As stringent social distancing measures come into force across the country, we consider legal issues charities may face in the coming months.
This is the first in a series of briefings that will offer tips for managing legal and governance issues charities may face in these difficult times.
Many charities are likely to experience significant challenges to their operations as a result of Covid-19 – whether in the form of long-term staff absence, increased demand for services, needing to close or reduce the scope of services, breakdowns in supply chains or for completely unforeseen reasons. In some cases, these may be sufficiently serious for the charity trustees to consider whether they should make a serious incident report to the Charity Commission.
The Commission’s current advice is that “charities should continue to report serious incidents using the current guidelines and their own judgement and we will advise if and when this situation changes”. Trustees would therefore be advised to apply the usual tests in determining whether the threshold for making a serious incident report has been met, though noting where Covid-19 has been a contributing factor – particularly where it has had a significant impact on financial modelling and/or created a situation that the trustees could not reasonably have foreseen.
Whether or not to make a report of a serious incident should be kept under review as the situation develops. For some charities, especially those which do not encounter potential serious incidents fairly routinely, this may be their first encounter with the reporting regime. These charities are advised to consider carefully whether the incident in question meets the materiality thresholds outlined in the Commission’s guidance. If a decision is made not to report, the reasons for this should be carefully recorded.
Our recent briefing offers tips on developments with RSIs here.
Many charities are also registered with other regulators (such as the Care Quality Commission, the Office for Students, Ofsted and the Department for Education to name a few) and it is worth evaluating what other obligations there may be that require a report or update to be made to a relevant regulator.
While the economic implications remain difficult to gauge at present, it is already clear that parts of our economy will be very severely affected in months to come.
The law does not require boards to be perfect or to have access to perfect information; what it does expect is for a board to act reasonably and take reasonable steps before acting. In testing times charities must keep their own operations under careful review. Where a charity’s situation is acute, trustees should keep under active consideration whether relevant solvency tests continue to be satisfied, or whether they should stop trading in order to avoid any risk of wrongful trading.
Below are five steps a board can take to put itself in a much better position:
- Constantly monitor whether you are able to conclude that the charity has a reasonable prospect of avoiding insolvency
- Take appropriate professional advice and follow it
- Ensure access to reliable financial information and constantly update and monitor that information
- Put the interests of creditors first
- Meet regularly and minute your deliberations.
This Farrer & Co briefing expands on these points and details some other practical steps. (Note that references to considering the interests of shareholders should, in a charity context, be read as considering how best to further the charity’s purposes.)
If a charity’s trading subsidiary is in financial difficulty, can the charity assist it to weather the storm? Again, the usual principles will apply: a charity is not able to subsidise its trading subsidiary in most circumstances and will need to consider whether any financial investment by way of a loan or equity investment can be justified as being an investment in the charity’s best interests and prudent in the circumstances. Where a trading subsidiary’s activities create some “charitable return”, it may also be possible to consider a social investment. When considering investments in a trading subsidiary there are tax considerations to navigate alongside legal ones, and the Charity Commission’s guidance “CC35 – Trustees, trading and tax: how charities may lawfully trade” is a good starting point for charities.
The Commission’s guidance is clear that a charity must not subsidise a failing subsidiary, however, trustees may be able to take the view that this is a comparatively unprecedented situation, and that any risk associated with further investment can be adequately mitigated by the terms on which it is offered (for example by imposing a higher interest rate on loan finance). This will however require careful assessment of the viability of the subsidiary in the current climate: protecting the charity’s assets must be the trustees’ first priority.
UK government guidance issued on 23 March 2020 has stopped all public gatherings of more than two people. This is likely to impact the majority of public fundraising events; many venues and communal spaces have also now closed.
Where events are cancelled, what rules apply to returning funds to ticket holders? This will usually be governed in the first instance by the terms and conditions which apply to the ticket – see this Farrer & Co briefing for more detail on commercial transactions, including the interpretation of force majeure clauses.
Charities are therefore advised to look carefully at the terms and conditions which apply to events and ticketing, and also at relevant insurance policies which might be able to cover losses. Careful thought should also be given to the charity’s communications strategy when refusing refunds in order to ensure that it is done with sensitivity and in a way that (as far as possible) preserves the relationship with the supporter. Charities may also need to consider situations where they have received donations from individuals who are sponsoring participants in a cancelled event. Again, this will turn on the terms of the sponsorship: many fundraising platforms describe such contributions as “donations” and do not specify any right to repayment, so the basis on which one would be claimed is unclear.
Charities should be mindful that where there is no contractual obligation to return funds (for example, where a technical force majeure situation has not yet arisen), more careful thought is likely to be required – especially where some or all of the funds have been described as a donation to the charity. It may be the case that returning a payment could amount to an ex gratia payment for which Charity Commission consent would be required, so refunds where no contractual obligation exists are generally only likely to be appropriate in exceptional circumstances. The Commission acknowledges that in relation to small ex gratia payments (£1,000 or less) trustees may feel it would not be administratively sensible to apply for authority to make the payment, and in such cases they are unlikely to challenge this. However, if a series of refunds amounts to more than £1,000 then it is less certain as to whether authorisation is required from the Charity Commission.
