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Sixth Report Session 1998-99

Volume 2
OCTOBER 1998 - MARCH 1999

The full report of selected cases

Summary of selected cases

CHARITY COMMISSION

Case No. C.1188/96

Delays by the Charity Commission leading to a loss of earnings

1.1 Mrs P is a trustee of the S Trust and a director of T Ltd, which company is the sole trustee of the V Trust. She complained that the Charity Commission (CC) delayed unduly and unreasonably in pursuing their statutory enquiries into her remuneration from the S Trust and the V Trust; that the consequent loss of one year's payment caused long-term damage to her financial position; that CC refused to authorise her to be made an ex gratia payment in respect of that loss, despite it having been caused by their delay; and that, in any case, the trust deeds for the S Trust and the V Trust provided for Mrs P (being a person engaged in a profession or business) to be remunerated by those charities.

1.2 My investigation began in August 1997 once comments had been obtained from the Executive Director of CC after the Member had referred the complaint. I have not included in the report every detail investigated by the Ombudsman's staff, but I am satisfied that no matter of significance has been overlooked.

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Background

1.3 CC, who are generally responsible for the supervision of charities, are governed by the Charities Act 1993 (the 1993 Act). Section 8 of the 1993 Act gives the Charity Commissioners (the Commissioners) power to institute inquiries into a charity. Under section 16 of the 1993 Act the Commissioners may by order establish a scheme for the administration of a charity (a section 16 scheme), and subsection (6) of section 16 says that, where the charity trustees have neglected to apply for a scheme and the Commissioners have given them an opportunity to make representations to them, the Commissioners may proceed as if an application for a scheme had been made by the charity. Under section 26 of the 1993 Act the Commissioners may by order (a section 26 order) sanction any action proposed or contemplated in the administration of a charity where they consider it is expedient to do so in the interests of the charity. Section 27 of the 1993 Act enables the Commissioners to authorise charity trustees to make ex gratia payments where the trustees feel they are under a moral obligation to make such a payment. The section provides that the Commissioners shall act in so doing in accordance with directions as may be given by the Attorney General and that any refusal by the Commissioners to authorise a payment shall not preclude the Attorney General, on subsequent application, from authorising the trustees to make payment.

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1.4 CC set out the responsibilities of charity trustees in their leaflet CC3(a). The September 1993 version of that leaflet says that trustees are obliged to act strictly in accordance with a charity's governing document (deed) and that they must not derive any personal benefit or gain from the charity. Another leaflet (CC11 - first issued in 1994) deals with the remuneration of charity trustees; it says that, where there is already a power of remuneration in the charity's deed, that power may be used; but the leaflet adds that the deed's terms must be adhered to and strictly construed. Where there is no express power in the deed, the trustees will need to apply to CC (making out a detailed case) for CC's authority to add such a power. The leaflet says that, in exercising their power to authorise remuneration in individual cases, CC apply the guidelines that have been laid down by the courts: they take into account a charity's size, structure and the way it operates and the administrative obligations that those factors place upon the charity's trustees. CC also consider the degree of the trustees' involvement in the day to day running of the charity, the specialist nature of the skills required and the comparative costs of obtaining specialist skills from outside the trustee body. The leaflet goes on to say that, if CC agree to the trustees' proposals for remuneration, they will give their consent:

• in a case where the deed contains a power of variation, by a section 26 order to permit the trustees to exercise that power;
• in a case where the deed does not contain a power of variation, by a section 16 scheme to vary the charity's trusts;
• in a case where the trustees simply wish to remunerate a particular trustee or to make a single payment for work done for the charity, by a section 26 order.

