Supreme Court confirms charitable company members must be single-mindedly loyal to the purposes of the charity: What are the implications?

The Supreme Court recently ruled that, in principle, members of a charitable company have a fiduciary duty of single-minded loyalty to the purposes of the company. The case concerned The Children’s Investment Fund Foundation (UK) Limited (a charitable company limited by guarantee). In this article, we look at some of the practical implications of the decision, including the limits on its effect.

The case involved a governance dispute with one of three director/members of the charity agreeing to step down (with compensation for loss of office) if a grant was made to another charity. The general rule is that a company cannot make this type of payment unless it has been approved by a resolution of the members. If a charitable company is involved, the resolution is ineffective without the prior written consent of the Charity Commission. The remaining director/members surrendered their discretion to the Court and this gave rise to the question: do the members of a charitable company owe a fiduciary duty to stay loyal to the purposes of the charity?

It is undisputed that members of non-charitable companies can usually exercise their voting powers in their own interests, even with a view to profit, and with no fiduciary obligations attached. However, there has been uncertainty over whether that is the case for members of charitable companies. The Court decided that all members of a charitable company limited by guarantee owed a fiduciary duty of single-minded loyalty to the company’s charitable purposes. This duty also applied in some circumstances to the exercise of the rights attached to membership, including the right to vote.

The following key points arise from the Court’s decision:

• The Court and the Charity Commission will be very reluctant to examine the motives behind a member’s vote unless it is obviously corrupt. Effectively, there will be a presumption that a member has voted in good faith and in compliance with their fiduciary duty to be loyal to the purposes of the charitable company.
• The decision has no effect on third-party rights such as a founder’s right to veto decisions or appoint and remove trustees. However, those rights will possibly be more vulnerable to being ousted by members and harder to enforce than membership rights within the articles.
• To avoid questions over loyalty to overall purposes, it is possible that founders and donors (who are not fiduciaries) might seek to protect their interests and the donations they have made by creating restricted trusts over assets.
• The Court did not consider the impact this decision might have on charitable companies that are members of another charity.
• The Court decided that members owe loyalty to the purposes of the charitable company rather than the company itself. This is a crucial point because if the duty were owed to the company itself, it might stifle potential mergers and the distribution of funds to other charities. The Charity Commission is expected to issue guidance which will, hopefully, reinforce this point.
• Members’ fiduciary duties may be reduced in the articles but only up to a point. The basic core fiduciary duty to act honestly in the administration of the charity and for the benefit of its beneficiaries cannot be excluded.
• The decision only applies to members with rights under articles of association and not other kinds of member such as church members or supporters.
• Having a fiduciary duty does not entitle a member to more information than the member is entitled to under the general law, which in practice is very little, usually no more than to receive the annual financial statements.
• The general rule is that fiduciaries cannot delegate decisions to others. However, members can delegate voting rights to a proxy if this is allowed by the articles and the Companies Act 2006.
• The Court made it clear that any incidental benefits authorised by the articles of the company would not cut across the fiduciary duty. However, members should still declare a conflict and not vote on any issue relating to the award of such benefits.
• The Court confirmed that how loyalty to the purposes of the charity is put into effect is entirely subjective. There may be disputes between rival factions, or between members and trustees, about what loyalty actually means in practice.

The Supreme Court’s decision will make it easier for the Charity Commission to make directions to members in future, although the Court did say that The Children’s Investment Fund Foundation (UK) Limited case was exceptional as the trustees had applied to the Court and stressed that the Court would normally respect the non-intervention principle.

If you require advice on the implications of this decision for your charity, our dedicated Charity and Education Law experts have extensive experience in mediating disputes and advising charity members and directors on their role. For further information, please contact Robert Meakin.