Charity trustees are rarely prosecuted or pursued personally if they have acted in good faith; the law generally seeks to protect those acting as trustees. However, it is important that all trustees and prospective trustees understand the potential risks involved in their role.
- The Charity Commission and the courts can relieve trustees from liability if they have acted honestly and reasonably and have not benefited from their actions.
- They have also stated that they will rarely enforce liability on an unpaid trustee who has made an honest mistake.
- However, they do expect higher standard from trustees who act in a professional capacity or are paid for being a trustee.
- And there is no legal protection for trustees who have acted dishonestly, negligently or recklessly.
These guidelines are provided by the Charity Commission and should serve to reassure trustees and potential trustees that, if they act in good faith, they will generally be protected and supported by the law. However, having an understanding of where trustees’ personal liabilities can arise can help you and your organisation avoid any issues in the first place and can help you manage you charity in the most effective way possible.
Trustees are responsible for the general management, administration and governance of their charity. They are ultimately responsible for the lawful running of the organisation as well as its success in achieving its charitable goals.
Further details of the specific duties of charity trustees can be found in the Charity Commission Essential Trustee Guidance.
Wherever there is a failure by a trustee to fulfil their duties, there is the potential for liability to arise; these liabilities can be generally split between a trustee’s liability to their charity and their liability to third parties.
Trustee Liability to the Charity
A trustee can be held liable to their own charity – either by the charity itself or by the Charity Commission – if they cause a financial loss, are complicit in causing a financial loss or are negligent in their failure to stop a financial loss.
Other examples include when a trustee enters into a contract on behalf of the charity that benefits the trustee and when a trustee receives an unauthorised payment or benefit from the charity.
Trustee Liability to Third Parties
Charity trustees can become liable to a third party in numerous ways. For example, if they sign a contract and are unable to fulfil the terms. However, trustees can also be personally liable for organisational liabilities, such as employment and public liability claims.
Whether this is the case is dependent on the legal status of your organisation and, to some extent, the governing document of your charity (a charity can indemnify trustees for honest mistakes, however, this indemnity is only up to the limit of the value of the charity’s assets and does risk bankrupting the charity).
In the case of trustees’ liability to their charity, this is a personal liability that arises out of their relationship with the organisation and the legal requirements of their role. Therefore, a trustee’s liability to their charity is not affected by the legal status of the organisation.
However, in terms of liabilities to third parties, trustees’ personal liability can be limited or removed where their organisation is incorporated as a legal entity. When a charity is incorporated, the organisation has its own legal identity and therefore the trustee would be signing contracts and undertaking other activities on behalf of the charity, as opposed to in their personal capacity.
This insurance is rarely called upon to pay claims but accusations and investigations are more common. Trustee Indemnity is there to help the charity and its trustees mitigate the financial impact of any such action subject to the scope of the policy.