Background

The Charity Commission for England and Wales opened its inquiry into The Cup Trust in April 2013. Almost five years on, the inquiry is still open. Arguably, one of the most significant aspects of the inquiry was the action taken by the Charity Commission in disqualifying the sole corporate trustee (Mountstar (PTC) Limited) from acting as a charity trustee for the maximum period of 15 years under its new discretionary power contained in the Charities (Protection and Social Investment) Act 2016. This was one of the first times this power had been utilised.

It is understood that the Charity Commission did not seek to pierce the corporate veil and disqualify the individual directors of the corporate trustee at the same time. However one of the directors was fined and banned from the accountancy profession for 10 years by the Financial Reporting Council.

It has been stated that the Charity Commission is considering taking regulatory action against the individual directors, although no further update on this is available at the moment while the inquiry is still in progress.

Should the corporate veil be pierced in such circumstances?

 In The Cup Trust Appeal to the First-Tier Tribunal (Charity) (“FTT”) in 2013, it was stated in the decision at paragraph 145 that:

“We do not need to decide this point or the extent to which the corporate veil can be pierced because Mr Jaffey (representing the Charity Commission), who did not refer us to any of the usual authorities in this area, did not invite us to do so. He submitted that if it is right that no fiduciary duties were owed by the directors to the charity, if Mountstar failed to properly manage the charity (for example by failing to properly scrutinise the Scheme, and independently of the influence of the conflicted Mr Jenner) then it would be guilty of mismanagement or possibly misconduct.”

It is unfortunate that piercing the veil was not considered in this case, or that the decision did not contain any obiter dictum on the subject.

In order to consider what the position may have been if the issue had been put before the FTT, we can look at other sources on the matter.

In the Charity Commission’s Operational Guidance OG38 under ‘Liability of Corporate Trustees’, the Charity Commission advises that:

“Where a body corporate is the sole trustee of a charity, the individual persons who, from time to time, are responsible for the management of the corporate body are not themselves trustees of the charity.  The duties, responsibilities and liabilities of trusteeship lie with the corporate body.  However, that body must act through individual persons in order to express its will.

If the body corporate commits a breach of its duty as a trustee, it will have done so only as a result of a breach by its directors or other individual officers of their duties towards the body corporate.  While they, therefore, cannot be held liable directly by the charity, they may be held liable to the corporate body for any liability it has incurred in respect of the charity.  We should, therefore, stress to the officers of corporate trustees that they should familiarise themselves with:

  • the terms of the charity’s governing document; and
  •  the procedures which have been prescribed in legislation (such as the Companies Acts and Regulations made under them).”  (emphasis added)

This guidance suggests that the corporate veil should not be pierced in these circumstances: instead it is for the corporate trustee itself to hold the individuals directors liable.  

HM Revenue and Customs Fit and Proper Persons Test

The HM Revenue and Customs (“HMRC”) Fit and Proper Persons test is used to ensure that only ‘fit and proper’ people are managing the affairs of a charity. This ‘management condition’ is one of the conditions a charity must satisfy in order to claim UK charity tax reliefs.

 HMRC guidance states that:

“The fit and proper persons test applies to the ‘managers’ of the charity. The term ‘manager’ is defined in the legislation as the persons having the general control and management of the administration of the charity. This can apply to the trustees of charities, directors of corporate charities, directors of corporate trustees, CASC officials, and any other persons having general control and management over the running of the charity or the application of its assets.

The term ‘general control and management’ has a wider scope than that found in the Charities Act 2011, which applies only to trustees of a charity.” (emphasis added)

Adopting the logic of HMRC, the corporate veil should be pierced as the individual directors of the corporate trustee are ‘managers’ of the charity. We can only really speculate on this point, as we are unlikely to get a judgment on the point soon since such cases are fairly sporadic.

Is the position in Scotland different?

What is the position in Scotland and does it differ from the position set out above?

First of all, the trustee declaration on the OSCR website states that it can be completed by both charity trustees and corporate trustees. If the proposed charity is to have a corporate trustee, the declaration form asks that its directors should complete the declaration. The declaration form asks for personal information and for the signatories to declare certain statements are true – they are asked to do so as an individual. This may on the face of it suggest that OSCR considers the individual directors to be the charity trustees, although this is just one interpretation of the form.

 Under s31 of the 2005 Act, OSCR has the power to ‘suspend any person concerned in the management or control of the charity who has been responsible for or privy to the misconduct, who has contributed to, or facilitated, the misconduct…’. The definition of charity trustees is the ‘persons having the general control and management of the administration of a charity’.

Can we take from the fact that s31 did not simply state that OSCR has the power to suspend charity trustees to mean that the intention was to apply the power more widely, and to include situations relating to the misconduct of directors of a corporate trustee? The answer could well be yes.

The proposition that OSCR would look through the corporate trustee to its directors is strengthened by comments in the OSCR guidance, ‘Who’s In Charge: Control and Independence in Scottish Charities’. In this publication, OSCR uses Lothian Health Board Endowment Fund as a case study when discussing the situation where the charity trustees are identical to those of another linked body. Although the issue itself does not specifically refer to a corporate trustee, the circumstances are not too far removed and parallels can be drawn.

The individuals involved in the Lothian example were appointed to the relevant NHS Health Board and, by virtue of that appointment, were appointed ex officio to the board of the Endowment Trust. In essence, though, the legislation creating NHS endowments states in clear terms that the NHS board is the trustee. Under ss82-83 of the NHS (Scotland) Act 1978, NHS Health Boards are directed to hold all endowments and property vested in them on trust for such purposes relating to services, hospitals, etc.

It is common for a charity to be registered within which may be held and administered the funds with the NHS Health Board owns as a corporate trustee under the 1978 Act. The charity trustee of such a charity is the NHS board in its capacity as trustee, as defined in the 1978 legislation. When considering the OSCR guidance and the 1978 Act together, it is fair to conclude that OSCR would look through the NHS Health Board to the individual members as the charity trustees (that is, as the persons having control and management of the affairs of the charity). 

Life Changes Trust

A further real-life example of a Scottish corporate trustee scenario which also points to this conclusion is Life Changes Trust. In its accounts, the internal structure of the charity is explained. Life Changes (Trustee) Limited (which is a separate registered charity) is the sole corporate trustee of the Life Changes Trust. In the trustees’ annual report, it is explicitly stated that:-

“The directors of Life Changes (Trustee) Limited are in general control and management of that charitable company and the trust, and are therefore, for the purposes of charity law, the charity trustees of both organisations.”

Therefore the position seems to be that in Scotland, as far as charity law is concerned, we would fall on the pro-piercing side of the fence. If such an action were raised in the Scottish Courts (presumably proceeding firstly through the Scottish Charity Appeals Panel) then arguments may be put forward to pierce the corporate veil from a charity law perspective, even if the formal company law position may differ. How the courts would decide such a case remains to be seen.

While the Scottish charity law position seems clear from these examples, a definitive answer, taking into account the full extent of company law, is unlikely to be obtained until these circumstances present themselves in a Scottish court.