Supreme Court update: duties of members of charitable companies

Landmark judgment on charity law and of particular note to membership charities

The Background

The UK Supreme Court has today issued its judgment in Lehtimaki and others v Cooper. The background to the case revolves around the Children’s Investment Fund Foundation (UK). The Foundation was set up by a husband and wife and holds very significant assets. The husband and wife founders unfortunately divorced. There was an agreement in respect of the Foundation that a grant payment would be made to another charity (set up by the wife) in exchange for her resigning as a trustee and member of the Foundation. While an English situation, Scottish charities should be aware of the judgment. It will also be a decision that charities with large memberships will also want to consider in generally recognising the rights and powers of members.

The basic legal structure of the Foundation

The Foundation is a company limited by guarantee with charitable status. Being a company limited by guarantee it has trustees (directors in company law parlance) and members. Members of the company are legally distinct from trustees (directors) even if the same persons occupy the roles. Members have a range of powers and rights – important ones including being able to amend the articles of association and appoint and remove trustees (directors).

What happened and the member decision-making issue

The members (as distinct from trustees) of the Foundation needed to approve (via a member resolution) the agreed grant to the other charity. Two of the three members were the husband and wife. They were conflicted and could not vote. It left one member to vote. The Foundation applied to court for directions on the decision (this came due to Charity Commission process). The court directed the remaining unconflicted member to vote to approve the grant payment as it was in the best interests of the Foundation. That member however wanted to be free to make their own decision and accordingly appealed against the court directions. That appeal process ended up in the Supreme Court.

A member as a ‘fiduciary’ and integral part of internal governance

The court direction to vote in favour of the resolution was based on a member of a charitable company being a ‘fiduciary’. Being a fiduciary means the powers and rights of being a member were afforded with a view to acting in the best interests of the Foundation. If the member was not a fiduciary – like a shareholder in a private company limited by shares – he could vote according to his own wishes and interests.

The nature of the member’s position also stemmed from their integral internal role in the administration of the charity’s governance. This can be contrasted with a shareholder in a private company standing outside the company’s governance. And on top of that, the duties are owed to the charity’s purposes (with a “single-minded loyalty” according to Lady Arden in the Supreme Court)… as ever, the constitutionally-stated purposes being fundamental to everything that happens with a charity. The Supreme Court also noted that the member’s rights are affected by the particular articles of associations. A reminder that charity constitutional documents need to reflect the specific charity.

In the appeal process prior to the Supreme Court it had been noted that members of a charitable company have duties akin to those of a member of a Charitable Incorporated Organisation. Scotland has the different but conceptually similar Scottish Charitable Incorporated Organisation (SCIO). Members of a SCIO have certain duties (a limited version of trustee duties) under the Charities and Trustee Investment (Scotland) Act 2005.

Never happen again?

The Supreme Court decision also supported court intervention with the direction to the member to vote a particular way. This was even where there was an absence of breach duty. It should be acknowledged that the background to the Foundation and the court directions were extremely unusual. While the intervention of the court might be unusual, the principle that members of a charitable company are fiduciaries is a more general principle. Indeed, it is possible to envisage the members as fiduciaries point being central to future disputes (albeit with very different factual backgrounds to this case).

It was also noted by Lady Arden that it would be unlikely for those setting up a charity to expect an interruption to the purposes of the charity being performed and the beneficiaries safeguarded when a member reached a different view from the court (that issued the direction). This case might be used by some to have members ‘tow the line’. In other situations, it will serve as a reminder to members not to act somewhat capriciously.

In a Scottish context, the situation could crop up ‘after the event’. The Foundation situation required early formal interaction with Charity Commission. The same (save for it perhaps being a notifiable event) situation would not have required OSCR process during the charity’s internal decision-making. It might therefore have come to light later or in a different way and outwith a direct regulatory process.

Large or ‘mass’ membership charities

While the Supreme Court deliberately did not dive into this in detail, it was noted that it was an error of an earlier court in this case to suggest the position might be different for larger or ‘mass’ membership charities.

It means that members of charitable companies must recoginise they are fiduciaries and use their powers and votes appropriately in the interests of the charity’s purposes.

More generally, it should serve as a reminder to charities to keep up-to-date records on membership and to understand the (powerful) rights and powers that members hold. If there is to be a significant difference of opinion about the direction of a charity, it is very likely that it will be legally played out via the medium of the powers of the members. Clarity over the powers and rights of the members (and whatever name it might go by) is important. Trustees and management must remember this.

 SCIO members

While having a different legal basis and with express statutory rules, key elements of the Foundation judgment can migrate to SCIO member decision-making. As noted above, SCIO members have express duties under the 2005 Act.

For guidance and help with charity law and governance matters, get in touch:- Alan Eccles alaneccles@bkf.co.uk