The decision of the Supreme Court in the case Lehtimaki & others v Cooper, relating to the charitable company the Children’s Investment Fund Foundation UK, may have left the sector with more questions than answers in relation to the fiduciary duties of members in a charitable company.
Fiduciary duties are obligations that arise as a result of the existence of a particular kind of relationship between two parties, where the parties have agreed that one of them (“A”) will act for the benefit of the other (“B”).
The law relating to fiduciary relationships provides that a fiduciary must act in the interests and for the benefit of the beneficiary of such a relationship, and sets out some key fiduciary obligations, including:
- A must not put themselves in a position where A’s personal interests conflict with those of B, or there is a real possibility they may do so (the “no conflict rule”).
- A must not profit from his position at B’s expense (the “no profit” rule).
- A owes undivided loyalty to B, and must avoid situations where A’s duty to someone else conflicts with A’s duty to B (the “undivided loyalty” rule).
In relation to non-charitable companies, it has long been recognised that a member has no fiduciary duties towards the company of which they are a member.
It is now apparent that the situation in relation to charitable companies is, however, different.
It is clear from the decision that members of a charitable company do have fiduciary duties. It is also clear, however, that the extent of a member’s fiduciary duties will depend on the particular circumstances, and must be worked out when they arise.
Key points from the judgment:
- A member of a charitable company owes a fiduciary duty to the charitable purposes of the charity, not to the company itself, and that duty is “one of single minded loyalty” – although that loyalty is entirely subjective, and disputes about what loyalty means in practice may well arise.
- The principles decided upon in the judgment apply to members of charitable companies large and small.
- As a result of the fact that trust law allows fiduciary duties to be “diminished by an appropriate means and to an appropriate extent”, the fiduciary duties that a member owes are tailored by the Memorandum and Articles of Association of the charitable company in question – and it may be the case that the Memorandum and Articles impose restrictions which mean that a member cannot discharge their fiduciary obligations as recognised under the general law.
- It is not possible, however, to reduce a member’s fiduciary duties below an “irreduceable core” of obligations, to perform the trusts honestly and in good faith for the benefit of the beneficiaries.
There are many grey areas following this judgment, although it is clear that members of charitable companies have fiduciary duties, and that the Court can use its inherent jurisdiction in respect of charities to order a member of a charitable company to exercise their fiduciary discretion in a particular way.
This may be of use to charity trustees needing to make a difficult decision, and considering whether to ask the Court to make the decision on their behalf, but concerned that any such decision by the Court may be effectively blocked by a subsequent vote of a reluctant membership.
It is to be hoped, however, that further guidance from the Charity Commission will be forthcoming on the newly emphasised fiduciary duties of members of charitable companies, to clarify some of the outstanding questions.