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1.5 A further leaflet CC7 deals with 'ex gratia payments' by charities. It says that the term as CC use it has no precise legal meaning but describes a payment which trustees feel under a moral obligation to make, which they are not legally obliged to make; which they have no power to make under the governing document of their charity and which they cannot justify as being in the interests of the charity. Leaflet CC7 says that at first sight the law (which requires a charity's trustees to apply the charity's funds only in furtherance of the purposes of the charity and in ways permitted by its deed) might seem to preclude the trustees from making an ex gratia payment. However, it explains that a judicial ruling, in the case re Snowden dec'd (1970)1 Ch 700 established the principle that trustees can make an ex gratia payment where it can fairly be said that if the charity were an individual it would be morally wrong of him to refuse to make the payment. Permission is required from CC under section 27 of the 1993 Act (paragraph 1.3) before an ex gratia payment can be made. Leaflet CC7 says that where CC refuse to make an order under section 27 the charity seeking authority for an ex gratia payment may make a fresh application directly to the Attorney General.

1.6 Leaflet CC7 also says that there are payments other than ex gratia payments which CC may need to authorise. Those include payments which the trustees have no legal obligation or power to make but which the trustees believe it to be in the charity's interest to make. The Commissioners can make a section 26 order to permit payment provided that the trustees have been able to satisfy CC that the payment would provide a definite advantage to the charity. ('Tudor on Charities' (Eighth Edition - London 1995) gives as an example of such a payment a monetary reward to a retiring employee who has provided exceptional service which benefits the charity by encouraging other employees to give comparable service.)

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1.7 CC's internal guidance for their staff on the remuneration of trustees was, at the time of the events in question, contained in their policy instruction B15. That guidance says that in the absence of express provision in the charity's governing document the Commissioners' prior authority is required before payment can properly be made. In pursuit of such authority a charity needs to show that payment is both necessary for the charity's good administration and reasonable in relation to the service rendered, and the income of the charity. The guidance also says that any action of trustees in paying remuneration unauthorised by the charity's deed constitutes a breach of trust and might be grounds for CC to start an inquiry under section 8 of the 1993 Act. The guidance goes on to say that if, following inquiry, CC's Monitoring and Investigation Division consider that the trustees may be able to make out a case for the remuneration to continue, the papers should be passed to CC's Charities Support Division for action. The trustees should be told either that payments must cease until authority for them to continue is given and, if a sufficient case is made out, authority should be conferred by a section 16 scheme; or if the trustee concerned is being paid as an employee the trustees should be told that the individual in question should resign as a trustee until the matter is resolved. Additionally the guidance says that a section 26 order cannot be made in a case of unauthorised payment of remuneration because under that section only actions proposed or contemplated may be sanctioned. It adds that, where a section 16 scheme is made, restitution of sums already paid under its terms should not be pursued.

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1.8 In the case of Boardman v Phipps (1967)2 AC 46 it was determined as a fundamental rule of equity that a person in a fiduciary capacity must not make a profit out of his trust, nor place himself in a position where his interest might conflict with his duty to the trust.

1.9 The V Trust was created by a trust deed dated 25 March 1966 which named T Ltd as sole trustee of the charity. (Mrs P was, at the time of the events in question, a director of that company.) Paragraph 10 of the V Trust deed said that any corporate trustee acting as trustee shall be paid remuneration and expenses as may be reasonable and any trustee (other than the settlor or any wife of the settlor) who was a solicitor or "other person engaged in any profession or business" might act for the charity and be paid for such work. The S Trust was created by a trust deed dated 21 July 1977 with four original trustees, one of whom was Mrs P. The S Trust deed said that any trustee (other than a precluded person) who was engaged in any profession or business was entitled to be paid for time spent or services rendered in connection with the trust powers and provisions. "Precluded person" was defined in the trust deed as the settlor or any wife of the settlor.

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Jurisdiction

1.10 Charities are not within the Ombudsman's jurisdiction. I refer in the report to the actions of the charities concerned in this case only to place in context the actions of CC. Section 12(3) of the Parliamentary Commissioner Act 1967 prevents the Ombudsman from questioning the merits of a discretionary decision taken by a body within his jurisdiction where no maladministration has occurred. Section 5(2) of the 1967 Act says that the Ombudsman shall not normally investigate any matter in respect of which the aggrieved person has or had a remedy by way of proceedings in any court of law. The investigation has been restricted to CC's administrative actions in dealing with Mrs P's case.

