How to limit your liability

Trustees should understand the risks of their charity remaining unincorporated

Enniskillen, 1989: Plight of trust highlights the advantages of incorporation
Enniskillen, 1989: Plight of trust highlights the advantages of incorporation

The recent case of the Spirit of Enniskillen Trust has highlighted the need for trustees to understand fully what it means to be part of an unincorporated charity.

When the trust became insolvent in March, seven trustees discovered they could be left personally liable for pension debts of more than £295,000. The trust was founded in 1989 to work with young people in the wake of the Enniskillen bombing. It had five staff, all of whom were members of a final-salary pension scheme.

According to John Gordon, the solicitor handling the charity's insolvency, the poor running of the scheme and a significant fall in the value of the charity's building - its only asset - caused the debt. Although it is unlikely that the Enniskillen trustees will be pursued for the debt, Gordon says they could have avoided the situation by incorporating the charity.

According to Charity Commission guidance, a charitable company limited by guarantee under the Companies Act is the most common form of charitable incorporation. The trustees of a charitable limited company have the protection of limited liability for debts or other financial obligations.

A limited company has a legal personality that is distinct from its trustees, and it is the charity that is liable for any debts. Charities that want the protection of limited liability without having to register with both the commission and Companies House, as charitable limited companies do, can from early this year become charitable incorporated organisations.

CIOs have to register only with the commission, but registration is being staggered and, to date, only newly formed charities and unincorporated charities with annual incomes above £250,000 can become CIOs.

Emma Moody, head of charities at Dickinson Dees solicitors, says: "In a corporate charity, the primary liability falls upon the corporate vehicle, not the trustees personally."

One way in which trustees of unincorporated charities can protect themselves from liability, she says, is for trustees to take out indemnity insurance, but she warns that it doesn't cover everything.

According to commission guidance it is possible for trustees of an unincorporated charity to enter into an informal agreement with their creditors to either defer or reduce the payment of debts. Charities can also agree with creditors that any debts will be met only if there are sufficient funds in the charity to do so, the guidance says.

Moody says she would almost always advise incorporation for a new charity. "The only exception is if you are a charity that just makes grants to other organisations; then the chances of a liability arising are low," she says.

Both the CIO and charitable company forms offer the same level of liability protection, but there are other issues to consider, Moody says. "CIOs have not been around very long and the legislation is new. There won't be a central register of charges, such as grants or loans, which makes it more difficult for charities to borrow money," Moody says.

Fundraiser and consultant Valerie Morton is a trustee of a small, unincorporated charity. She says that most trustees of unincorporated charities are particularly diligent because of the potential liability they face.

But Morton is concerned that some trustees of unincorporated charities do not fully understand their liability. "You find a lot of people become trustees out of goodwill, because they think they are volunteering to help a charity. A surprising number don't do their due diligence."

Morton says that it is rare for trustees of unincorporated organisations to become liable for the charity's debts, but it is very important for them to be aware that they are liable.

"The downside is that some people are turned off from being a trustee if the charity is unincorporated," she says.

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