Founding a Charity? Make Sure You Understand Your Legal Duties!

Successful business people often reflect their good fortune in philanthropy and set up charitable foundations in order to give something back to society. However, one High Court case has underlined that those who do so take on a wide range of legal duties, breach of which can have grave consequences.

A property developer (the founder) established a charity into which excess profits from his thriving business were paid. He needed to raise funds for a new venture and caused two companies, which were owned by the charity, to grant security over a number of their properties. Those properties were charged with a £10 million liability at an interest rate of 0.25 per cent per annum.

That was done for the benefit of a property company which was itself owned by an overseas trust of which the founder was a beneficiary. In a separate transaction, the founder caused one of the companies to enter into an unsecured loan note for £4 million in the property company’s favour on terms that it would receive interest of 8 per cent per annum. There was no evidence that any interest had in fact been paid.

The Charity Commission had concerns regarding the corporate governance of the charity – in particular in relation to unsecured lending to companies controlled by the founder – and eventually intervened. A new independent board was appointed and proceedings launched against the founder, who had been removed as a director of the companies.

The Court ruled that the founder had not been dishonest and had genuinely believed that the transactions were in the interests of the companies and the charity. However, he had breached his fiduciary duties as a director of the companies in failing to ensure that their boards received independent legal advice.

He had driven through the transactions, which the Court found were unattractive and risky from the companies’ point of view. He had failed to address the obvious conflict of interest that arose through his involvement in both sides of the transactions. The Court’s decision opened the way for the companies to seek compensation from the founder personally for any losses that they had suffered due to his breaches of duty.