The Charity Commission has published new guidance explaining what charity trustees need to know when thinking about taking or defending legal action generally, and when the Charity Commission needs to be involved.
"CC38: Charities and litigation: a guide for trustees" considers all types of legal action that a charity might have to take or defend (other than criminal cases or challenges to decisions by the Charity Commission). In the words of the Charity Commission's Chief Legal Advisor, Kenneth Dibble: "The guidance aims to help trustee bodies reach a justified decision on litigation and crucially, to manage risk effectively by assessing the challenges and costs their charity might face".
What are the obligations on charity trustees?
Legal action can be a significant risk to a charity's beneficiaries, assets and reputation. It is therefore imperative that charity trustees take proper steps to ensure their decisions comply with their general duty to act in the best interests of the charity. Helpfully, the guidance sets out a list of the general principles that charity trustees should take into account when deciding to proceed with legal action. Included within this list are the requirements that, in making their decision, charity trustees:
- take and consider legal advice;
- consider and assess the economic prospects of success or failure and the impact on the charity;
- consider whether their intended actions are proportionate in the circumstances; and
- decide whether it is necessary or appropriate to ask for the Charity Commission's consent or advice.
Importantly, the guidance requires charity trustees to be able to justify their decision to engage in legal proceedings and demonstrate that they have explored and, if appropriate, ruled out all other reasonable options open to them to resolve the dispute. If they are not able to do this, charity trustees run the risk of breaching their duty under section 31 (1) of the Trustee Act 2000, to ensure the costs of pursuing litigation are "properly incurred … when acting on behalf of the trust". If trusties are found to have breached their duties, the Court may order them to pay any legal costs personally.
It is important to stress, however, that simply taking legal advice may not be sufficient to demonstrate that the costs of litigation were properly incurred. The guidance does however list further precautions that can be taken by charity trustees to protect themselves from personal liability, including: asking the Charity Commission for an order under section 105 of the Charities Act 2011 to authorise the use of charity funds for litigation; asking the Charity Commission to give advice under section 110 of the Charities Act 2011 about whether they would be acting in accordance with their duties in taking or defending legal action, or considering whether to obtain legal costs insurance. Alternatively, in certain circumstances a Beddoe order can be obtained from the court, granting charity trustees permission to incur expenses on behalf of the trust by bringing or defending a legal action.
The final section of the guidance considers the role of the Charity Commission in so called "Charity Proceedings". These are proceedings that relate to the internal administration or domestic affairs of a charity such as the removal of a trustee or an action for breach of a trustee's duty.
Charity Proceedings are distinct from other proceedings in that the Charity Commission has a special regulatory role in authorising their instigation. Their primary concern is whether it will be in the interests of the charity for the court to be asked to adjudicate on the matter.
The guidance sets out the procedure for making an application for the Charity Commission's consent. Where such consent is not given, it will be necessary for the party bringing the proceedings to apply to a judge of the Chancery Division of the High Court for leave to issue proceedings under s.115(5) of the Charities Act 2011. If such an application is made, the party bringing the proceedings should provide a copy of the commission’s refusal letter to the court with their application.
The clear guidance is undoubtedly to be welcomed by charity trustees unsure of their position should a matter become contentious and helps to remove some of the uncertainty which trustees can face when considering their next steps.