Stark Warning to all Charity Trustees: Be Alert to Threats to Solvency

October 7, 2014

A recent decision in the Chancery Division of the High Court in the case of Denis Stewart, Kathryn Fee, Jackie (sic) Fitzsimons, Clarke Frampton, Tony (sic) Gallagher, Eric Rainey and Sean Donaghy v Her Majesty’s Attorney General for Northern Ireland [2013] NICh 10 sounded a grave warning to all charity Trustees. Mr Justice Deeny appealed to Trustees to be alert and to take active steps to address any threat to the solvency of a Charitable Trust in a “timely and expeditious way”. Highlighting the onerous obligations of Trustees, His Lordship emphasised that Trustees must be ready to deal with any threat of insolvency promptly.

The Plaintiffs in this case were the Trustees of the charity “Spirit of Enniskillen Trust” (“the Trust”). The Trust was founded in 1997 as part of a cross-community reaction to the horrors of the Enniskillen bombing in 1987. The Trust provided pensions for its five staff via the Northern Ireland Charities Pension Scheme (“the Scheme”). The terms of the Scheme stated that if one of the participating charities ceased to contribute to the Scheme then the liability for any shortfall fell on the remaining members of the Scheme.

The Court was informed that although the Plaintiffs were aware of a contingent liability to the Scheme of £98,000.00 as at 31 March 2011, there had been a “somewhat relaxed” attitude about it. This approach was partially down to the fact that the Trust had purchased their offices in 2000 and the building had increased in value dramatically as a result of the property boom. Thoughts of joint liability to the Scheme were not at the forefront of the Trustees’ minds and therefore no action was taken to address the issue.

However, the downturn in the economy and a significant decline in available funding had a dramatic impact upon the Trust’s finances. Moreover, the ill fortune of the Trust was exacerbated by the difficulties of another member of the Scheme which resulted in the Trust’s contingent liability to the Scheme rising to £232,000.00 by March 2012. After seeking professional advice in November 2012, the Trust ceased operating in March 2013 and made all staff members redundant. By this stage, the contingent liability had risen to nearly £290,000.00, which clearly exceeded the Trust’s assets. The Court found that, with hindsight, the Trust should have left the Scheme in 2011, by paying the sum of £98,000.00 and altering the terms and conditions of any continuing employees thereafter by agreement, or in the alternative, making some or most of them redundant.

Mr Justice Deeny exercised the Court’s equitable jurisdiction and appointed a liquidator to wind the  Trust up. His Lordship did not direct the liquidator to investigate whether there was any neglect or default by the Plaintiffs, in part due to the ongoing statutory role of the Charity Commission and the potential personal liability which the Trustees were now facing for any deficit in the pension arrangements of their former employees.

Mr Justice Deeny granted the Plaintiffs’ application on the basis that it would “provide a just and effective remedy” and also readily accepted the invitation of Counsel for the Attorney General to “shine a spotlight” on these events. Whilst not reaching any conclusion in relation to the conduct of any individual involved in this particular case, he felt it right to mention that Chief Executives and Finance Directors of charities will inevitably be in a conflict of interest situation where their own personal interests will favour remaining employees and members of such a valuable pension scheme but the best interests of the Trust may well be to the contrary. Trustees would be well advised to bear this in mind.

Should you have any queries about the contents of this article, please do not hesitate to contact Cleaver Fulton Rankin’s Charity Team on 028 9027 3141

Please note; the content of this article is for information purposes only and further advice should be sought from a professional legal advisor before any action is taken.

Please contact Cleaver Fulton Rankin on 028 9027 3141 or alternatively visit www.cfrlaw.co.uk