Conflict of interest – the trustee who was an employee

A high net worth individual, Bill, who was passionate about trees and hugged a few, set up a charity in 2002 (which due to client confidentiality, we will call BILL’S ARBO), which owned an area of natural landscape in England in order to plant lots of trees and turn it into an arboretum.

Bill appointed several of his close friends as trustees, including one, Tony in 2002. Tony was also a trusted adviser to Bill and was an employee of Bill both personally and through his advertising business BAL Advertising Limited (BAL). Tony was so trusted by Bill, that Bill appointed him as one of his executors to Bill’s will.

Before his death, Bill owned 99% of the shares in a company called Bill Properties Limited (BPL).  The purpose of the company was originally to be the freehold owner of an office building in Basingstoke.  Tony was also a director of BPL.

Bill died of old age in the summer of 2014.

After Bill’s death, it became apparent to the Executors that the job of administering Bill’s estate was going to be complicated and time consuming and, for this reason, the Executors decided to retain a number of individuals employed by Bill himself to assist with the administration of his estate.  It was decided by the Executors that these employees, who were Bill’s employees but paid through BAL’s payroll, even after his death, should be employed by BPL and so their employment transferred to BPL.

From 1 March 2015, Tony became employed by BPL to assist with the administration of Bill’s estate.  Tony had worked closely with Bill during his lifetime assisting him with both personal and business matters.  Tony was therefore well placed to be able to administer Bill’s estate in the most efficient way possible as he had a detailed understanding of Bill’s affairs.

Tony was paid approximately £60,000 in basic salary per annum with medical insurance benefits valued at £6,000. There was no written employment contract between Tony and BPL, nor any between Tony and Bill. The former’s employment with the latter was based on verbal agreement sometime in 2002 and evolved through custom and practice.

Under Bill’s will dated in 2012, Bill left the residue of his estate to BILL’S ARBO, as he had no family or next kin.  The assets including the Basingstoke property and a healthy cash balance and shares in BPL were part of Bill’s estate at the time of his death and Bill had sufficient assets in his estate other than the shares in BPL to satisfy all of the specific legacies under his will.

In 2019, the administration of Bill’s estate drew to a close and therefore all of the other employees of BPL were made redundant and the Basingstoke premises were sold, so that BPL could be wound up in the near future.

In the same year, Tony, being the last employee of BPL, put forward a proposal for a severance payment including enhanced redundancy pay, which he said reflected his loyal service to Bill, his companies and the charity in which he was a trustee.

A number of issues arose, which impacted on charity governance

Issue one

The decision to employ Tony to carry out the administration of Bill’s estate was taken by the Executors of Bill’s estate, including Tony.  However the trustees of the charity (BILL’S ARBO) were aware of Tony’s employment by BPL even though they were not involved in the decision to employ him.

At that time, the constitution of BILL’S ARBO (Memorandum and Articles of Association in 2002) included provisions stating that the trustees could not be employed by the charity, nor could they receive payment for services provided to the charity unless those services were provided in a professional capacity.

All the trustees of the charity, with the exception of Tony, were concerned that Tony’s employment by BPL was indirect employment by the charity, because his employment with BPL was a cost to that company and impacted on the value including the cash in the business that was destined to be paid over to the charity. Moreover, as a trustee of the charity, any employment by any trustee was expressly prohibited under the constitution of BILL’S ARBO at the time when his employment began.  The trustees of the charity sought advice from us on whether this constituted a breach of their duty to act within their powers, as they were aware of his employment, even though they did not make the decision to employ him.

We advised, that whilst he should not have been employed by BPL and be a trustee of the charity as well, this breach of duty was an honest mistaken oversight by the charity trustees, except Tony.  They did not believe that they needed to be involved in the decision to employ Tony because Bill’s estate was in the relatively early stages of administration and they did not realise the potential for BPL to become the main residual cash asset that would transfer to the charity, on BPL’s disposal of its assets and winding up.

