Analysis
H and C were two directors and trustees of a charitable company limited by guarantee. They, together with L, were the members of the company. In July 2015 H and C agreed that, subject to the approval of the Charity Commission or the court, C would resign as a director and member of the company and the company would make a grant of $360m to a charity founded by C.
Companies Act 2006, s217 provides that:
‘A company may not make a payment for loss of office to a director of the company unless the payment has been approved by a resolution of the members of the company’.
The Charities Act 2011 provides that such a payment also requires the prior written consent of the Charity Commission. The memorandum and articles of the company further provided that no trustee may receive a ‘material benefit’, directly or indirectly, without the prior approval of the Commission. Both H and C had contracted not to vote at any members’ meeting in respect of the grant, leaving L the only voting member.
Upon an application by C for approval of the grant and for a determination as to whether s217 was engaged and whether there was a ‘material benefit’ in the circumstances, Sir Geoffrey Vos C directed that L be joined to proceedings and then held ([2018] Ch 371) that:
- (i) the trustees had surrendered their discretion to the court, rather than seeking the court’s approval of a decision already made;
- (ii) the making of the grant was in the interests of the charity’s objects, although he was ‘not saying that no reasonable trustee or fiduciary could disagree with [his] view’;
- (iii) the grant would constitute a payment in connection with loss of office for the purposes of s217, and also confer a ‘material benefit’ on C;
- (iv) as a member of a charitable company L owed fiduciary obligations to the charity; and that accordingly
- (v) L would be directed to vote in favour of the motion.
L appealed, and the Court of Appeal ([2018] EWCA Civ 1605) allowed the appeal on the grounds that although L did owe fiduciary duties as a member of a charitable company, the court would not intervene in an exercise of discretion by a fiduciary where an actual or threatened breach of trust is absent. Parliament had by s217 of the 2006 Act entrusted the approval of such decisions to members, rather than the court.
C appealed to the Supreme Court, and L cross-appealed as to whether he owed fiduciary duties to the charity. The Attorney General was joined to the appeal.
The issues on appeal were:
- 1) Does L as a member of the company owe fiduciary duties to the objects of the charity in deciding how to vote?
- 2) If so, can the court direct L as to how he should vote?
- 3) Does s217 of the 2006 Act alter that position?
Held:
- 1) The members of a charitable company owe fiduciary duties to exercise their powers in the best interests of the objects of the charity. The courts have always taken a beneficent supervisory role towards charities and have wide powers to give effect to charitable gifts – Liverpool and District Hospital for the Diseases of the Heart v Attorney General [1981]. The extent of those duties will be determined by the memorandum and articles of the company; no special rules applied to ‘mass membership’ charities. This mirrors the duties imposed upon members of charitable incorporated organisations by the Charities Act 2011.
- 2) Even absent a breach of duty, the court could direct L as to how to exercise his vote. The categories of exception to the general principle of non-intervention are not closed, and charities were such an exception – Attorney General v Governors of Christ’s Hospital [1896] distinguished. In order to avoid an impasse in L voting contrary to the court’s decision, the court would direct his vote.
- 3) Section 217 does not alter that position. It was not Parliament’s intention to give members control over the court’s exercise of powers over the company. The articles of the company entrust its management to the trustees, who in turn surrendered their discretion to the court. The court, having determined the best interests of the charity’s objects, can then direct the members as to their vote.
- 4) Per Briggs, Kitchin and Wilson JJSC (Arden JSC dissenting): the court having determined, in proceedings to which L was a party, what is in the best interests of the charity’s objects, that conclusion becomes binding on all parties and it would be a breach of duty for L to then vote so as to frustrate that course. Once such a decision is made, the duty of the fiduciary is to use his powers so as to give effect to the court’s decision. If he cannot in conscience do so, he should resign.
Appeal allowed.
JUDGMENT LADY ARDEN: Overview [1] The Children’s Investment Fund Foundation (UK) (‘CIFF’) is a charitable company with more than $4bn in assets helping children in developing countries. It was founded by Sir Christopher Hohn (‘Sir Christopher’) and Ms Jamie Cooper (‘Ms Cooper’) in 2002, but it became difficult to manage when their marriage broke down. …Continue reading "Lehtimäki & ors v Cooper [2020] WTLR 967"