In addition, where an element of the price of a ticket is eligible for Gift Aid, giving refunds (whether in accordance with terms and conditions or otherwise) may call into question the availability of the relief. The Charity Tax Group has written to the Chancellor asking him to allow Gift Aid claims in respect of cancelled events to stand, but whether this will be permitted is far from clear.
The Fundraising Regulator has also published this guidance on fundraising and Covid-19.
Many charities may have board or general meetings scheduled over the coming months and be wondering what steps should be taken to observe social distancing measures and protect attendees, particularly those more at risk from Covid-19. Please note that this section is principally directed to charities which are structured as companies – if you would like advice on different structures, please do get in touch.
One-off decisions where a meeting cannot be held
If a decision is needed at short notice on a specific matter and the trustees are all in agreement, they may act informally where they are unanimous. This has been interpreted by the courts as meaning that an agreement signed by all the directors of a company on different dates, and not as a board, is a contract binding the company. By analogy, a decision approved over email by all the trustees on different dates is likely to be valid; though it would of course be desirable to specify a timeframe for responding to ensure that decision-making does not become protracted.
Trustees may also consider passing a written resolution in place of a resolution at a meeting – this may be in accordance with provisions in the charity’s governing document or may again rely on the principle of informed unanimous consent.
Taking decisions within a meeting is the better option where time and circumstances allow, as it is considered best practice from a governance perspective and allows trustees to discuss the decision together.
It is likely that if the current situation continues charities will need to identify a more satisfactory approach to decision-making. Written resolutions are generally only suitable where the matter is straightforward and/or there has already been an opportunity for discussion and debate, and unanimity is never guaranteed (and may be harder to secure if, for example, board members are taken ill).
It is now generally accepted that a board meeting can be held by telephone or other electronic means (such as video conferencing), without an express reference to this in the governing document.
However, if a meeting is held by telephone or other electronic means, it is recommended that:
- all those entitled to receive notice give their express consent to the meeting being held by such means;
- the arrangements are such that each participant can hear all the other participants; and
- minutes of any such meeting are circulated to each trustee for approval to ensure they are a correct record of the business transacted.
AGMs: if you go ahead
Provided that there is nothing in the Articles which either expressly or impliedly restricts the holding of electronic or “virtual” meetings, it is in theory possible to attend an AGM by electronic means. All participants must however be able to attend, speak (and hear others) and vote at the meeting. Depending on the size of the meeting, this may prove logistically and/or technologically challenging.
There is no consensus on whether a fully virtual general meeting is permissible under UK law – several bodies have expressed concerns with this practice on the basis that the AGM is the only opportunity that members have to meet and address the entire board. While the position of charities is different in that members do not have a proprietary interest in the charity’s assets, it may nonetheless be felt that postponing or adjourning the meeting is a more appropriate course of action, and less open to challenge.
If a physical meeting does go ahead, trustees could also encourage the use of proxies and (at the discretion of the board) written submissions by more vulnerable attendees. Note that holding a physical meeting is unlikely to be possible under current UK government guidance.
AGMs: if you adjourn
If an AGM has not yet been called, there is no difficulty with the trustees identifying a date later on in the year for the meeting, albeit trustees should consider whether delaying the AGM may result in accounts not being approved in time to meet relevant filing deadlines.
If an AGM has already been called (with notices to members sent out) but the trustees do not wish to go ahead, they could consider notifying members of their intention to postpone or adjourn the meeting to a later, more suitable date.
Postponing a members’ meeting is usually only possible where there is an express power to do so in a charity’s governing document.
For charities without the power to postpone an AGM that has been called, and where circumstances require delaying the meeting’s business until a later time, adjourning it may be a practical option. This means that the meeting will technically take place at the specified time and place (so it must be possible to do that with a few attendees) but will be immediately adjourned on the grounds either that it is inquorate or that it is not appropriate to proceed in the circumstances. A time and place for continuing the meeting can then be notified to members once the position has become clearer. The adjourned meeting will count as a continuation of the original meeting and only the business which was to be transacted at the original meeting can be transacted at it; this does not however prevent the trustees from calling another meeting on the same day, should that prove necessary.
Where trustees conclude that a general meeting cannot safely be called or adjourned and must therefore be cancelled or postponed, the Charity Commission has now published guidance which suggests that they can do so where they have no other choice, but that they should record their decision in order to demonstrate good governance of their charity.
The Commission has acknowledged the difficulty that some charities may face with complying with their filing obligations – particularly if they are not able to hold an AGM at which to approve accounts. The Commission has confirmed that “As an immediate step, charities that are due to submit an Annual Return imminently, but feel unable to do so, can call us to request a filing extension.”
It is unclear what would be considered “imminent” for these purposes, so if trustees have any concerns about being able to file on time, they would be advised to contact the Commission.
Companies House has also indicated some tolerance for missing filing deadlines, provided that an application to extend a deadline is made to it ahead of the filing deadline that can no longer be met.
The twelve-month delay in implementing the changes to IR35 tax rules will be welcomed by charities and are covered in this Farrer & Co briefing.
Looking ahead to the coming months
There is no doubt that the coming months pose a significant challenge to the sector, and indeed to large sections of the public around the world, and many charities will be on the front line in tackling the issues which arise. Many others will be feeling the strain of reduced income and operational obstacles.
The team here are all now working remotely and will continue to be on hand to provide support, advice and guidance as we navigate the difficult weeks and months ahead. Please do get in touch if you think we can help.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, March 2020