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Charities Warned to Check That They Are Fit to Take on Public Services- 09/09/2010
Many charities will find it difficult to fill the hole left by public spending cuts, raising large amounts of funds and delivering services, without exposing their trustees to great personal financial risk, according to a leading Midlands corporate lawyer who specialises in working for charities.
Stuart Rea, Partner at Wolverhampton law firm FBC Manby Bowdler LLP, says that many charities do not have the best legal protection in place against risk for their trustees.
“Most of the 190,000 charities on the Charity Register bring in funds of less than £10,000 a year, so there is great scope for them to raise more money,“ says Mr Rea.
“However, the vast majority of these smaller charities are set up as trusts or unincorporated associations. These provide little or no legal protection for the trustees who employ the charity’s staff, enter into contracts and other commitments on behalf of the charity and hold charity property in their own names on behalf of the charity. This means they take on unlimited liability for any legal action taken against the charity, including personal injury and other negligence claims against the charity, and effectively puts all their personal assets at risk.”
According to Mr Rea, the trustees of an unincorporated charity which wants to play a larger role in the Prime Minister’s much vaunted ‘Big Society’ will have to consider the increased risk to them personally of taking on this role.
He says: Greater charity activity will carry with it a corresponding increase in personal financial risk and the trustees should rightly be reluctant to accept that risk.
“Charities can look at to taking out trustee insurance, but this can be expensive and has not really been tested yet. So practically, the most likely means of reducing risk for the trustees will involve changing the charity from unincorporated to incorporated or limited company status.”
To gain limited liability, charities have traditionally registered as companies limited by guarantee. But, this means that charitable companies must answer to two regulators: Companies House and the Charity Commission. The dual registration requires that they must file two different sets of accounts and annual returns.
There is another status for charities on the horizon, as set out by the Charities Act 2006. The Charitable Incorporated Organisation (CIO) is the first legal structure of its kind created specifically for charities. CIOs will have the same limited liability as a company but will only report to the Charity Commission, filing one set of accounts and one annual report.
Mr Rea says: “Unfortunately, according to the Charity Commission, CIO status will not be an option available for charities until at least early 2011, but on the basis that they have been promised imminently since before 2006 charities should not hold their breath.
“When they do come in, it is likely that existing company charities will be able to convert to CIO status, so charities should not necessarily wait for CIOs to become available before deciding to convert to limited liability status, especially if the risk to the trustees is increasing as a result of the charity wanting to take action now.
“However, the first task for unincorporated charities is to carry out a risk assessment and to seek legal advice on any potential liabilities for the trustees, having regard to the both the charity’s current and proposed activities, to ensure that any risk is minimised now, and after any future expansion of activities,” concludes Mr Rea.
With 38 partners, FBC Manby Bowdler is one of the largest law firms in the West Midlands. The firm has offices in Wolverhampton, Willenhall, Telford, Shrewsbury and Bridgnorth.