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Members’ Duties

on Monday, 23 October 2017.

In a recent decision, the High Court decided that the members of a charitable company have duties to the charity. Why is it important and what might it mean in practice?

Legal orthodoxy had been that when members of a company exercise their functions, voting on resolutions, they owed no duties to the company. They couldn't exercise powers as members fraudulently or in bad faith, but otherwise were free to exercise them in their own interests. The principle was well established in case law.

The suspicion was that things had to be different where charities were concerned - even though the legal evidence seemed to point the other way. The assumption gained ground, in part as a result of the Charity Commission's 2004 publication "RS7 - membership charities". This made the bold legal claim that members are bound to "use their rights and exercise their vote in the best interests of the charity for which they are a member."

CIOs Compared

When Charitable Incorporated Associations were introduced, the step was taken to enshrine the duty of a CIO member in statute. The Charities Act provides that the member of a CIO must exercise function in the way "most likely to further the purposes of the CIO". 

The fact that Parliament had felt the need to say that CIO members had a duty seemed to cast more doubt on the thought that the law automatically imposed a duty on the members of a charitable company.

The First Recognition of the Duty

The duty was first recognised in June 2017. A charity, The Children's Investment Fund Foundation (UK) proposed making a substantial grant to Big Win Philanthropy.  Certain Companies Act provisions came into play, meaning that the decision had to be put to the members.

Reflecting the assumption that had been developing in the sector, the Court's judgment records that the parties almost unanimously assumed that members owed duties:

  • to act in the best interests of the charity; and

  • not to act in a conflict of interest.

The Court decided that the assumption had been right.

The Court explained that the law establishing that companies were not owed duties by their members did not apply to charities. Unlike those company members, the member of a charitable company is not "exercising his own right of property, to vote as he sees fit." On the contrary. The member of the charitable company doesn't own shares. The member of a charitable company has powers meant for furthering the purposes of the charity, is part of the administration of the charity. They are indeed bound, as the Charity Commission claimed in 2004 to "use their rights and exercise their vote in the best interests of the charity for which they are a member."

Must Members of a Charitable Company Always Exercise Powers in the Interests of the Charity?

For the time-being, that is the working assumption. 

However the judge was careful to confine his reasoning to the circumstances of the case. We shouldn't read too much into this qualification. It reflects a degree of pragmatic caution on the part of a judge laying down new legal principle. For the most-part powers of members will fall squarely within this category of powers meant for furthering the purposes of the charity and have to be exercised accordingly. Powers intended for other things will be the rare exception.

Members of Non-Company Charities

The division of charity governance between trustees and members isn't just a feature of Charitable Incorporated Associations and companies. It is also found in charter corporations, unincorporated associations and Community Benefit Societies. 

The Court's reasoning would apply equivalently to these other structures. Their members will have powers and functions meant for furthering the purposes of the charity, which they are legally bound to exercise in the interests of the charity.

Conclusion

When the reported law implied that members could use their powers for their own interests, the Charity Commission may have seemed bold in stating that the position was otherwise for charities. However it reflected the practice and assumption of the sector. That practice and assumption is now formally recognised by the court as the position in law.  


 For further information, please contact Elizabeth Knight in our Charity Law Team on 020 7665 0917.

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