Charity Chat March 2017 - Trustees obligations loans and grants
- AuthorDavid Porter
David Porter continues his series of blogs with the aims of ‘Charity Chat’ to make Trustees, Directors, Governors and Committee Members (the Trustees) aware of their obligations and the processes that have to be followed to run the Charity correctly. The references I make are to the Charities Act 2011 (the Act) unless stated to the contrary. If there are matters you wish to raise please let me know.
Loans and Grants
As a charity develops it might find that it needs to obtain a loan or more particularly obtain some grant funding. The Trustees need to check that they have the powers in the constitution to borrow money or raise funds. If this is not the case sections 197 (companies) and 285 (unincorporated ) of the Act allow the Trustees to amend their powers.
Often, where the amount of the loan or grant is large in relation to the charity, the lender or funder may want to secure their position by a legal charge over the charity’s property. Grants often have a ‘claw back’ provision asking for a return of all the money if the terms of the grant are not complied with. Before taking on the loan or grant, sections 124 to 126 of the Act require that the Trustees obtain proper advice, in writing, from a person who is reasonably believed by them to be qualified by ability and practical experience of financial matters and who has no financial interest in relation to the loan or grant. That person can be a Trustee or employee of the charity, but if the amount is large, it might be better to obtain a professional report so that there is some protection if the loan or grant should not have been taken in the first instance.
Matters to be highlighted
The Trustees will need to be satisfied that
- the loan or grant is necessary to pursue the course of action they have in mind;
- the terms of the loan and grant (particularly the ‘claw back’ provisions) are reasonable given the status of the charity;
- the charity can repay the loan on the terms suggested.
The Trustees or charity staff will need to provide the person giving the advice with written details of the proposals and a cash flow forecast should be prepared to ensure that the repayment schedule is achievable. The length of the cash flow will depend on the terms of the loan but 5 years is not unusual. A resolution confirming the grant or loan would then be passed.
Failure to comply
Where the Trustees have taken out a loan, in circumstances in which they should have known of the mandatory provisions and failed to follow them, they may be subjected to personal liability. Further the charge might not be enforceable by the Bank against the Charity so that the Bank would look to the trustees. Banks and other financial funders usually provide a draft resolution acknowledging compliance, so that Trustees would be in some difficulties to suggest that they did not know of the requirements.