Liability of Charitable Trustees

In two of my early articles (“As common as dirt” and “Lessons from a Polytechnic”) I outlined the disadvantages of unincorporated societies, stating that “for any society, other than the most basic, incorporation is highly desirable because of the clear practical benefits.”  In summary, those are:

  • An incorporated entity is recognised in law as a separate legal “person” from its members, in the same way a company is a separate legal entity from its shareholders, with the consequential benefits of incorporation,
  • An incorporated society or trust has “perpetual succession,” and thus it continues in existence as long as it complies with the law and is not wound up or otherwise removed from the Register,
  • An incorporated society or trust executes documents as a separate legal person under common seal and can, subject to its constitution, enter into contracts in its own name, buy, sell, own, lease, and rent property, borrow money and give securities, and can also sue and be sued in its own name,
  • The members of an incorporated society enjoy “limited liability,” and the trustees of an incorporated charitable trust obtain exclusions from personal liability similar to those enjoyed by company directors, with exceptions, and
  • The mere fact of incorporation also gives a society or trust a quality of permanence.

Should charitable trustees be alarmed about personal liability?

My 23 March 2012 article highlighted the potential personal liability of those in governance of not-for-profit entities.  Anthony Grant’s article, “Inland revenue goes hunting for professional trustees,” (NZLawyer, issue 172, 4 November 2011) focussed on charitable trustees, and cited White & Ors v Williams & Ors [2011] EWHC 494 (Ch).  That case concerned various breaches of trust of charitable trustees which resulted in the trustees being refused indemnity from trust assets (despite, apparently, relying on legal and accounting advice).  Mr Grant’s article was followed by another by senior IRD staff, Graham Tubbs and Sanjiv Weerasinghe, “Inland Revenue Departments’ approach to tax debts incurred by trusts,” (NZLawyer, issue 176, 27 January 2012).

The White & Ors decision quotes with approval Picarda’s Law and Practice Relating to Charities (4th edition) at page 633; “A private trustee must be loyal to the interests of the beneficiaries.  The charity trustee owes his duty of loyalty to the public.”  While the two recent articles addressed the responsibilities of private trustees, it should immediately have rung loud alarm bells for existing (or potential) governors of charities (and those advising them) – for reasons I now explain.

A compelling case for incorporating charities

In the UK charities cannot incorporate, and in an earlier decision in the White & Ors litigation an unsecured creditor had obtained judgment against the charitable trustees personally.   In New Zealand, as long as the creditor knows the identity of an incorporated charity when liability arises, the creditor would be unlikely to obtain judgment against charitable trustees for a simple debt.  This is a consequence of incorporation constituting an entity as a separate legal person from its trustees.

Trustee liability

As reflected in the Court of Appeal decision in O’Hagan v Body Corporate 189855 [2010] NZLR 445, the law in relation to the liability of trustees in private trusts is clear:

[49]   … Unlike a company, which is a different legal person from its shareholders, Ms Clark’s legal status as owner of the unit did not alter when she transferred it to herself and her co-trustee.

[50]  In NZHB Holdings Ltd v Bartells it was stated [NZHB Holdings Ltd v Bartells (2004) 5 NZCPR 506 (HC).]: 

“[34]  Recent experience in more than one case suggests that the concept of trust is used more often than it is understood.  Unlike a company or an incorporated society a ‘trust’ is not a legal person recognised as distinct from the humans who direct their affairs …

[37]  … [T]he Court of Appeal in In re Graham; Pitt & Bennett ex parte Nolan & Skeet (1891) 9 NZLR 617, 621 held that

‘There is no such thing recognised as that the trustees have an identity different from themselves individually, and that they themselves do not become liable when acting for the trust estate, unless there is an express contract to that effect.’”

 [51]  The judgment in Bartells continued …

[42]   So in New Zealand law, and in that of England and of New South Wales, in the absence of more limiting language the description of a contracting party simply as ‘trustee’ renders that party personally liable.  There is a presumption in favour of personal liability which must be refuted if a person contracting as ‘trustee’ is to be relieved of liability beyond the extent of the trust assets.”

Liability of charitable trustees/committees

It will be immediately apparent that where a charity is a separate legal entity, and that is known to a creditor, the principles set out in O’Hagan and Bartells do not apply.  This suggests that incorporation of charitable entities is not just desirable but essential.

However, the trustees (or committee) of an incorporated charity can still be liable, at least in some circumstances:

  • As agent for an undisclosed principal, if a charity’s creditor is not aware that the charity is incorporated,
  • If in breach of their duties to the charity, a Court may hold them personally accountable, and
  • As discussed in my 23 March 2012 article, on liquidation of an incorporated charity, Part 16, Companies Act 1993 applies, with potential personal liability if proper accounting records are not kept or where trustees have “misapplied, or retained, or become liable or accountable for, money or property of the [charity], or been guilty of negligence, default, or breach of duty or trust” in relation to the charity, and both of these sections would have applied in the factual circumstances in the White & Ors case.

Hunting for professional trustees?

Too many people accept appointment to positions of governance in charities without fully understanding that being a trustee involves serious and onerous duties, and that being a trustee or committee member of a charity may be a complex burden, involving not only an understanding of the trust but also an acquaintance with relevant legal rules and principles.  The first obligation of all charitable trustees is to become familiar with the document constituting the charity (the trust deed, or will, or the rules of the charitable society), the charity’s property and records, and any limitations to which the charity is subject, and then never to forget the objects and terms of the trust.  This may appear to be too obvious to state, but being a trustee involves serious and onerous duties.  A “policy of masterful inactivity” (Underhill and Hayton, Law Relating to Trusts and Trustees, 4th Ed, 1987) is entirely inappropriate!

Mr Grant’s cautions for professional trustees therefore apply to those who accept office as trustees or committee members of charities.  They will obtain greater protection than is available in the UK if the charity is registered, but the dangers in governing a charity in New Zealand still remain real.

This is one of a series of articles on societies and charitable trusts (originally published in the NZ Lawyer magazine) by Mark von Dadelszen, a Hastings lawyer and author of Law of Societies, 3rd Edition, 2013. If any reader has examples of issues that have arisen or questions about societies or charitable trusts that might be a suitable subject for one of these articles please contact Mark at mark.vondadelszen@bvond.co.nz.