The ties between a local authority and a charity were the subject of a recent Charity Commission report. Rachel Tonkin looks at the issues raised and the lessons to be learned.
A recent regulatory report by the Charity Commission has highlighted the risk that charity independence, and in turn charitable status, can be threatened where local authorities are able to exercise control.
The Commission's report is a useful reminder of the well-established charity law requirement that charities must be independent from the state, because they must exist in order to carry out their own charitable purposes and not for the purposes of implementing the policies of a governmental authority.
It will be of interest to charities who receive funding from local authorities and other public bodies but is also of wider interest to charities whose membership includes funders and other stakeholders.
The Charity Commission's report follows its regulatory intervention against Croydon Council's proposal to become a majority member of recreation and leisure charity Fairfield (Croydon) Limited ('Fairfield') which maintains and manages an entertainment venue. Fairfield and the council had existing agreements in place whereby Fairfield leased council-owned premises and the council made grants to Fairfield which paid for the rent under the lease. In order to safeguard its significant funding of planned refurbishments to the premises, the council proposed becoming a corporate member of Fairfield and taking 75% of the voting rights.
The report makes it clear that such a move would call the charity's independence into question and as such may cost Fairfield its charitable status. The Commission warned the trustees that the proposal would result in a 'take-over' by the council, rendering Fairfield vulnerable to the decisions of the council, and as a result, not sufficiently independent. The proposal was ultimately withdrawn, but it demonstrates that the Commission will seek further evidence and scrutinise the transactions if the independence of a charity is called into question.
It is clear that the Commission expects control of grant funds to be dealt with via the terms of a grant agreement, rather than by the funding body taking control of the governance arrangements. However, there will still be limits on the extent to which a local authority funding body can exercise de facto control through the funding arrangements (see the Commission's guidance The Independence of Charities from the State - RR7).
The Commission's approach here is perhaps unsurprising, but what is arguably of wider interest are its comments in relation to the duties of members of charities:
"Many local authorities are involved in charities as sole corporate trustees. This is not a concern, because trustees have a clear legal duty to make decisions in the charity's best interest. However, members of charities have no such obligations; they can act in their own interests, rather than in the interest of the charity."
Interestingly, this appears to be at odds with the Commission's view expressed in its guidance for membership charities, that members of charities act in a fiduciary capacity and therefore must exercise their rights in the best interests of their charity. It is not clear whether this represents a change in stance by the Commission in relation to charitable companies, where the position as to members' duties has never been entirely clear. Such a change would be interesting, particularly given that the legislation in relation to Charitable Incorporated Organisations (CIOs) specifically confirms that members of a CIO have a duty under the Charities Act 2011 to act in a way that the member decides, in good faith, would be most likely to further the purposes of the CIO. Whether any change of stance also affects members of other kinds of charities (including unincorporated associations and Royal Charter corporations) also remains unclear.