How to Become a Charity Trustee

Personal liability refers to the costs a trustee may become individually responsible for paying, because of their role. When you take on the role of a charity trustee, you agree to certain duties. For example, to ensure the charity complies with laws that apply to it and has suitable policies in place; that you manage its finances responsibly; and that the charity fulfils its charitable objectives. If the trustees fall short of these duties – for example, by inadvertently using the charity’s funds for purposes that are outside the charity’s objects, or for paying a trustee when this hasn’t been properly authorised – they can be held accountable. This includes repaying the charity for any loss it has suffered as a result. Trustees of unincorporated charities (charities that aren’t also companies or charitable incorporated organisations – CIOs) can also be held personally liable if the charity does not have enough funds or other assets to meet its commitments. Therefore, checking that any charity you intend to join as a trustee is incorporated (a CIO or a company, as well as a charity), is one way of limiting your personal liability. Incorporated charities – usually charitable companies or CIOs – have their own ‘legal personality’ and can enter into contracts in the name of the charity. This means that a claim made by a third party – for example, for breach of contract – would usually be made against the charity itself rather than its trustees (as long as they’ve complied with their legal duties). The amount that can be paid out to meet that claim would be limited to the value of the charity’s assets. If the trustees have acted properly but the charity gets into financial difficulty and needs to be wound up, the amount individual members have to contribute is usually limited to £1 or £10. This is why we refer to trustees of incorporated charities having ‘limited liability’. There is a greater risk for trustees of unincorporated charities – such as a charitable trust or charitable unincorporated association – because, technically, the charity acts in the name of its individual trustees. For example, if it takes out a loan the individual trustees are personally responsible for making sure it’s repaid. This means that, in theory, they could be personally liable for meeting those financial obligations if the charity itself does not have enough funds, even if they have acted in good faith. Taking appropriate advice and having good internal controls all help to minimise the likelihood of this happening. (And this can be avoided if you become a trustee of an incorporated charity.) A charity itself, the Charity Commission or the courts can take action against trustees who have not followed their legal duties. But don’t panic: cases of trustees being held personally liable are exceedingly rare. Personal liability generally only arises if the trustees have failed to discharge their duties and this actually causes loss to the charity or improper gain to the trustee. If you follow the guidelines and act in good faith, you have nothing to worry about. Trustees are also able to obtain trustee indemnity insurance, which in certain circumstances covers individual trustees from having to personally pay legal claims that are made against them in their role. It can usually be purchased using the charity’s funds. There are limits on what the insurance will cover – and it can actually be quite narrow – but it can provide reassurance to trustees. There is further guidance about personal liability and trustee indemnity insurance in the Charity Commission’s guidance CC49: Charities and Insurance and in the Trustee Liability Guide. The Charity Commission also provides the following guidance about personal liability: “Understanding and applying your legal responsibilities as a charity trustee and dealing with potential risks is the best way to avoid problems and the risk of personal liability. Trustees can become personally liable to their charity if they cause or contribute to the charity suffering a financial loss. The law generally protects trustees who have acted honestly and reasonably. The Commission and the courts: ●can relieve trustees from liability if they have acted honestly and reasonably and have not benefited from their actions ●rarely enforce liability on an unpaid trustee who has made an honest mistake ●expect higher standards from trustees who act in a professional capacity or are paid for being trustees Trustees who receive an unauthorised payment or benefit from their charity have a duty to repay it. The Commission can’t relieve trustees from this duty. There is no legal protection for trustees who have acted dishonestly, negligently or recklessly. However, there may be financial protection for those trustees who have made an honest mistake: from a provision in the charity’s governing document, trustee indemnity insurance cover or relief from the Commission or the court.” This means that, as long as you are conscientious in your role and follow Charity Commission guidance, you really shouldn’t need to worry about personal liability. If something unforeseen does go wrong, the Charity Commission will usually work with trustees to help resolve the situation, recognising that in all but a very small number of cases trustees are trying to do their best for the charity. The easiest way to check if a charity is incorporated is to search the Register of Companies at www.companieshouse.gov.uk. If it comes back with a match, the charity will either be a company or a CIO.