Caveat emptor

December 2008

Moira Protani outlines the pitfalls facing charities purchasing goods or services from their trustees...

We all know the general rule that trustees cannot benefit and cannot be remunerated unless the payment is authorised by the trust instrument, an order of the High Court or the Charity Commission or some special statutory authority. This has caused problems in the past, especially for small charities. If a trustee was prepared to give services and/or materials on advantageous terms for some project of the charity, the trustees could not proceed if there was no authorisation for the payment to that trustee.

The Charities Act 2006 makes a welcome change by providing machinery for permitting trustee remuneration in connection with services to a charity, provided certain strict conditions are adhered to.

Section 36 of the Charities Act 2006 amends the Charities Act 1993 (the 1993 Act) so as to relax the restriction on the remuneration of charity trustees or trustees for a charity, (and any connected persons as defined) where the remuneration relates to the supply of services to or on behalf of a charity. The new powers are set out s 73A of the 1993 Act, with supplementary points including definitions in s 73B.

The Charity Commission has issued guidance on the use of this power, which is contained in section E of the Commission’s Guidance Note CC11: Trustees Expenses and Payments.[i] Trustees must have regard to this guidance when using this new power.

Meaning of expressions

The law in this area is particularly complex and definitions of expressions may prove helpful:

Remuneration of a trustee for the purposes of this new power is widely defined and includes not only payments but any benefit in kind.
Services includes not just the services themselves but can cover goods supplied ‘in connection with the provision of services’.
Trustee for the purposes of trustee remuneration is widely defined, and the trustees of a charity must apply the rules on trustee remuneration when any of the following people are likely to receive remuneration:
1. A charity trustee or trustee for a charity;
2. A child, parent, grandchild, grandparent, brother or sister of any person in 1;
3. The spouse or civil partner of any person in 1 or 2;
4. A person carrying on business in partnership with any person in 1 to 3;
5. An institution which is controlled by one of the persons in 1 to 4 or two or more such persons together;
6. A body corporate in which any person 1 to 4 has a substantial interest, or two or more of them taken together.
The connected persons provisions of sch 5 of the 1993 Act paras (2) to (4) apply to this section and provide further definitions and clarification.

What are the preconditions for using this new power?

In brief the power is exercisable provided that the following four conditions are met:

there must be a written agreement and the remuneration must be reasonable;
the charity trustees must be satisfied that the transaction is in the best interests of the charity;
only a minority of trustees can benefit; and
there must be no express prohibition of the remuneration in the trust instrument (73A(3) to (6)).

When exercising the power the charity trustees are subject to the statutory duty of care under the Trustee Act 2000 (73B(2)), and they must also have regard to any guidance issued by the Charity Commission (73B(1)).

The trustees; duty of care means, that the trustees must act honestly and in good faith, and must exercise all reasonable care and skill in reaching their decision. What is reasonable care and skill will depend on any special knowledge which a person has or claims to have and any special knowledge it is reasonable to expect from a business or professional person acting as trustee.

Some working examples

The case studies set out in Figure 1 may provide clarification of how this change in the law may be applied in practice.

As these case examples show, this is a valuable new power but trustees will need to be careful to comply with the requirements.

Getting it right – a checklist

Before deciding to enter into any agreement the trustees should check that:

they have exercised their powers responsibly and in the best interests of the charity;
they have taken professional or other appropriate advice where there are doubts;
they have satisfied themselves that the payment is justifiable;
any conflicts of interest will be properly managed;
any agreements will be properly managed and performance monitored;
any agreement will be retained by the charity as part of its records; and
any payments will be disclosed in the charity accounts.

Having made their decision the trustees must ensure that they have a written agreement with the person to be remunerated which contains at least:

an accurate description of the services to be provided;
the name of the person to be remunerated;
details of the amount to be paid; and
provision for the remunerated trustee to be absent from the appropriate parts of the trustees meeting and to ensure that the trustee does not vote and is not counted as part of any quorum required. The trustee may provide the meeting with information if requested but should not otherwise speak on the remuneration issue.

