Trustees Can Be Made Personally Liable For The Losses Of A Charity In Certain Circumstances

One of the main problems for charities is finding people to help run them who have the particular skills needed to do so – such as financial or legal skills. The reason behind this is usually that such people are highly aware of the fact that charity trustees can be made personally liable for the losses of a charity in certain circumstances.

Strictly, this is because charities formed as unincorporated associations or trusts have no legal identity that is distinct from their trustees. As well as causing problems in putting together the right management team, this can also cause unnecessary complexity when undertaking certain types of transactions. For example, if a property is owned by the unincorporated charity and a trustee wishes to retire, there may well be a considerable amount of paperwork required. There can also be other difficulties – such as persuading a bank holding a loan secured against the property owned by the charity to release a retiring trustee from his or her obligation to the bank.

One possible solution is to change the charity’s structure, turning it into a limited company. The main advantage of this is that a company is a legal entity in its own right and can contract in its own name, which means the potential liability of the directors (the erstwhile trustees) can be limited, provided they are neither negligent nor act in breach of their duties.

The Charities Act 2006 created a new sort of company, specifically for charities, called the Charitable Incorporated Organisation (CIO), which is shortly to be made available.

The Act also provides, for the first time, a mechanism (to be administered by the Charity Commission) which will make it easier for smaller charities wishing to cease operations to transfer their funds to other charities and wind themselves up.