Investigation

1.11 Appendix A to the report sets out a chronology of the main events in the case, and the dates mentioned in the findings refer to that chronology. Appendix B lists the abbreviations used in the report and their meanings. In summary, in December 1993 CC opened an inquiry under section 8 of the 1993 Act into payments made by the S Trust to Mrs P. In February and March 1994 the S Trust's accountants, whom I refer to as firm X, explained to CC that Mrs P provided directorial services to the trust and to the V Trust as a part-time policy consultant and on 23 March they provided CC with a copy of her contract and other information that they had requested. On 15 September firm X asked CC for a decision on Mrs P's remuneration. On 11 January 1995 CC apologised to firm X for the delay; a new CC officer who had taken over the case asked for details of Mrs P's contract with the V Trust. That officer sought advice in March from CC's legal section regarding the payments already made to Mrs P and on 22 May she referred the papers on both trusts to CC's Charities Support Division in Taunton for consideration of Mrs P's remuneration from the trusts. Firm X telephoned CC at Taunton in early November asking for a decision and on 28 November another CC officer wrote to them saying that CC considered that neither trust's deed allowed them to make payments to Mrs P but that, if the trustees of both trusts were able to make a satisfactory case, CC might authorise her future remuneration by way of a section 26 order. Firm X replied on 21 December and asked that the order authorise payment from 1 June 1995, when Mrs P had chosen to cease drawing remuneration pending CC's decision. Correspondence between firm X and CC continued from January to March 1996 and on 22 April CC said that a draft order was being prepared but that it would not be retrospective. Nevertheless CC would not pursue restitution for what they saw as improper past payments made to Mrs P. The section 26 order was sealed on 22 May.

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The Charity Commission's response to the complaint

1.12 In giving her comments to the Ombudsman on Mrs P's complaint, the Executive Director of CC said that the trust deed of the V Trust provided for payments to be made to a trust corporation, a corporate trustee or a trustee (other than the settlor or any wife of the settlor) being a solicitor or other person engaged in any profession or business. The Executive Director said that Mrs P was not within any of those permitted categories. She was not an individual trustee and so did not qualify for payment under the relevant clause of the deed in respect of professional or business services. However, the Executive Director said that, as a director of T Ltd (which was the corporate trustee of the V Trust - paragraph 1.9) Mrs P was in a fiduciary position with respect to both the company and the charity and so should not have put herself in a position where her interest might conflict with her duty to the charity. In support of that view the Executive Director quoted the case of Boardman v Phipps (1967)2 AC 46 (paragraph 1.8).

1.13 The Executive Director went on to say that Mrs P was a trustee of the S Trust. Under the professional charging clause of the S Trust's deed, a trustee engaged in a particular profession or business might be remunerated for carrying out specific duties for the trust appropriate to that profession. The Executive Director said that the profession in question would normally be that of a solicitor, accountant or surveyor. Mrs P was a policy analyst and the duties she performed were not confined to her profession; therefore they fell outside the scope of the clause. Again, she was in a fiduciary position because she was a director of T Ltd, which was also a trustee of the S Trust, and that compounded the situation.

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1.14 The Executive Director said that all payments to Mrs P by both charities prior to the May 1996 order had therefore been made without legal authority and that CC had had to consider restitution. They had decided not to pursue it because the payments appeared commensurate with the duties undertaken by Mrs P and, if she had not done the work, the charities would probably have employed someone else at similar or greater cost. The charities had therefore not suffered as a result. Further, it was likely that a court of law, in considering a case for breach of trust, would have taken the view that Mrs P had sought to act properly by taking professional advice about her remuneration following a trustees' meeting on 10 April 1987 when the matter had been discussed. Unfortunately that advice, given by the charities' accountants rather than their solicitors, had been wrong in saying that Mrs P could charge the charities for specific work.

