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avoiding personal liability for trustees
If you are a trustee of a charity which does not have limited liability status (e.g. through being a limited liability company or CIO for example) you may be taking the risk of personal liability if something goes wrong. This is because as a trustee, on behalf of a charity, you enter into contracts in your own name. If the contract is breached you may be held to be personally liable and your own personal assets may be at risk.
There are also other risks, as a legal case in 2008 illustrated:
Environment Agency prosecution
In 2008 the Environment Agency prosecuted the chairman and treasurer of a golf club for polluting a nearby river when there was a fuel oil leak from an underground pipe which ran from the club’s storage tank to the boiler. The leak was caused by builders who were working for the club and accidentally damaged the pipe.
As the golf club did not have limited liability status, the trustees of the club could be prosecuted personally for a criminal offence under the Water Resources Act 1991. There was no excuse or defence under the Act as the offence was one of ‘strict liability’. The maximum sentence under the Act was 2 years and a fine.
The case went to the Court of Appeal, which held that, even without their being any element of personal responsibility for the leak, the individuals running the golf club could be prosecuted and found guilty of a criminal offence.
Lord Justice Hughes held that not only could the club and its trustees be prosecuted, but also any of its 900 individual members. All trustees or members of charities and clubs (such as sports or social clubs) that do not have limited liability status could be personally liable on the same basis.
how can I avoid personal liability?
The most practical and reassuring solution to this problem may be to incorporate the organisation as a CIO or a limited company. There are certain steps that have to be followed before an unincorporated association can become a CIO or a limited company, these are:
1. Before the application can be made the CIO needs to be ‘set up’ and this means deciding the following:
- what your charity’s purpose is/are*;
- what type of charity structure it will have (e.g. association or foundation)*;
- whether the charity’s constitution will be based on the Charity Commission’s association or foundation model constitution and preparing this document*;
- what the charity’s name is going to be;
- who the trustees are going to be and obtaining their agreement to act; and
- deciding how your charity will be funded.
*Please note, we can assist you with these points if necessary.
2. Apply on-line to the Charity Commission by filling out the on-line application form; and
3. If necessary, transfer the assets from the unincorporated association, to the CIO. As well as effecting the transfer of the assets this document provides the trustees with an indemnity from the CIO, up to the value of the assets that are transferred, in view of the liability trustees face, as demonstrated in the above case. This means that the trustees are then protected by the limited liability nature of the CIO from the transfer date and up to the value of the assets that have been transferred for events before the transfer date.
company limited by guarantee
- Form a company limited by guarantee.
- The new company would then need to register as a charity in its own right (this is because registered charity status cannot be transferred from the existing charity.)
- You will note the CIO application does not involve the extra step of registering as a charity, as this is done with the CIO application. In addition, choosing to be a company limited by guarantee means that the company is registered with Companies House and the Charity Commission, both of which annually require information from the charitable company. Therefore, choosing to register as a CIO would avoid the requirement of having to provide such information to Companies House.
Please note, the above is meant as general guidance only and is only up to date at the time of writing. If you would like specific advice on the above, or the other options that are available with limited liability status, please contact Tim Field on telephone 01245 453802 or by email email@example.com.