The recent Charity Commission report on its inquiry into the Bersam Trust charity highlighted several failings in the running of the charity, not least in its management of loans made to it and conflicts of interest.
This, against the backdrop of serious financial challenges that charities are currently facing, rendering loans from trustees increasingly tempting, has brought the matter of loans to charities into the spotlight.
According to Pro Bono Economics, a £6.4 billion loss of income between June and December 2020 was predicted for the UK’s charities, with smaller charities especially exposed to the crisis.
Recent research into the financial reserves of charities also found that more than one fifth have reserves equating to less than one month of expenditure and one-tenth have only a few days reserves or less. Charities are therefore exploring various options for funding; trustee loans is no exception.
It is important that any trustees intending to make such loans understand the remits within which such loans are permitted and how they must be managed under charity law. Aside from firstly considering whether the charity will be able to repay the loan, the following are important considerations for trustee lenders (the Lender):
1. Check the charity's governing document at the outset to be satisfied that the charity has the power to borrow and that interest can be charged on the loan.
The general rule under charity law is that a trustee cannot receive a financial benefit from its charity unless that benefit has been authorised by the Charity Commission or is permitted in the charity's governing document. Interest paid to the Lender without authority would amount to a breach of trust that the Lender may be required to repay.
Most modern governing documents include a power for trustees to make loans to their charity and receive interest subject to certain controls. For example, the Charity Commission's current model governing documents permit interest to be paid on trustee loans provided the rate of interest is reasonable and does not exceed the Bank of England base rate.
2. Be aware that loans between charities and its trustees give rise to a conflict of interest.
One of the main criticisms of the Charity Commission in its inquiry into the Bersam Trust was that it failed to manage conflicts of interests adequately, an area in which the Charity Commission is increasingly focusing its attention.
The Lender must understand how such a conflict is to be managed by reading any conflict of interest policy the charity has in place and following any rules set out in the charity's governing document. As a minimum, the Lender must not be involved in the charity's decision to enter into the loan and must be absent from any discussions regarding the loan.
3. Clearly document the terms of the loan.
The Bersam Trust was criticised for not having documented the majority of loans it had received and, in some of those that had been documented, incorrect parties had been named.
The terms of a loan must be set out in writing, not least to protect the Lender by having evidence of the charity's obligation to repay. As a minimum, the loan agreement should confirm who the lender and borrower is, the amount of the loan and term, whether interest is being paid and/or security being charged.
The Lender should be satisfied that the agreement is signed by the correct parties on behalf of the charity. Requirements in this respect differ dependent upon the structure of the charity.
Bear in mind that the charity's structure may impact upon what the charity is willing to agree to. Trustees of charitable trusts, for example, must enter into loan agreements personally on behalf of the charity (as such structures do not have separate personality from its trustees) and would be personally liable to repay the loan if the charity cannot. They may therefore want to limit the liability under the agreement to the assets of the charity. Whereas this should not be needed for a charitable company or a charitable incorporated organisation (CIO) as they can enter into the loan agreement in the company or CIO name.
4. Consider whether security over any land owned by the charity will be required
The majority of charities cannot enter into a charge without an order from the Charity Commission unless the trustees have obtained and considered proper written advice on the charge. The Lender will want to be comfortable that the correct procedure in this respect has been followed; the charity trustees would need to confirm this by way of a certificate in the loan document. Any security should be registered with the Land Registry.
5. Seek legal advice when navigating the above issues; this is key to protecting the Lender.