Divided loyalties

The Nolan Committee, amid squeals of displeasure from certain camps, sparked a wide-ranging debate about the need for people in public life to disclose their interests. MPs, among others, have been forced to consider potential conflicts of interest in their work.

And so have charity trustees. They are engaged in public life because charities are established, in theory, to benefit the public. So it is useful to remind ourselves of the principles that already apply to charity trustees.

The rule about self-dealing in equity is well known in theory, though less well observed in practice. It states that, unless allowed by the governing body or an order of court, a trustee must act gratuitously and not benefit at the expense of the trust.

In the case of a charity, whether it is constituted as a trust or a company, this rule applies with one exception – an order to bring a benefit to a named trustee may be made by the Charity Commissioners free of charge, instead of the court.

A charity trustee cannot normally acquire trust property, be paid for acting as a trustee, or be paid for other work carried out for the trust. So a trustee who is also a plumber, for example, can recover no more than the cost of materials for plumbing work carried out for the charity. Nor is a trustee allowed to receive any other benefit, such as free advertising in the newsletter.

This principle has been held – Boardman v Phipps (1967) – to extend to information a trustee acquires. In practice, it may be extremely difficult for trustees to avoid using inside information for their own financial gain. But if they do benefit financially, the resulting 'profit' is held on a constructive trust for the charity.

It is not uncommon for a body of charity trustees to want to sell charity land or other property to a particular trustee for an enhanced price. In such circumstances, the commissioners can make an order under section 36 (1) of the Charities Act 1993 (in the case of land) or under section 26 on the basis that the sale – at an enhanced price – is “expedient in the interests of the charity”.

An associated principle, which derives from the self-dealing rule, is that trustees may not place themselves in a position where their duties may conflict with personal interests. Equity, like justice, must not only be done but be seen to be done.

Charity trustees who find such a conflict looming have various options: they can declare an interest, refrain from voting, withdraw their participation from the discussion, leave the room where the discussion is taking place, avoid the meeting altogether or, ultimately, resign as a trustee.

Sometimes, the existence of a potential conflict will be perfectly obvious to the other charity trustees, such as where the trustee is the owner of land adjoining land belonging to the charity and the charity is about to apply for planning permission for a development. But on other occasions, the conflict will not be obvious, and it will be entirely up to the trustee concerned to disclose the interest and take appropriate steps to safeguard the charity. There may be difficulties in application, but the principle is clear.

A similar problem may arise when the trustee has no personal interest in the matter but has a duty to some other person or body that does – Re Thompson's Settlement (1985). A common example of this is when the trustee has been appointed by a local authority or other outside body which itself has an interest in something in common with the charity.

The general rule about appointees is simple: their duty is solely to the charity of which they are trustees, not the body that appoints them, whatever its interests may be. The difficulty arises where the trustee also happens to be a member of the local authority. Acute and intractable conflicts can arise in these circumstances.

It is often suggested, even by the Charity Commission, that the ultimate safeguard is resignation. By removing the conflict, a former trustee can then act in accordance with their personal interests or other duties without any conflict of interest.

But case law suggests otherwise. Having been a trustee provides a person with information that is the property of the charity, in line with the principle in Boardman v Phipps.

And the proprietary nature of the charity's interest continues after the trustee's resignation: the trustee still cannot use it for their own advantage without accounting to the charity for any profit made. Similarly, a trustee's resignation does not enable them to enter into a transaction which would not have been proper if they had remained a trustee – see Wright v Morgan (1926).

The moral must be that a charity trustee in such a position should tread extremely carefully. Before acting as a former trustee in a manner that would not have been open to them as a trustee, they must be sure to obtain from the charity commissioner either a formal order or at least a written letter of advice under section 29 of the Charities Act 1993.