1.15 The Executive Director acknowledged that CC had failed to communicate clearly to the charities the results at each stage of the investigation and the reason for transferring the case within CC for further consideration of particular issues. She added that CC had reviewed their procedures and taken steps which should prevent such communication failures in the future. The Executive Director said that it would not be appropriate for the charities to make ex gratia payment to Mrs P for her past services. The reasons for that had been explained by CC in their letter of 22 April 1996 when it had also been explained why CC did not see the case as one where a section 16 scheme would be an appropriate mechanism to authorise past payments. The Executive Director concluded by saying that CC took the view that Mrs P had voluntarily given up her paid employment in June 1995 having accepted that she was not entitled to payment.

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Findings

1.16 In April 1987 when firm X gave their initial advice to Mrs P they took the view that she could not be remunerated by the charities for her work as a trustee but she could charge the charities for specific duties she carried out. The charities and Mrs P proceeded on that advice; the S Trust and the V Trust paid Mrs P at an hourly rate for fulfilling a role as a part-time director. I have no reason to doubt that all parties acted in complete good faith.

1.17 However, CC decided to initiate an inquiry under section 8 of the 1993 Act in February 1994 when they saw from the S Trust's 1993 accounts that payment had been made to Mrs P, a trustee of that charity (paragraph 1.9), for directorial services. That was a decision which CC were entitled to take. CC, in their letter of 9 February, pointed out the general principle that a trustee should not benefit from the execution of a trust and sought a breakdown of payments made to Mrs P. Firm X replied promptly on 16 February and after a further exchange comprehensively on 23 March. They refuted the argument (and CC later accepted the point) that Mrs P was a 'precluded person' (paragraph 9), and argued that the S Trust's payment to her was for work as a director not as a trustee. Despite a reminder from firm X, CC did not respond until 11 January 1995. That was a substantial delay which merits my criticism.

1.18 CC's 11 January letter broadened their inquiries to include the V Trust (though they did not - and I see that as an oversight - make it explicit that that charity too had become subject to an inquiry under section 8 of the 1993 Act). The response from firm X on 2 February implied that Mrs P was a trustee of the V Trust. (She was not a trustee of that charity - T Ltd, of which Mrs P was a director, was the sole trustee - paragraph 1.9.) Firm X's letter of 2 February argued that Mrs P, as a policy analyst, was a professional person who was entitled (on the mistaken basis that she was also a trustee of the V Trust) to be paid by authority of the professional charging clause in that charity's deed (and the equivalent clause in the the S Trust deed - paragraph 1.9). (That view contradicted the view that firm X themselves had expressed in their letter of 27 April 1987.)

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1.19 After officer B in CC's Monitoring and Investigation Division had obtained some further information from firm X, she set out the position, as she saw it, affecting both the S Trust and the V Trust and asked officer C in CC's Legal Division for advice. Officer C in her response of 24 March correctly distinguished between the S Trust (where Mrs P as an individual was a trustee) and the V Trust (where she was not). Regarding the V Trust, officer C reached the view that, although Mrs P was paid directly by that charity, because she was not a trustee of that charity payments to her could not be justified by the remuneration clause in that charity's deed (paragraph 1.9). Officer C then went on to consider whether Mrs P's position was that of any other person, not being a trustee, who received remuneration. She concluded that that was unlikely because of Mrs P's fiduciary position regarding T Ltd and, by extension, the V Trust. As for the S Trust, officer C did not accept the proposition that professional work as a policy analyst was within the construction of the professional charging clause of that charity's deed and, even if it were, Mrs P had been acting for the charity as a part-time director and not as a policy analyst. Officer C concluded that Mrs P was prima facie liable to make restitution to both charities as the remuneration she had received was unauthorised. She set out the reasons why she saw restitution as inappropriate but asked CC's Charities Support Division to consider first whether they were prepared to authorise future payments. (If they were not prepared to authorise future payments officer C considered that CC's Monitoring and Investigation Division should reconsider restitution.) It seems to me that officer C was entitled to reach the decisions she did on the legality of payments made by the charities to Mrs P. The consequences of those decisions were open to legal challenge but it is for the courts not the Ombudsman to give binding interpretations of the law (paragraph 1.10). In March 1995, when officer C gave her views, Mrs P was still in receipt of remuneration from the charities. It follows that, whatever shortcomings there had been in CC's handling of the case before then (and certainly I identify the long delay between March 1994 and January 1995 as such - paragraph 1.17), the loss of which Mrs P complained had not yet arisen.

