The Personal Liability of Charity Trustees
1. General
It is by no means possible to give comprehensive advice on the extent and degree of risk of personal liability.
The responsibilities of Charity Trustees are well summarised in the Charity Commission's leaflet CC3, in which the question of personal liability is referred to in paragraphs I1 and I2.
This note is concerned only with the liability of trustees of Charitable Trusts as opposed to directors of companies or persons involved in administering un-incorporated associations.
2. Trustee expenses
Generally speaking a trustee should not have to incur any expense in respect of the charity. A trustee is entitled to be indemnified against all reasonable costs and expenses which he may incur in the course of his duties provided those costs and expenses are incurred properly: such expenses would include reasonable travelling expenses and surveyors' and lawyers' fees.
3. Liability for loss to the trust fund
Losses can be made in the course of administering a charity, for example in a fund-raising exercise, but a trustee should not normally have to bear any loss himself unless he has somehow been at fault or has breached some duty which he owes.
If the loss is caused through the default of an employee or volunteer and that employee or volunteer has been properly selected and reasonably supervised in the tasks or duties he is carrying out for the furtherance of the objects of the Charity, a trustee will not himself be liable.
4. Breach of trust
A trustee may be made personally liable if he commits a breach of trust and as a result the charity suffers loss.
The question therefore is: What precisely is a breach of trust?
Put simply, a trustee commits a breach of trust:-
(a) where he acts in a way which is not authorised by the terms of the Trust Deed or other constitution of the Charity (such as the Memorandum & Articles of a charitable company); or
(b) he neglects to fulfil his duties as a trustee
Breaches of trust therefore may include a very wide variety of misconduct including negligence, acts of dishonesty, or forgery and conversion.
There may be a breach of trust for example if payments are made to beneficiaries who do not fulfil the qualifications in the Trust Deed.
The standard of care required of a trustee generally in his dealings with the Trust Assets is as follows:
He must use reasonable care and skill in his work as trustee and he must consider seeking professional advice on all matters when necessary.
5. The extent of the liability
Trustees who have committed a breach of trust which has resulted in a loss to the Trust Fund must make good that loss. BUT the Charities Act 2006 allows trustees to apply to the Charity Commission, as well as to the courts, for relief from personal liability for a breach of trust where the trustee has acted honestly and reasonably, although note that relief is unlikely to be given where the breach of trust was deliberate and unthinking.
6. Who is liable for a breach of trust?
A trustee is only liable for his own acts and defaults and not for those of his co-trustees (Trustee Act 2000 Section 40). However, there may be more than one trustee involved in a breach of trust and each of those trustees will be personally liable for the whole of the resulting loss regardless of the degree of blame attaching to him. This means that, for instance, where one trustee has allowed trust funds to be controlled by a co-trustee who misapplies them, both will be equally liable even though the involvement of one trustee has only been passive.
7. The right to contribution
If one of the trustees concerned in a breach of trust is sued, he will be entitled to contribution from his co-trustees except where he has been found guilty of fraud.
8. Trustee indemnity insurance
Depending what is in the Charity’s governing document, generally trustees can take out trustee indemnity insurance using funds belonging to the charity without applying to the Charity Commission. This is a new provision of the Charities Act 2006 which should generally give comfort to people thinking of becoming trustees who do not want to take personal risks.
We hope it goes without saying however that cover would only generally be available where a mistake has been made honestly and not as a result of wilful misconduct.
© Harold Michelmore & Co 2007
Please note that the information and advice in this Note is provided for general guidance only. We believe it is accurate and up to date, but you must seek personal advice on any specific case or matter. We cannot accept liability for your reliance only on information or advice in this note.