Trustees: What are your liabilities and how can you minimise risk?

Trustees are vital to any charity. From settling strategy, managing finance, deciding on governance, to oversight of the day to day operations of the charity, charitable organisations simply wouldn’t run without Trustees. But where exactly does the role of a trustee leave you in terms of risks and accountability? Where does your liability lie? What can you do to minimise this risk? Your liability depends on factors including the nature of the risk, whether you acted in good faith and the structure of your charity.

Liabilities fall into 2 categories:

1. Governance Liabilities: These arise from the duties a Trustee has; and
2. Operational Liabilities: These are incurred due to the nature of work a charity does. The question of whether you will be responsible for operational liabilities depends on whether your charity is incorporated.

Structure of Charities

If your charity has its own legal personality it will be responsible for its own debts and obligations. It is unlikely you will be liable unless you have provided a personal guarantee. Even if the trust becomes insolvent, as a trustee you would not generally be accountable.

In the case of unincorporated charities, as a trustee, if you enter into a contract with a third party in your personal capacity you will be responsible for the charity’s debts and obligations. You are entitled to be indemnified from property which belongs to the charity but if it runs out of funds and is unable to meet its debts (e.g. salaries and rent) you will be responsible for these. This is why so many charities now seek limited liability.

Irrespective of the structure of your charity legal action may be brought by the Charity Commission, Attorney General or other trustees against you for breach of trust. However, if you have acted in good faith and have complied with your duties it is unlikely you will be prosecuted. An example of breach of trust is spending the charity’s money on activities outside the scope of its objects.

Personal liability

You will also be personally liable in circumstances including the following:

1. Where you are found to be criminally liable (your charity may also be held accountable);
2. Where a tribunal finds that you have been discriminatory towards another trustee or employee, you may be ordered to pay compensation to the victim together with or in place of the charity;
3. Where you are in breach of your obligation to look after the charity’s resources and the charity suffers a loss.(The Charities Commission has emphasised that it is likely to enforce personal liability where a trustee has acted dishonestly or recklessly);
4. Where you have sanctioned wrongful actions or omissions of employees and volunteers; and
5. When you allow the charity to trade at a time when you should have known or knew that it was inevitable that it would become insolvent.

How can minimise your charity’s risk and your personal liability?

Indemnity

Subject to certain exceptions relating to penalties and criminal liability, it is likely your charity will be able to indemnify you if you have acted in good faith and in accordance with your duties. However, you will still be liable if the charity is unincorporated and it does not have enough assets to meet the indemnity.

Insurance

Liabilities may be covered by insurance. If you don’t have an insurance policy in place, you may consider obtaining:

1. Professional indemnity insurance: This would be registered the name of your charity and would cover insurance against liability for negligence. You would need check the extent of the cover and whether it covers all your requirements.
2. Trustee Indemnity Policy: This protects trustees personally and is funded by the charity subject to certain conditions. In general terms, it covers claims relating breach of trust, situations in which trustee have acted wrongfully but not recklessly or dishonestly. It does not, however, cover liability for third party debts. Legal fees of trustees who are under investigation will also be covered.
3. Public Liability and Employee Liability Insurance: Most charities have this and it will cover claims against the charity under health and safety and employment legislation.

If you want more information on the potential risks you are personally liable for OR you are in doubt about your potential personal liability, please call 01245 330351 on [email protected] before signing any agreements on behalf of your charity.

Beyond charity law, we also offer a full range of legal services to the charitable sector including employment law, general commercial advice including intellectual property and commercial premises.