Expert advice

Chairman's corner: What are my liabilities?

Governance | Hannah Armit | 25 Jun 2010

The Chairman elicits the help of Hannah Armit when a concerned chief executive is tired of trustees burying their heads in the sand, despite impending insolvency...

Dear Chairman, 

I am chief executive (CE) of a well governed charity. In my role as CE I am required to be a trustee of a charity that is badly governed and on the brink of insolvency. The trustees of this charity believe in hiding their heads in the sand and are in complete denial with regard to the charity’s financial situation. I’m not in a position to resign as a trustee because to do so will require me to resign as CE of my charity. My own trustees are sympathetic but the other charity just will not listen to what I, or my trustees, have to say. Can I ask my charity to indemnify me against any personal liability if the charity is in fact, or becomes, insolvent? Also I serve as a non-trustee member on the audit committee of a third charity. What are my responsibilities and liabilities in such a situation? All three charities are charitable companies.

Yours sincerely,

A worried CE 

Dear worried CE,

You are being placed in an unreasonable position. You should not be required to continue to hold this office and your employers should either take steps to improve the finances of the charity or permit you to stand down. You also need to write to both boards to place your views on record.

You do have a degree of protection from liability because a corporate charity is a separate entity, distinct from its trustees and liability normally begins and ends with the assets of the charity.

However, there are a number of exceptions. The most relevant is that you can be personally liable if the charity goes into insolvent liquidation and you knew or ought to have known that there was a reasonable prospect of that outcome, but you did not take corrective action to minimise the potential loss to the charity’s creditors. In this regard you are in exactly the same position as any other trustee of the charity and it is irrelevant that you say you are ‘required’ to sit on the board.

If they are satisfied that it is in the best interests of their charity (for example if the ongoing relationship between the two charities is important), your employers can indemnify you. However, in doing so they are exposing the assets of their charity to considerable risk and this would need to be weighed against the benefit of you remaining on the board. A better alternative would be to check whether you are already covered under existing directors and officers insurance and, if not, insisting on a suitable policy being purchased if it is available given the current state of the charity’s finances.

Your position on an audit committee is much better. Your only real responsibility is to act within the terms of reference of the committee, including ensuring that regular reports on the activities of the committee are made to the board of the charity. Assuming you only act in an advisory capacity, as a non-trustee member of the committee, you should not be exposed to any liabilities, unless your advice is negligent.

Yours sincerely,

Hannah Armit Solicitor,

Farrer & Co LLP