Good faith and fiduciary duties – Charity members and trustees when relationships break down

There may be trouble ahead

Charity board trustees oversee the charity and hold the leadership team to account. Members approve the Annual Report and Accounts and hold trustees to account. Straight forward enough, right? You would think so. But not all the time and sometimes there is trouble ahead when relationships between the groups of members and trustees break down. That’s when your charity needs legal advice.

A charity approached us in just that situation. It was a junior school academy trust, but nevertheless academies are charities, which can be accountable to the Charity Commission, just as they are accountable to the Department for Education; and so what follows below is just as relevant to the non-education charity setting.

Background

Local press coverage picked up on tensions between Members of the Academy Trust and the school leadership team. To make matters worse the local schools commissioners wrote to the chair of trustees, expressing concerns about the governance of the trust. Now, no board wants to be faced with concerns about governance for fear that that local commissioner exercises its powers to intervene in the leadership or governance of the trust.

Why the concerns? Well, a member of the Academy Members conducted themselves in such a way as to represent a serious and blatant misuse of their role. Not only were they challenging a parent consultation process conducted by the head teacher on changing the term dates, but also they threatened to remove and instigate disciplinary action against the headteacher. Thereby purporting to intervene in operational and strategic running of the Academy, akin to day to management of the Trust’s business. To make matters worse, the Member was at that time a parent. Putting himself in a position of conflict of interest between his role as a Member and his role as a parent.

Deadlock

The situation was one of deadlock, because this Member was one of only three Members and the Chair of the Trustees’ Board was not included in the Membership. There was no readily available way of removing the Member or their peer Members under the Articles of Association or otherwise.

The situation required some lateral thinking and some assembling of the relevant legal principles to deploy.

Interventions

Unchecked, their action could have invoked the following interventions:

• The Education Skills Funding Agency (EFSA) could have issued a Notice to Improve governance, drawing adverse publicity as this would need to be published on the Academy’s website, until EFSA is satisfied that appropriate measures have been taken
• The Secretary of State for Education could have issued a direction under s128 of the Education and Skills Act (2008) prohibiting or restricting involvement of any person in the management of the Academy (which could include Members)
• The Secretary of State could have compelled the Academy to enter into arrangements that required them to become part of a Multi-Academy Trust;
• The Charity Commission could have exercised their statutory inquiry powers to look into the governance of the Academy and make recommendations to improve governance
• A court could identify conflicts of interest by Members and grant declaratory relief to direct the actions of a Member in accordance with the guidance set out by the Supreme Court in Lehtimaki v Cooper [2020], which establishes the principle that members are fiduciaries, (just as trustees are) and owe a single minded duty to the charitable objects (the advancement, for the public benefit, of education in the community). Central to the responsibility of a fiduciary is that they must not put themselves in a position where their own interests and those of the beneficiaries (the children who are educated at the school) conflict (the ‘no-conflict principle’). They must also act in good faith.

Governance documents

This particular charity did not have the requirement to act in good faith included in its Articles of Association and so we advised on the necessity to amend their Articles accordingly and create a Code of Conduct for Members and Trustees to abide by, to ensure that governance was robust and fully compliant and that people clearly understood their respective roles.

Back down

With the benefit of pointing out the significant implications of the Members’ conduct in relation to the above risks, we wrote to the Member to reiterate that under the Companies Act 2006 and guidance from the Department for Education and Charity Commission: the Board is the decision making body and the Members are simply guardians of governance of the Trust, equated to shareholders, with a qualification that, obviously in a charity setting, they do not receive a dividend. They can hold the Board to account, particularly at AGM time when the Annual report and Accounts are up for approval. But they must not intervene in operational (day-to-day business) or strategic matters, which are for the Trustees on the Board to oversee and set. We also had to point out that this Member was not acting objectively in the threatened reprisals for something they disagreed with; and their action was undermining of the Board’s discretion in exercising its operational oversight and strategic responsibilities, something that the local school commissioners were very alive to.

Finally, we also pointed out to this Member that the Charity Commission has detailed guidance on managing conflict of interest, the role of fiduciaries and the Nolan Principles of public life. All of which were disregarded by this Member.

The Member backed down and resigned. Those Members who were aligned to his stance also resigned, enabling new Members to come forward to be appointed and approve the new Articles of Association. Robust governance was restored.

If your charity finds itself in a similar situation, please do not hesitate to reach out to us.