The Court of Appeal confirmed in the case of The Children's Investment Fund Foundation (UK) v Attorney General and others that members of a charitable company limited by guarantee do owe a fiduciary duty to act in the interests of the charity.
Although this is an important decision that brings welcome clarification to the question of whether members owe a fiduciary duty, it is not clear what the scope of the duty is or what it means in practice for charities. The Court was however clear in stating that it had no power to direct how a member should exercise that duty unless the member was in breach of that duty.
For a summary of the facts in this case and more information on the decision of the High Court, you can refer to our previous update here.
Scope of the fiduciary duty
The Charity Commission has long been of the opinion that members have an obligation to use their powers in the best interests of a charity. This is the position set out in the RS7 guidance which states that 'the rights that exist in relation to the administration of a charitable institution are fiduciary, regardless of the identity of the person or persons on whom the rights are conferred.' The members of a charity exist for the benefit of the charity and members' powers are all directed at assisting the charity in achieving its exclusively charitable objects. It therefore does not come as a surprise that the Court of Appeal has delivered this judgment.
What is disappointing however is that the Court of Appeal did not use this opportunity to set out the exact nature of the fiduciary duty owed by members. Instead, the Court of Appeal stated that it was sufficient to say that such a duty is owed and that it corresponds to the duty imposed on members of charitable incorporated organisations ("CIOs").
Pursuant to section 220 of the Charities Act 2011, members of CIOs have an express duty to 'exercise the powers that the member has in that capacity in the way that the member decides, in good faith, would be most likely to further the purposes of the CIO.' This is a subjective duty but CIOs are still a relatively new concept and this has yet to be argued before a court.
Mass membership charities
The Court of Appeal was also ambiguous when considering the application of fiduciary duties to mass membership charities and stated that 'it does not necessarily follow that members of charities such as the National Trust also have fiduciary obligations.' Rather unhelpfully the Court did not comment on this further other than saying it may be less reasonable to expect those belonging to a mass-membership charity to act exclusively in the interests of the charity but, in any event, it would not be legitimate for a member to vote to obtain benefits for themselves.
This leaves a number of unanswered questions. How large does a membership charity have to be for fiduciary duties to cease applying to its members (if that is what is suggested)? Or do fiduciary duties differ as membership organisations grow? Is it therefore a sliding scale?
A sensible conclusion when reading the judgment is that fiduciary duties are owed by all members of charitable companies limited by guarantee. The problem with this ruling is policing the application of the duty in mass-membership charities.
What action should charities take in light of this ruling?
Following this decision, it may be necessary for charities to take pre-emptive measures to ensure members are acting within the best interests of the charity, for instance it may be sensible to implement codes of conduct for members.
Trustees are expected to complete a register of interests form and declare conflicts of interest at board meetings. Could the same be expected of members? Is it possible that charities could seek to prevent conflicted members (e.g. consider members who are also employees or beneficiaries affected by a particular decision) from voting on certain matters? The question again arises of how this can be reasonably be managed in a mass-membership charity.
In our previous article, we also discussed whether members can look to legitimately challenge or overturn a trustee decision on the basis that it is in the best interests of a charity or could trustees argue decisions by members were contrary to their fiduciary duties? These are questions that have not been addressed by the Court of Appeal.
It does not look as if this judgment will be appealed to the Supreme Court. It now falls on the Charity Commission to issue guidance clarifying the scope of this ruling to ensure that members can comply with their legal obligations.