OPERATIONAL GUIDANCE

LOCAL AUTHORITIES AND TRUSTEES

ISSUES CONNECTED WITH THE INDEPENDENCE OF TRUSTEES PARTICULARLY WHEN THE TRUSTEES ARE NOMINATED BY LOCAL AUTHORITIES

OG 56 B2-26 July 2000

Purpose: To provide guidance on independence issues particularly when the trustees are nominated by local authorities

Divisional responsibility

For action:

Charity Support Division
Registration Division

For information:

Investigation Division

Contents

1. Issues at registration
2. Local authorities wanting to appoint trustees

Meaning of expressions - list of Glossary terms used in this Guidance
Index to further related information

1. Issues at registration

1.1 Independence of purpose
1.2 Misuse of powers
1.3 Factors indicating genuine independence

1.1 Independence of purpose

In order to be a charity a body must be established for exclusively charitable purposes. It cannot be established wholly or in part to further the purposes of a non-charitable body such as the authority itself.

We should be alert to this principle especially at the registration stage where the charity is being set up to take on a local authority facility with a body of individual trustees some of whom may be nominated by the local authority. In such cases we should ensure that the charity will be properly independent. (Section 1 of OG 56 B1 provides guidance on applications for registration from charities with a local authority as sole trustee).

For example a body may be apparently set up:

• to take over the leisure facilities of a local authority; and

• to provide in them recreational facilities within the meaning of the Recreational Charities Act 1958.

However the real object may be to further some local authority purpose which falls outside the ambit of the 1958 Act. It may be the intention that the powers reserved to the local authority in the constitution of the body will be used to ensure this.

1.2 Misuse of powers

Where a body’s constitution reserves a particular power to a local authority and that power is capable of being exercised (consistently with the constitution) in the interests of the local authority the body in question will not be a charity. The purposes for which the body is established will include the non-charitable purpose of promoting the interests of the local authority.

In that sort of case the existence of the power goes to status.

On the other hand the power may be exercisable (on the correct interpretation of the body’s constitution) only in the interests of the body itself. In that case evidence of an intention to misuse the power may indicate that the body is not being set up in good faith as a charity. However such evidence may show no more than a degree of ignorance of the relevant legal principles on the part of the promoters. In all cases we would be justified in making further enquiries.

Even if the issue does not go to status we are likely to want to consider investigating and checking abuse of this kind.

Quite apart from formal powers a body may have been established in such a way that it is financially and practically dependent upon the local authority. Evidence that the local authority intends to exploit that dependence for its own purposes may suggest that the body was not established in good faith. There may for example be evidence that:

• a business plan for the new body; and

• draft funding agreements with the local authority

have been drawn up even before the appointment of trustees.

If those agreements contain provisions that commit the new body:

• to carrying out various policies of the local authority; or

• to complying with decisions made from time to time by the local authority

it may be difficult to avoid the conclusion that the new body has been established in part at least to enable the local authority to pursue its own wishes and policies.

Experience suggests that once we have explained the legal principles whose practical effect is to require a charity to be independent local authorities are generally prepared to concede the necessary degree of independence.

In a case where the local authority refuses to adjust its relationship with the new body even when those principles are explained the conclusion that the body is not established in good faith as a charity is likely to be unavoidable.

1.3 Factors indicating genuine independence

A charity established by or at the behest of a local authority is required to be no more or less independent than any other charity. There would be no doubt that a body was sufficiently independent to be a charity if it:

• is set up with independent trustees who are not subject to a conflict of interest between the charity and the local authority;

• is in a position to obtain its own independent professional advice;

• negotiates any funding or leasing arrangements with the local authority at arm's length;

• has arrangements in place which preserve the trustees' fundamental discretions as to the selection of beneficiaries and the provision of services and does not require the trustees simply to give effect to the policies and wishes of the local authority; and

• has trustees who are free to make their own decisions on matters outside any funding arrangement.

