​Duties of Members of a Charitable Company

One of the grey areas in charity law has just been clarified by the High Court in Children’s Investment Fund Foundation (UK) v Attorney General [2017] EWHC 1379 (Ch), a case regarding the court’s power to direct a member of a charitable company to vote to sanction the payment of a grant to another charity that might be regarded as a payment in respect of the loss of office of a departing trustee.

Historically, many charities seeking the advantages of an incorporated legal form have become companies limited by guarantee. Like a conventional company limited by shares, a company limited by guarantee has two layers of governance: a board of directors (in the case of charitable companies, they are often referred to as the trustees) and members who may be:

(a) the same people as the directors/trustees,

(b) the person(s) or organisation who set the company up and wishes to retain strategic control, or

(c) a wider membership, typically where the charity relies on membership for its revenue or for the carrying out of its work.

While the directors/trustees of a charitable company are the key decision-makers, company law reserves certain matters for the members, including:

• the removal and replacement of directors;
• the amendment of the Articles of Association (subject to the requirement for Charity Commission consent for “regulated alterations”);
• the approval of certain transactions between the company and its directors; and
• in some cases, the destination of any remaining assets when the company is wound up.

If a charitable company has the same people acting as directors and as members, it is clear that those individuals owe a duty to the company because of their trusteeship. However, what is less clear is what duties, if any, the members may owe to the company if they are not also trustees.

The Charity Commission has for some time put forward the view that members can owe duties to the charity. In its 2004 publication RS7 – Membership charities it states that:

“In exercising their right to vote and influence the governance of a charity, members of a charity should ensure that their behaviour is not damaging to the running of the charity or to its good name. The Charity Commission takes the view that members have an obligation to use their rights and exercise their vote in the best interest of the charity for which they are a member.”

The Commission’s reasoning here is perhaps best explained by the following extract from the “legal considerations” section of the publication, which acknowledges the uncertainty:

“the Charity Commission considers that the rights that exist in relation to the administration of a charitable institution are fiduciary, regardless of the identity of the person or persons on whom the rights are conferred.

If, under the terms of the governing document of an institution, administrative rights can be exercised otherwise than in the interests of the institution, without a breach of trust or duty being committed, then the question arises whether the institution is in fact established for exclusively charitable purposes. If this is the case, the organisation is not charitable.

Some uncertainty does exist, however, about the extent to which members of charitable companies are legally obliged to vote in the best interests of the charity of which they are a member. It has been argued that the members of charitable companies are in the same position legally as the members of non-charitable companies.”

And, as argued by counsel for The Children’s Investment Fund Foundation (UK), there is a “negative analogy” in respect of members of a Charitable Incorporated Organisation: section 220 of the Charities Act 2011 expressly gives members of a CIO a duty to exercise membership powers in the way that the member decides, in good faith, would be most likely to further the purposes of the charity. If it was necessary for the Charities Act to impose an express duty on members, does it not follow that the absence of such an express duty under the Companies Act leaves members free to act as they see fit?

In the recent decision, the Chancellor of the High Court Sir Geoffrey Vos acknowledges that, “Generally a member of a commercial trading company may vote his shares at a general meeting in accordance with his own interests or wishes… A member of a commercial trading company does not… owe any fiduciary duties in respect of his voting rights.”

However, in relation to a charitable company limited by guarantee, the critical distinction seems to be that “Members of a charitable company limited by guarantee without a share capital do not generally have a personal proprietary interest in their shares, since they cannot benefit personally from their membership“.

In the absence of a proprietary interest in the company’s assets, and in view of the dedication of the company’s assets to the achievement of its charitable purposes, the member’s powers are “directed at aspects of the management and administration of the charity designed to achieve the charity’s exclusively charitable objects“.

The Court endorsed the submission by counsel for the Attorney-General that, at least in this case, the members of the charitable company “are part of the administration of the charity, and they cannot lay claim to any private interest” and confirmed that the members of the charity in question had, by becoming members, assumed such a responsibility to the charity as would reasonably entitle the charity to expect them to act in the charity’s interest to the exclusion of their own or a third party’s interest. In other words, a fiduciary duty applies to the members (as defined in Grimaldi v. Chameleon Mining NL (No 2) [2012] FCAFC 6).

So the point made in the Commission’s publication RS7 was approved (in the circumstances of this case) as being correct regarding the obligation of members of a charitable company “to use their rights and exercise their vote in the best interests of the charity for which they are a member“.

Sir Geoffrey Vos C also stated that “It would be contrary to the whole regime established by the increasingly prescriptive legislative regime reflected in the Charities Act 2011 if the member of a company such as CIFF could vote in his own interests or in a manner detrimental to the charitable objects of the company.”

However, the judgment concludes with a word of caution about applying the decision too widely:

“I should not leave this aspect of the matter without emphasising the specific nature of the decision I have reached, and the exceptional character of this case. I have looked at numerous charities’ cases over three centuries and the present position has not arisen before. It may never arise again. The position might be different if there were numerous independent members of the company, or if the trustees of CIFF had not relinquished their discretion to the court.”

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IBB Solicitors’ specialist Charities team has over 50 years’ combined experience in delivering practical commercial adviceto charities and not for profit organisations and those who work with them. For advice, contact a member of the team, call us on 03456 381381 or email enquiries@ibblaw.co.uk