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1.20 What, then, of subsequent events? CC's internal guidance says that after discovery of unauthorised remuneration CC's Monitoring and Investigation Division should, if they think a case for remuneration to continue can be made out, refer the papers to CC's Charities Support Division (paragraph 1.7). That was what officer C had recommended. It was not until 22 May 1995 (some two months after officer C had given her advice) that officer B initiated that action. When officer B referred the case to CC's Charities Support Division on 22 May she also wrote to firm X. She told them that CC were concerned that the payments to Mrs P might have been in breach of trust and that her role as a paid employee and trustee of both charities might represent a conflict of interest. Officer B's letter was clearly wrong in one particular. Mrs P was not a trustee of the V Trust and I criticise CC for that error. (Although firm X - paragraph 1.18 - may also have misunderstood the point, officer C had told officer B on 24 March that Mrs P was not a trustee of the V Trust.) Additionally it is not clear whether or not Mrs P was an employee of either charity. Firm X had described her on 16 February and 23 March 1994 as self-employed. Officer C had advised officer B (on 24 March 1995) to clarify the nature of Mrs P's payments from the V Trust. Officer B recorded on 22 May that CC had decided not to do that. Had CC decided otherwise the facts at least as far as that charity were concerned might have been clearer. After becoming aware of the letter from officer B to firm X Mrs P ceased to draw remuneration in June 1995. I find that understandable and to her credit. She made firm X aware at that point of her action and of her anxiety to resolve matters quickly but I have not seen evidence that CC were told of that until, at the earliest, the telephone call referred to in firm X's letter of 3 November to Mrs P. Be that as it may, on referral CC's Charities Support Division should have told the charities promptly what was permitted regarding Mrs P's remuneration. Since, according to officer C's view (paragraph 1.19), there was still the possibility that restitution might be sought for remuneration paid, failure to take timeous action meant that the amount potentially subject to restitution was needlessly increasing.

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1.21 CC's Charities Support Division did not, however, react to the referral until 28 November. In her letter to firm X officer D said that Mrs P should not receive any remuneration from either charity while CC were considering the question of remuneration. Officer D said that Mrs P appeared to have been paid as an individual by the V Trust, such payments were not covered by the provision in the V Trust deed which permitted payment to the corporate trustee; payments to her were not covered by the professional charging clause; she was in a fiduciary position towards the charity and was not in the same position as an employee. That latter view contrasted with officer B's assertion (paragraph 1.20) that Mrs P was a paid employee of both charities. As for the S Trust officer D said that Mrs P could not step down as a trustee in order to become an employee because if she did so she would in effect benefit from her position as a trustee. Again that view contrasts with officer B's statement that Mrs P was an employee. The point is material because CC's guidance provided that where unauthorised payment is discovered to have been made to a trustee as an employee either the trustees should be told to cease payment or the individual in question should be told to resign until the matter is resolved (paragraph 1.7). That latter option was not given to Mrs P. Had CC found out timeously whether or not Mrs P was an employee of the S Trust and the actual basis of payment from the V Trust, it is possible that matters may have been resolved without Mrs P suffering a break in her remuneration.