These points do not constitute a legal test for charitable status and should not be regarded as a check-list.

These enquiries may lead to the conclusion that the organisation is not established for exclusively charitable purposes and therefore should be rejected.

Alternatively they may reveal concerns about administrative issues rather than issues of status and if so the case should be referred for monitoring the relationship with the local authority.

2. Local authorities wanting to appoint trustees

2.1 Appointing the individual best fitted to carry out the responsibilities of trusteeship of the charity
2.2 Schemes which define powers of appointing trustees
2.3 Points to consider
2.4 Avoiding conflicts of interest

2.1 Appointing the individual best fitted to carry out the responsibilities of trusteeship of the charity

There is no objection in principle to local authorities appointing trustees. Indeed the local authority may be well-placed to identify individuals who have much to offer as trustees.

However a local authority must understand that it is bound to appoint the individual best fitted to carry out the responsibilities of trusteeship of the charity in question.

It may indeed be desirable for a local authority having a power of appointment to consult the trustees of the charity as to whether the trustee body currently lacks any particular expertise. The local authority must not expect its appointee to represent its interests. He or she must act solely in the best interests of the charity. Hence for example a local authority should not appoint a trustee in order to protect its interests under a funding agreement.

2.2 Schemes which define powers of appointing trustees

Local authorities sometimes take the view that where they offer charities financial assistance for example where this may be necessary for the charity’s continued survival they should have the right to nominate all or a majority of the trustees.

Where we have to define powers of appointing trustees in the schemes which we make our preference is not to confer a power on local authorities to nominate all or a majority of trustees. Local authorities who provide financial assistance for charities should not necessarily expect to receive in return for that assistance the right to appoint all or a majority of their trustees. However if the funding authority is insistent there may be no practicable alternative but to agree if the charity's viability is to be secured. A trustee appointed by a local authority like any other trustee is bound to act solely in the interests of the charity. A trustee who is a member or officer of a local authority whether appointed by the authority or not should consider the need to withdraw from trustee discussions of matters in which the authority has an interest which is distinct from that of the charity. The governing document of the charity may require him or her to withdraw. By not withdrawing a trustee in this position increases the legal risk that the relevant transaction may subsequently have to be set aside

However where we make a Scheme to provide for a local authority to appoint a majority of the trustees we should advise it that:

• the interests of the charity and its beneficiaries are separate from and so may not be the same as those of the local authority and its tax and rate payers; and

• its nominated trustees must act in the best interests of the charity.

We should set out in the Scheme a regime under which trustees with a conflict of interest and duty are precluded from taking any part in the relevant decisions which may involve such a conflict of interest.

We should also indicate our willingness to give them advice should they feel themselves to be in a position where they may be unable to comply with these conditions.

2.3 Points to consider

Caseworkers should bear in mind that any financial gain to the charity (for example as a result of a financial agreement with the local authority) should not be at the expense of the charity losing its separate identity from the local authority.

In this sort of case we should ensure that the local authority understands clearly these obligations on the trustees and that having the right to appoint all or a majority of trustees is not the best way to represent its interests. It should take other steps to monitor the use of its funding and to secure that that funding is used for the purposes for which it was given.

This can for example be achieved through reporting arrangements between the charity and the local authority.

2.4 Avoiding conflicts of interest

It is important to ensure when we are appointing trustees that the trustee body should be able to operate effectively. That requires us to avoid appointing individuals who are likely to be subject to substantial and continuing conflicts of interest (for example as a result of a funding agreement with the local authority).

In the case of a charity which has intermittent contact with the local authority a trustee who is a member or employee of the local authority will need to withdraw from discussions at which a conflict of interest arises. If there are several trustees in that position it may be sensible (depending upon the circumstances and in particular the likelihood of such conflicts arising) to constitute the trustee body so as to ensure that there will be a quorum of individuals who will not be conflicted in that way.

The following words and phrases are defined in the Glossary of Terms:

•

trustees

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