Paul’s article was originally published in Charities Management, 31 October 2022, and can be found here. 

An example of the Charity Commission’s use of its regulatory powers: inquiry into Moss Side and Hulme Community Development Trust

Charity trustees are often worried about what the Charity Commission might do if they get something wrong in the running of their charity.  Media coverage in recent years of a wide range of wrongdoings in the sector, ranging from safeguarding through to avoidance of business rates, have added to the already high levels of anxiety among those who freely give their time, energy and expertise to charities.

Of course, in a sector with over 169,000[1] registered charities and many thousands of others that are not required to be registered, it is perhaps not surprising that there will be enough questionable activity to provide the media with a steady stream of exciting headlines to catch readers’ eyes.  Even with the knowledge that these cases represent a tiny proportion of the charity sector, trustees can be forgiven for thinking that they could be the next people to be hauled before the Commission and subjected to public criticism for their mistakes.

In many cases, the trustees can be reassured that the problems are minor and are not likely to reach the level of seriousness that would justify the Commission using its formal powers under the Charities Act 2011.  However, from time to time we do have to let trustees know about some of the possible outcomes if they get on the wrong side of their regulator, and particularly if they do not cooperate with the Commission.

In a recent inquiry report[2] published by the Commission, into the conduct of trustees of the Moss Side and Hulme Community Development Trust, we can see a wide range of the formal steps the Commission is willing to take.

This charity was included in the Commission’s “double defaulters” class inquiry, opened in 2017 under section 46 of the Charities Act 2011, regarding failure to file accounts for the years ending 31 August 2015 and 31 August 2016.  The charity did eventually file those accounts and it was removed from that inquiry.

However, within five months the Commission had opened a second inquiry following the charity’s failure to file its 2017 accounts.  That inquiry found that:

• the trustees had failed to ensure that the quorum requirements of the charity’s governing documents were satisfied, in that it was being run by just two trustees;
• two trustees had been paid by the charity, in breach of its governing document; and
• the trustees had failed to provide any evidence of activities in furtherance of the charity’s objects.

The trustees were again in default of their duty to file their 2018 accounts, despite the Commission having made an order under section 84 directing them to do so.

During the course of the inquiry, the Commission used its powers under section 47 to obtain information from the trustees and from the charity’s auditors and bank.

Once again, the overdue accounts were filed and the inquiry was closed in November 2020, with the issue of an order under section 84 of the Charities Act 2011 requiring the trustees to:

• pursue the recruitment of new trustees;
• hold an AGM;
• review the charity’s decision-making procedures;
• review arrangements for ensuring that accounts are filed on time;
• adopt policies for the management of conflicts of interest;
• review the charity’s activities; and
• ensure that there is no further unauthorised payment of trustees.

The section 84 Order gave the trustees 6 months to show compliance with its requirements, but it will come as no surprise that the Commission heard nothing from the trustees.  Complaints were also received that no AGM had been held.

So a third inquiry was opened on 29 September 2021 to examine the trustees’ failure to comply with the earlier section 84 Order.  In this third inquiry, the Commission used its powers under sections 76(3) to appoint a third trustee and under section 337 to direct that an AGM be called.

The AGM was held in March 2022, but in the meantime additional trustees were co-opted, and, of the two trustees who had been found to have mismanaged the charity in the previous inquiries, one resigned and the other was removed by the other trustees.

In April 2022, the Commission used its powers under section 181A, introduced by the Charities (Protection and Social Investment) Act 2016, to disqualify two of the trustees from being a charity trustee or holding any senior management position in a charity for a period of 7 years.

