Increasingly, Trustees are asking whether they might become personably liable. This is an excellent question and one that all officers of charities should consider.
We were recently asked whether Trustees can be held personally liable if a Trust becomes insolvent. The short answer is yes, in certain circumstances. However, there are some protections which can limit liability and it will depend on what action the Trustees took. For example, if there was some dishonest action, Trustees could be liable, but for genuine decisions this is less likely.
These principles would also apply to officers of other entity types such as to officers of incorporated societies or directors of charitable companies.
Inbuilt protections for Trustees
Our trust deed limits the liability of Trustees using indemnity clauses like this:
No Trustee hereof will be liable for any liability or expense arising from any cause whatsoever when acting with the authority of the Board and will be entitled if the Trustee has paid the expense or discharged the liability out of the Trustee’s own funds, to reimbursement from the Trust Fund.
However, this is usually followed by wording like this:
UNLESS such liability or expense arose from the Trustee’s dishonesty, wilful misconduct or gross negligence or was incurred without authority from the Board.
In other words, if a Trustee is dishonest, engages in wilful misconduct or gross negligence, or creates liability without the approval of the Board, the Trustee may be held liable. This makes sense – liability limitations exist to ensure Trustees are not unreasonably held accountable for their decisions, while at the same time requiring them to avoid poor behaviour.
If you would like help to create or amend a trust deed, please contact us.
Can insurance help?
Trustee insurance (often called Directors and Officer Liability Insurance) policies may help but often exclude the insolvency of the Trust and any dishonest activities by Trustees.
Insolvency
If the Trust is unable to pay its debts it may apply for voluntary liquidation under section 24 of the Charitable Trusts Act 1957 (“CTA”). A creditor or Official Assignee (a government-appointed person responsible for managing liquidations) may also apply to the Court for the liquidation of the Trust under section 25 of the CTA. In either situation, section 301 of the Companies Act 1993 may apply.
Section 301 permits the court to require Trustees to personally repay money or return property, or pay compensation if it appears to the Court that a Trustee “has misapplied, or retained, or become liable or accountable for, money or property of the company, or been guilty of negligence, default, or breach of duty or trust in relation to the company.
How do Trustees protect themselves?
In many respects, Trustees have similar responsibilities to directors of companies when it comes to insolvency. They need to pay close attention to their financial situation and understand if they are reaching a point when they may not be able to pay their creditors. We recommend:
- Paying close attention to the financial situation.
- Asking, “Will we be able to pay for the contracts we have with creditors?” If you are unsure, avoid entering into the contract.
- If insolvency is looming, seek professional advice urgently.
- Consider whether you should contact IRD to explain the situation. IRD and employees rank highly among creditors. IRD often initiates liquidation proceedings.
In a nutshell
- Trust Deeds indemnify Trustees for certain matters. These do not include dishonesty, wilful misconduct or gross negligence or taking steps without authority from the Board.
- Insurance usually excludes insolvency.
- If a Court determines a Trustee has misapplied, or retained, or become liable or accountable for, money or property of the company, or been guilty of negligence, default, or breach of duty or trust in relation to the company, the Trustee may be personally responsible for reimbursement.
- Trustees must understand the Trust’s financial circumstances and make decisions that will avoid insolvency.
We can help
We have acted for hundreds of charities and can help your charity as well. Please contact us for specific advice on Trustee liability for your circumstances and how to prevent it.
