The duties and liabilities of charity trustees and company directors

This guidance is for charity trustees, company directors, or those serving in governing roles in incorporated organisations or separate legal bodies. This guidance was originally created in response to many Big Local partnerships deciding to formally incorporate or to set up separate legal bodies, to highlight the specific difference in responsibilities than being a volunteer member of a Big Local partnership.

This guidance is designed to help charity trustees and company directors to understand further their duties and liabilities, but should not be used as a replacement for seeking professional advice or consulting other guidance from the government or regulators.  

Where you may have been appointed as either a charity trustee or a company director (or both, depending on the legal body which is set up), this guidance summarises your duties and the rare situations where personal liability can arise.  

There is a glossary at the end of the guidance which explains the meaning of the more technical legal terms written here.  

Different Legal Forms

Depending on the type of legal body, you may have responsibilities as company directors and/or charity trustees. The table below confirms what your status is, depending on the legal body being used:

Name of legal body	Description	Acronym	Company Director?	Charity Trustee?
Charitable company limited by guarantee	A registered charity and company	CLG	Yes	Yes
Charitable incorporated organisation	A registered charity	CIO	No	Yes
Community interest company	A non-charitable company	CIC	Yes	No
Charitable community benefit society	A charity, currently exempt from registration with the Charity Commission	CBS (also sometimes known as a Bencom)	No	Yes

A lot of the duties described in this note represent the ‘common sense principles’ of good governance so even when a different type of legal body is used where you are not a company director or, alternatively, not a charity trustee, you are still expected to conduct the affairs of the legal body along these lines. For instance, a CIO is not subject to all the statutory obligations of companies (although some apply to them), but as they are charities, many of the duties of charity trustees overlap with those of company directors. Similarly, CBSs also have statutory obligations which are equivalent to those of companies.

The CIC is slightly different from the other options because a director of a CIC does not have the duties of a charity trustee. Duties relating to governing a charity do not apply to a CIC although you are still aiming to benefit the community through the pursuit of a social purpose alongside potential social enterprise activities.

In addition, where a CIC receives restricted charitable funding, those managing the funds may still act in a fiduciary capacity in relation to that money. This means the funds must be used only for the purposes for which they were provided and in accordance with any conditions attached to the funding.

To this end, directors need to be aware of the duties of charity trustees to the extent that they relate to the good management and use of charitable funds.

Duties of Company Directors

This section directly applies to directors of CLGs and CICs but is relevant to CIOs and CBSs as principles of good governance or under equivalent statutory provisions for these legal bodies.

The directors are responsible for the management and operation of the company or charity. They should each take an active role in the running of the company or charity and all directors are bound by the decisions of the Board. The directors are individually and collectively responsible for decisions taken by the Board.

As company directors, you have the following duties under the Companies Act 2006:

Duty to act within powers: you must act in accordance with the governing document (usually articles of association) and only exercise your powers for the purposes for which they are given.
Duty to promote the success of the company: you must act in a way that you consider, in good faith, would be most likely to promote the success of the company. In the case of a charitable company, this would include furthering the charity’s objects.
Duty to exercise independent judgment: this means that you must not, for example, agree to act at the direction of a third party to exercise your decision-making powers in a particular way.
Duty to exercise reasonable care, skill and diligence: this means the care, skill and diligence that would be exercised by a reasonably diligent person with:
- the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and
- the general knowledge, skill and experience that the director has.

This duty requires appropriate engagement from each of the directors in the running of the company and the business to be considered and voted upon by the Board.

Where a director has specialist knowledge in relation to the subject matter of the decision, a higher standard must be met. This means that, for example, a director with a legal or investment background will be held to a higher standard in respect of those areas than a person without that specialised knowledge.

Duty to avoid conflicts of interest and the duty to declare an interest in a proposed transaction or arrangement: you must avoid a situation in which you have, or could have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. A conflict of interest includes a conflict of loyalty. This duty is not breached if:
- a situation cannot reasonably be regarded as likely to give rise to a conflict of interest/loyalty; or
- the matter has been authorised by the directors not affected by the conflict.

Separately, if you are, in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, you must declare the nature and extent of that interest to the other directors. (An example would be if the company you are a director for was commissioning a piece of work and a business owned by your family member was going to apply to deliver the piece of work.)

Duty not to accept benefits from third parties: you must not accept a benefit from a third party given by reason of being a director or you doing (or not doing) anything as director.

These duties overlap to some extent with the duties of charity trustees described below as both charity trustees and company directors are fiduciaries.

Trustees’ Duties

This section applies to CLGs, CIOs and CBSs only (although these duties overlap with the duties of company directors).

A charity trustee’s legal duties come from the charity’s governing document and a mixture of charity and trust law. The Charity Commission has produced a helpful summary in its guidance, the Essential Trustee, which deals with the overlapping duties from various areas of law. This is a summary of the key duties which a trustee has:

Ensuring that the charity is carrying out its purposes for the public benefit. This includes reviewing the charity’s activities and understanding how the public benefit from the charity. It is a breach of duty (often called a breach of trust in a charity context) to undertake any activities outside the charity’s purposes, and you could be held liable to repay to the charity any moneys spent on activities outside the purposes.
Complying with the charity’s governing document and the law. The trustees are collectively responsible for ensuring that the charity complies with the law generally and with charity law and regulatory requirements (examples include data protection and health and safety law).
Acting in the charity’s best interests. This includes making balanced and informed decisions. You are expected to act in good faith and honestly in the best interests of the charity at all times. Avoiding conflicts of interest or loyalty is a key part of acting in the charity’s best interests. The general rule is that trustees may not get personal benefits from their positions. For example, unless so authorised in the articles of association or by the Charity Commission, a trustee cannot be paid for acting as trustee. (Trustees can, in certain scenarios and within set parameters, receive payment for providing goods or services to their charity).
Managing the charity’s resources responsibly. This includes avoiding exposing the charity’s assets, beneficiaries or reputation to undue risk and complying with any restrictions on spending funds or selling land. In particular, you have a duty to protect all of the assets belonging to the charity, for instance by ensuring that there are adequate financial controls in place and the charity’s assets are secure, maintained and insured (if relevant).
Acting with reasonable care and skill. You must exercise the care, skill and diligence which would be exercised by a reasonably diligent person with the general knowledge, skill and experience that he or she has. This means that a trustee with a legal or investment background will be held to a higher standard in respect of those areas than a person without that specialised knowledge.
Ensuring the charity is accountable. This includes demonstrating that the charity is well run and is effective, complying with accounting and reporting requirements and ensuring accountability where decisions are delegated.