these decisions can be critically important to the charity - and it is often difficult to distinguish between the interests of a member with a strong personal view and the interests of the charity and its charitable objects. Even where members are able to separate their personal interests to approach the issues, as in this case, with "studied neutrality", there is scope for dispute in good faith as to how the interests of the charity should be determined. The position has been made more complex by the surprisingly longstanding uncertainty about the legal duties of the members of charitable companies.

Advisers and others will study this judgment in detail in the hope that the Supreme Court's decision both makes sense of the case before it and provides useful guidance for charitable companies more generally given the diverse range of membership structures found in the sector. That wish is probably only partly met.

The decision that a member of a charitable company is a fiduciary is, as a matter of principle, clear and is also in line with the Charity Commission's position that "charity members have an obligation to use their rights and exercise their vote in the best interests of the charity of which they are member" and largely consistent with the approach taken by statute in relation to the members of Charitable Incorporated Organisations.

What we have seen is that the scope of the fiduciary duty and what it requires in any particular circumstance is less clear. The scope of the duty owed by the members of a charitable company will likely vary from charity to charity and will depend on a careful analysis of the relevant articles and applicable legislation. Since the duties are shaped by statute and contract - including the articles of association - some charitable companies will want to look carefully at articulating the scope of the duty owed by their members in their constitutions.

For specialist legal advice on your charity's duties, please contact Shivaji Shiva (07788 313 298) or Andrew Wherrett (07787 746 721) in our Charities team, or complete the form below.

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