Much like company directors, people who manage incorporated societies and charitable trust boards can be personally responsible for their decisions. While directors of companies have well-defined duties under the Companies Act 1993, the obligations of officers in other entities are less clear. In this article, let’s explore how courts may still hold board members of charitable trusts personally accountable, particularly around financial management.
Quasi Director Personal Liability
The liability of directors under the Companies Act 1993 is well known.
They have the obligation to act in good faith and in the best interests of the company, to exercise their powers for a proper purpose, to comply with the Act and any company constitution, to not allow the company to trade recklessly and generally, as a director, to take reasonable care (refer sections 131 to 138 of the Companies Act).
If the director fails to act in accordance with those standards they have a potential personal liability to the company, to the shareholders via the company, and to creditors, via a liquidator.
The status of a company as a limited liability person separate from directors and shareholders is also well-known. However, there are other incorporated entities which are analogous to companies and whose managing personnel are similar to directors.
One of them is a society incorporated as a body corporate (like a company) under the Incorporated Societies Act 2022.
The society is run by a committee, composed of officers, like a company board with directors. Sections 54 to 61 of the Act basically incorporate the Companies Act 1993 duties summarised above. It is therefore clear for those officers what standards they must adhere to in carrying out their roles.
These express standards are in contrast to charitable trusts incorporated as charitable trust boards under the Charitable Trusts Act 1957.
The main policy behind incorporation is to allow an unincorporated charitable trust which would be represented by individuals to have effectively a perpetual existence like a company. This is more convenient than individuals for the holding of property and the entering into obligations (see s 13 of the Act). The incorporated trust board has board members but what is their status as managers of the charity?
Under ss 24(2) and 25(4) of the Charitable Trusts Act 1957 if a board is put into liquidation voluntarily or by court order then Parts 16 and 17 of the Companies Act 1993 apply. Sections 300 and 301 are within Part 16 and refer to the obligation to keep proper accounting records with the ability of the court to require a person who is a manager of the entity to account for losses.
Therefore, while the liability of a board member is not so clear as a committee member under the new Incorporated Societies Act 2022, it would be most unwise for an incorporated board member to assume that their actions are beyond scrutiny in the case of challenge by the trust, beneficiaries or a liquidator.
The safest course of action for incorporated board members would be for them to assume that as board members they have the obligations of company directors under the Companies Act 1993.
In carrying out their roles they should pay strict attention to the Companies Act and the Incorporated Societies Act as guides to their conduct.
They should also assess the usefulness of any indemnity from the incorporated trust (does it have any liquid assets) and the availability and extent of insurance (what is the premium and the exclusions) in the same way as a prudent director would do due diligence on those issues, before accepting office.