Failure to get it right means that the entitlement to the whole or part of the remuneration can be forfeited under an order of the Charity Commission, and can involve repayment of the remuneration to the charity.

Inconsistencies

This change in the law is to be welcomed, and provided trustees are careful, will give legal recognition to the good work of well meaning trustees who seek to benefit their charity but who can’t afford to do it for nothing.

It is unfortunate that some of the Charity Commission Guidance in CC11 seems to be at odds with the requirements of the legislation. This is not helpful to trustees. They can, of course, fall back on the defence that if they have to follow the guidance in CC11 they cannot be criticised if they do just that.

Figure 1: Case studies

Case 1

Mr A is a trustee of a village hall charity. He runs a repairing and decorating business and offers to redecorate the hall at an advantageous price, including the supply of all the paint and paper. There is no power to pay trustees in the trust deed but no prohibition either. No other trustees are being remunerated. The trustees check out other prices and refer to the Charity Commission’s Guidance in CC11. They are satisfied it is a good deal for the charity. They have a meeting at which Mr A is not present and agree to take up his offer. The detailed arrangements are embodied in a formal agreement.

This would be acceptable. The trustees have complied with the requirements including exercising their duty of care. The supply of paint and paper is acceptable because it is connected with the provision of services (the decorating).

Case 2

As above but the decorating and repair business is run by Mr A’s civil partner Mr B and not by Mr A. This is still trustee remuneration and the rules must be followed as above.

Case 3

As for case 1 but the charity’s trust deed prohibits any trustee from receiving any remuneration or benefit. The trustees cannot proceed as there is an express prohibition.

Case 4

As for case 1 but in addition Mr A offers to supply timber at an advantageous price for some building work at the hall. He is not carrying out the building work. As a matter of law, this falls outside the scope of the new power which does not permit a trustee to provide goods which are not supplied in conjunction with a supply of services. However, the Commission states in its CC11 guidance that this is acceptable. If trustees have followed CC11 (as they are required to do) they could not be criticised for following the advice.

Case 5

As for case 1 but this time the trustees (who know Mr A very well) don’t check other prices and as they trust him as a friend and colleague don’t bother to set out the arrangements in an agreement. The work is completed satisfactorily. Although everything has gone well, the trustees have some explaining to do. They are not in a position to show that the deal was in the best interests of the charity, and they have not ensured a proper contractual arrangement to monitor delivery of the services.

The trustees are in breach of trust and if on investigation there is a loss to the charity, the trustees are responsible. In addition because the requirements for purchase of services have not been followed, the whole or part of Mr A’s payment may have to be returned to the charity. In small communities or groups of trustees who know each other well, this is understandable in human terms, but the results can be devastating.

Case 6

As for case 1. This time the labour charges are very low but the paper and paint are supplied at the current market (but not excessive) price. The combined labour and materials deal is still advantageous when compared with other suppliers.

This is a difficult one because the Charity Commission advice in CC11 says that when goods are purchased there must always be a price advantage to the charity in respect of the goods. If there is not, the Charity Commission takes the view that the trustees cannot say that the deal is in the best interests of the charity. This is (with respect) unrealistic. If the overall deal for the charity is clearly advantageous, and the cost of materials is not excessive, why should it matter how the component parts of the deal add up? I agree it would be otherwise if the materials were supplied at excessive prices.

[i] www.charity-commission.gov.uk/ publications/cc11.asp

Author: Moira Protani

Moira Protani joined Wilsons in September 2008, is head of the charities department and is based in the firm’s London office. She is an expert in charity law as it affects charities, trustees, donors, businesses and public sector bodies which engage with charities.

She advises on the establishment of charities, trustee powers and duties, schemes, taxation, grant-making, fundraising, mergers, disposal of land and buildings, dealing with the Charity Commission, constitutional and good governance issues.

www.wilsonslaw.com

Click here for other articles written by Moira Protani

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