We advised that had the trustees of BILL’S ARBO been aware of the potential breach of duty, they would have acted differently, ensured that they had the requisite power to employ Tony and had obtained the necessary authorisations to do so.  This would have required them to change the constitution of BILL’S ARBO to allow trustees to be employed by the charity and to obtain Charity Commission approval for both the change to the constitution and Tony’s employment specifically.  The trustees BILL’S ARBO would also have been careful to manage any conflict of interests in relation to the relevant decision-making. This could well have entailed inviting Tony to step down as a trustee of the charity or removing him.

Notwithstanding the potential breach of duty and conflict of interest, we advised that the trustees of BILL’S ARBO, except Tony, minute at a trustee meeting that they consider Tony’s employment by BPL to have been in the best interests if BILL’S ARBO.  Bill’s estate needed to be administered in the most efficient way possible, using the necessary financial skills and experience, to ensure that BILL’S ARBO, as the residuary beneficiary of his estate, received as much from his estate, including from the disposal of assets in BPL for cash as possible.  Tony was a qualified accountant and had a detailed understanding of the many assets in Bill’s estate (which had a net probate value of approximately £1.5m).  Therefore, the administration of the estate was made more efficient by having Tony work on the administration of the estate through paid employment rather than employ someone else with no knowledge of Bill’s assets.

We also advised that the trustees of BILL’S ARBO consider whether Tony was remunerated reasonably for the duties he was carrying out.  When considering this question, the trustees considered the remuneration being received by the other employees of BPL and the remuneration which Tony was receiving when employed by Bill personally.

Issue two

Under the then constitution of BILL’S ARBO (Articles of Association) there was no express power which allowed the trustees of BILL’S ARBO to be employed by BILL’S ARBO, or by any company owned by BILL’S ARBO.  However, we advised that there should be an amendment to the constitution so that trustees could be employed by the charity if Charity Commission approval was given.

As Tony’s employment with BPL came to an end, subject to his claim for enhanced redundancy, and as he agreed to step down from the charity board, rather than be removed under the Articles, the trustees did not need to seek Charity Commission approval for his continued employment.  However, with the benefit of our advice, they negotiated with Tony to pay him a reduced severance package more comparable with what other employees has been paid and not in recognition of the work he did for Bill personally and his trusteeship of the charity. The sums offered were considered more reasonable than his proposal having regard to: 1) the work which Tony carried out in relation to the administration of Bill’s estate; 2) his entitlement to 3 months’ reasonable (implied) notice of termination of his employment, having regard to his relative seniority and contribution to BPL and inclusive of his statutory notice entitlement of 4 weeks (based on 4 years’ service); and 3) his statutory redundancy entitlement occasioned by the cessation of the business of BPL and his job redundancy.

We advised that the trustees ensured that any conflict of interest in relation to this payment had been managed in accordance with the constitution of the charity and its conflict of interest policy.

 Report to the Charity Commission

We advised that the trustees should prepare a serious incident report to the submission to the Charity Commission, to be on the safe side and in accordance with our advice “if in doubt – report it”, as they should be as upfront and transparent as possible about the honest mistake which had been made.

The trustees were willing to tell the Charity Commission that they were committed to undertake a full review of the governance of the charity in accordance with the 2017 Charity Governance Code to ensure that a mistake like this never happened again. They also wished to carry out a review of all of the internal policies of the charity and update as necessary.

Application for approval

Issue one

The trustees of BILL’S ARBO sought confirmation from the Charity Commission that they did not need to open a formal inquiry into BILL’S ARBO’s and the employment of Tony by BPL. Now that Tony had stepped down as a trustee.

The trustees requested that the Charity Commission make an Order to protect them from any claims arising from their breach of duty.

Issue two

As Tony’s employment came to an end, the trustees of BILL’S ARBO requested that the Charity Commission make an Order to authorise the payment of the severance package, based on the above factors as a redundancy payment to Tony.

Application granted

The applications were granted and the orders sought were made by the Charity Commission, enabling the severance package to be agreed with Tony and be paid; and BPL wound up – in order for the residual cash to go to the charity to acquire more land to plant more trees in Bill’s name as he would have wished.

If you have any questions about the topics raised here, please get in touch