Do you know the rules about your charity's governing document?
Julian Lomas
More and more in our governance and other work, we are coming across small and medium-sized charities (even some larger ones) with governing documents that are very old. Many have not been reviewed (or even read) by Trustees for years or decades. Many others have not filed previous changes with the relevant regulators. And some have even implemented changes with the required regulatory consents.
Why does this matter?
While it is true that the sky hasn't yet fallen in for any of them, we find that charities with dated governing documents usually com with a host of non-compliance and other concerns.
In almost all cases the Trustees are in breach of their key legal duty to comply with the charity’s governing document and the law. Therefore, if the charity ever got into trouble, or there was a complaint to the Charity Commission, this could have serious consequences for the Trustees, up to and including personal financial liabilities and/or disqualification from acting as a Trustee.
This is a risk that is easily eliminated, so why take the risk?
What is a governing document?
The most common forms of governing document are:
(Memorandum and) Articles of Association for a charitable Company.
Constitution for a Charitable Incorporated organisation.
Trust Deed for a charitable Trust (this might also be called an Indenture or a Scheme or a Conveyance, depending on when the Trust was established).
Constitution for a charitable Unincorporated Members Association.
Rules for a charitable Community Benefit Society
Other, less common forms of governing document include a Royal Charter or an Act of Parliament but these are much more difficult to change.
Sometimes the governing document is accompanied by rules or bylaws made under powers in the governing document, which in turn become part of a charity’s suite of governing documents.
What are the common breaches?
The common issues we find for charities with dated governing documents include:
The charity is undertaking activities that fall outside its charitable purposes (objects). This is a serious matter and one which could cause the Charity Commission to seek to recover money spent on such activities from the Trustees (personally).
Some individuals are receiving unauthorised private benefits, such as Trustees being paid for services not authorised by the governing document. Again, this could result in the Charity Commission seeking to recover monies from the individuals concerned and/or the Trustees collectively.
Conflicts of interest are not being managed in accordance with the requirements of the governing document, which could lead to disqualification of one or more Trustees.
The composition of the Board of Trustees does not meet the requirements of the governing document or the Trustees are being appointed in ways not allowed for by the constitution (e.g. elections rules are not being followed).
The membership of the charity (if it has a wider membership) is either unclear or no longer complies with the requirements of the governing document or the need for a quorum for members meeting is being ignored because there aren’t enough members to get a quorum together.
Statutory registers for members and Trustees are not being maintained.
Decisions are being made by people or committees who do not have the authority to do so under the governing document.
Meetings are frequently not quorate, improperly convened or being held in ways that are not authorised by the governing document (for example by video or telephone conference).
Changes have been made to the regulated clauses in the governing document without prior consent from the Charity Commission, which means they have no effect and the Trustees will probably no longer be complying with their governing document because they think it has been changed when it has not.
Changes have not been filed with the relevant regulatory authorities. This is usually the Charity Commission but could also include Companies House (for a charitable company) or could be the Financial Conduct Authority (for a Community Benefit Society). This is a criminal offence and also means that funders and others cannot see what your current governing document includes.
How can the risk be eliminated?
All charities should maintain a simple record of their key documents - governing documents, policies, etc. - which states when they were last reviewed and updated and specifies a frequency for regular review of each.
A review of the governing document should take place every 3-5 years (or more frequently if something major has changed). It is unlikely it will need updating unless there are major changes in the law or what the charity does (in which case the amendments should be made when or before those changes occur without waiting for the next planned review). However, it will mean that trustees remain familiar with what the governing document says and so are more likely to be complying with it. The courts have held previously that Trustees cannot be complying with the governing document if they have not read it.
Regular review will also reveal areas of the governing document that may be difficult to understand, perhaps because they are written in legalistic or archaic language. In this case, the relevant provisions should be updated, or perhaps even an entirely new governing document should be adopted.
For example, following the Companies Act 2006, the clauses that used to be included in the Memorandum of Association of a company are now consolidated into the Articles of Association. However, if your charitable company has not updated its governing document since the 2006 Act came into force, you will still have both a Memorandum of Association and Articles of Association and both together form your governing document.
It is very likely that these pre-2006 documents will be written in opaque language and they will be out of step with the 2006 Act requirements (making interpretation very difficult for any one who is not familiar with the 2006 Act). It is also likely they will not align with current charity law (such as the 2011 and 2022 Acts) or confirm to Charity Commission guidance and good practice (such as requirements restricting benefits to members and Trustees or on management of conflicts of interest).
A good starting point for updating a governing document is to look at the Charity Commission model governing documents and compare them to your own. You can, and probably will need to amend the model documents but they are a good starting point. if you want to amend the models, we strongly suggest you get help from an expert (like us!).
If you choose to adopt a new governing document or make changes to the existing one, remember that there are regulatory requirements. For a registered charity, if you want to change the objects, dissolution clauses or provisions dealing with member/Trustee benefits or conflicts of interest you will need Charity Commission consent before formally deciding on the changes (e.g. at an AGM or EGM).
Once you have obtained any required consents you should follow the procedure set out in your existing governing document to adopt the changes and then file the new governing document with the relevant regulator(s).
Once the new governing document has been adopted, if the charity is a company then you must file the new document and the associated special resolution with Companies House (although it takes legal effect on the date of the resolution, unless you have changed the objects, in which case it takes effect when it is accepted by Companies House). Note also that if you change your objects you should also file a CC04 form with Companies House. Once the new governing document is accepted by Companies House, you must file it with the Charity Commission (even if they previously gave consent to some or all of the changes). All registered charities that are not companies must file changes to their governing document with the Charity Commission (again whether or not prior consent was required and obtained).
For charities registered in England and Wales who are also registered in Scotland, similar procedures need to be following with the Office of the Scottish Charity Regulator (OSCR).
If you have a dated governing document then it can be a little bewildering to navigate these processes for the first time, but once you have modernised your governing document a regular review cycle will mean that it never gets out of hand again and making changes should be much simpler.
Like this article? Join 250+ charity professionals receiving free monthly insights on governance, strategy and fundraising and much more.
Want to find out more? Contact us at julian@almondtreeconsulting.co.uk to discuss your organisation’s needs.