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1.22 In her 28 November letter officer D also told firm X to arrange for a case to be put to CC to justify payment of future (my emphasis) remuneration from the charities to Mrs P. Officer D said that if a sufficient case was made out authorisation would be given by way of a section 26 order. CC's internal guidance says that a section 26 order can only sanction actions proposed or contemplated (CC's emphasis) (paragraph 1.7). It is clear to me that what was required in Mrs P's case was consideration of an ex post facto validation of her remuneration by means of a section 16 scheme. CC's guidance (taken with the advice that where a section 16 scheme is made restitution of sums already paid should not be pursued - paragraph 1.7) is that, where a sufficient case has been made out, a section 16 scheme should be used to sanction previously unauthorised payments made before the date of the scheme.

1.23 Officer E considered (on 15 April 1996) that the trustees had made out a sufficient case for future remuneration only, and on her advice officer D told firm X on 22 April 1996 that the Commissioners could not authorise transactions ex post facto. Officer D also said that the order under section 26 would only sanction future payments, that a scheme under section 16 was not appropriate because Mrs P had given up her paid employment with the charities in June 1995, and that an ex gratia payment to Mrs P was inappropriate because the trustees were under no moral obligation to make such a payment.

1.24 I see CC's failure to consider a section 16 scheme on the grounds that Mrs P had voluntarily given up her paid employment as being quite unreasonable. Firm X had not said that Mrs P had given up paid employment. They said she had continued to work - she had simply taken no payment while the matter was being considered. CC's internal guidance gives the clearest instructions that in a case of unauthorised payment and where a sufficient case has been made out it is the section 16 scheme, not the section 26 order, route that should be taken.

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1.25 I also see CC's rejection of firm X's request for authorisation of an ex gratia payment as flawed. As I understand it, the argument in officer D's letter of 22 April was that as the trustees had been told by CC that trustees could not receive payments from their charities that meant that the trustees of the charities were under no obligation to make an ex gratia payment to Mrs P. Apart from the fact that trustees can be authorised by CC to receive payments from their charities, officer D's argument seems to amount to little more than saying that if there is no legal obligation and no legal power there is no moral obligation. That I see as mistaken since leaflet CC7 (paragraph 1.5) makes it clear that an ex gratia payment, as CC use the term, is precisely a payment which trustees are not legally obliged or empowered to make but which they wish to make by way of moral obligation. It seems to me that where an individual chooses to continue to work but not to draw payment while issues concerning her status are considered there is a basis for trustees to consider that they are, once the status issues have been resolved, under a moral obligation to make payment for the unremunerated work. I do not see evidence that CC considered the case for an ex gratia payment as fully as they should have done in the terms described in leaflet CC7, nor do I see evidence that they considered whether a payment to Mrs P for past work could be justified not as an ex gratia payment but as a payment the trustees considered it in the interest of the charities to make (paragraph 1.6).

1.26 I see those as further deficiencies in a case where Mrs P suffered injustice through CC's delay and poor handling. Had CC acted timeously I see a probability (through the operation of one or a combination of mechanisms - paragraphs 1.21, 1.24 and 1.25) that Mrs P would not have suffered the loss of which she complains. How, then, might she be put back in the position she would have been in had the maladministration I have identified not occurred?

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I suggested to the Chief Charity Commissioner that he might consider how that might best be achieved. In reply he said that he acknowledged the delays that had occurred in the case and that he was prepared to authorise the charities to make a payment to Mrs P in respect of the work she undertook for them between 1 June 1995 and 22 May 1996. CC would discuss with the trustees how that might be authorised.

Conclusion

1.27 The Chief Charity Commissioner's agreement to authorise the charities to make a payment to Mrs P of the remuneration she lost is a satisfactory outcome to a justified complaint.

Appendix A

Statement of events

Appendix B

Glossary of abbreviations

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Last updated: 19 April 2006