Keep it legal: Limiting trustee liability

If your charity is unincorporated and owns land, employs staff and enters into contracts, have you considered the personal liability situation of your trustees?

Imagine an employee making a claim for racial, sexual or disability discrimination.

Unlimited compensation is payable for such claims. If the charity has insufficient funds to finance the payment and the associated professional fees, the trustees could find themselves having to pay out of their own pockets.

On the other hand, if a charity were a company, any such claim would be made against the company and not the individual trustees. Directors or trustees of a company will not generally be personally liable to outsiders for actions that they are authorised to undertake in the name of the company.

Other advantages of incorporation include the vesting of all property and assets of the charity in a company, rather than in trustees, removing the need to alter title at HM Land Registry following any change of trustees.

The general term 'incorporation' can mean incorporating the charity as a whole by establishing a company limited by guarantee (which is the charity), or it can mean appointing a corporate trustee (a company limited by guarantee) in place of individual trustees.

Where charities employ staff, own land and property or enter into third-party contracts, it is sensible to incorporate or replace existing trustees with a corporate trustee. This could help attract trustees in future because many people would be unwilling to be appointed a trustee of an unincorporated charity.

Under the Charities Act 2006, the Charity Commission can relieve a trustee from liability for breach of trust or duty, where the trustee has acted honestly and reasonably and should fairly be excused for that breach.

In addition, the Charities Act 2006 provides for a new corporate structure specifically for charities, the charitable incorporated organisation.

although this may take two or more years to be implemented. Secondary legislation will further delay its introduction. There will be a mechanism for conversion from a company limited by guarantee to a CIO. We would therefore advise incorporating now in order to take immediate action to limit the risks faced by the trustees.

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