There are many other powers at the Commission’s disposal, including:

• with a magistrate’s warrant, to enter premises and to seize paper and electronic records, take copies and require anyone on site to explain any document or information or to state where it can be found;
• to require any person to provide any document or any information in their custody or under their control relating to any charity that is relevant to the discharge of the Commission’s functions;
• to disclose to any relevant public authority (such as a local authority, the police or HMRC) any information the Commission has received in connection with performing any of its functions;
• to suspend a trustee, officer, agent or employee of a charity from their office and also to suspend such a person from membership;
• to transfer charity property into the name of the Official Custodian, and to require any person to transfer property to the Official Custodian;
• to prohibit someone who holds any property on behalf of the charity from parting with it without the Commission’s approval;
• to restrict the transactions that may be entered into in the administration of the charity without the Commission’s approval, including freezing bank accounts;
• to appoint an interim manager of the property and affairs of the charity, either alongside or instead of the charity’s trustees;
• to direct trustees not to take, or to stop taking, any action specified in that order that the Commission considers would constitute misconduct or mismanagement;
• to order those in possession or control of charity property to apply the property in a specified manner;
• permanently to remove any trustee, charity trustee, officer, agent, or employee of the charity;
• to make a scheme for the administration of the charity; and
• to issue a formal official warning to either:
• • a trustee who has, in the Commission’s view, committed a breach of trust or duty or other misconduct or mismanagement in that capacity; or

• • a charity in connection with which it considers a breach of trust or duty or other misconduct or mismanagement has been committed.

The Commission does not take these steps lightly; as a responsible regulator, it will assess any case carefully before deciding that the statutory powers need to be invoked.  It operates within its Regulatory and Risk framework, which sets out how it identifies and assesses risks, how it responds and how it will review and adapt its approach and states that:

“To achieve maximum impact, we are risk-led in calibrating our response to issues that come into us. This approach ensures that no issue or complaint is overlooked, whilst at the same time making sure we are proportionate, prioritise the most serious issues and identify what action is right against identified risks of harm. In cases of severe harm, we will act robustly and quickly, intervene assertively and, if appropriate, communicate our engagement to the wider public to demonstrate how things can and do go wrong.”

Trustees should be aware that the Commission’s powers to disclose information to other agencies may be used in the context of passing primary responsibility for looking into cases to another agency that may be better placed to respond.  So a complaint to the Commission about the acts or omissions of charity trustees can, in some cases, lead to a police investigation and possible prosecution.

Having said that, the Commission’s regulatory functions will also take the conduct of charity trustees into account.  If it is clear that trustees have acted honestly and reasonably and are willing and able to take whatever actions are required to manage the risks that have been identified, the Commission will generally support the trustees in putting things right.

In contrast, if the trustees appear to have acted carelessly or recklessly, or have committed deliberate breaches of their duties, the Commission is more likely to resort to using its statutory powers to intervene in the management of the charity.  Likewise, if trustees do not show any willingness to put things right, the likelihood of formal intervention by the Commission is going to be greater.

That is not to say that trustees should always accept the Commission’s actions without protest.  Case officers do not always get things right, and it is worth bearing in mind that trustees can (and sometimes should) challenge the Commission’s handling of a case, either informally or through the more formal process of appeal to the First-Tier Tribunal (Charity) or the High Court or even, in relation to certain decisions, by judicial review.

But the case of Moss Side and Hulme Community Development Trust illustrates how matters can escalate if trustees do not cooperate, in that the Commission re-engaged its regulatory powers by opening new inquiries each time it appeared that the trustees were not taking the steps they had been told they needed to take to put things right.

In that respect, the case shows not only the range of powers the Commission has at its disposal, but also how trustees can, when head to head with the Commission on regulatory matters, influence the course that is taken.  The main lesson, therefore, is that trustees can make things better – or worse – by they way they respond to the regulator, and that when things get worse, the consequences can be quite severe.

[1] As at 31 March 2021: https://www.gov.uk/government/publications/charity-commission-annual-report-and-accounts-2020-to-2021

[2] https://www.gov.uk/government/publications/charity-inquiry-moss-side-and-hulme-community-development-trust-registered-charity-number-1093592