You Can’t Do What You Want! UK Court Finds that Members of a Charitable Corporation are Fiduciaries of the Charity

31 août 2017 | Troy McEachren

( Disponible en anglais seulement )

Presently in Canada, there are over 85,000 registered charities, most of which are set up as not-for-profit corporations. All of these corporations have members who regularly meet to elect directors, approve fundamental changes, and receive financial statements. When making these decisions, do members have a fiduciary duty to act in the best interest of the charity? Or, like a shareholder of a for-profit corporation, can they act in any way they want, even against the best interest of the charity? Surprisingly, until recently, this question had never been addressed by the courts. In The Children’s Investment Fund Foundation v. A.G. et al. [2017] EWHC 1379 (Ch), the English High Court of Justice held that a member of a charitable corporation is a fiduciary of the charity and must exercise his or her rights as a member in the best interest of the charity.

The Children’s Investment Fund Foundation (“CIFF”) was jointly founded by a wealthy banker and his wife to benefit children in developing countries. It has assets of over $4bn. Both spouses were trustees of the charity, creating conflicts in its administration. The members of the charity were the two spouses and a third person. When the founders divorced, their agreed settlement required the wife to resign from CIFF and for CIFF to grant $300 million to a another charity established by the wife. CIFF agreed to make the grant provided that approval was obtained from the courts.

One of the issues that was raised during the hearing was whether the members were under a fiduciary duty when voting on the transfer in question. The court held that the members were indeed fiduciaries for the following reasons:

  • The members have no proprietary interest in the charity;
  • The members have powers that are all directed at aspects of the management and administration of the charity and designed to achieve the charity`s exclusively charitable objects;
  • Legislation requires that assets of the charity be used for exclusively charitable objects and prohibits personal benefit of the members; and
  • Charities act in the public interest.

In the circumstances of this case, it was not necessary for the court to decide the nature or extent of a member’s fiduciary duty, but the court did find that a member of a charitable corporation had an obligation to use his or her rights and exercise his or her votes in the best interest of the charity.

While we are mindful of the differences between the legislative regimes that govern charities in Canada and the UK, we believe the reasoning set out by the court could be applicable in common law Canada in the right circumstances. While Quebec is not a common law regime, it does have a strong set of fiduciary rules which could permit a court to find that members of a charitable corporation owe fiduciary duties to the charity (see: Art. 1299 to 1370 Civil Code of Québec.).

For most members, this decision simply confirms how they have always exercised their authority, which is in the best interest of the charity. But for some members who either neglect their duties or who act in interests other than those of the charity, they would (at least in the UK) be acting contrary to the fiduciary duty that they owe the charity.  This could expose them to the risk of censure, expulsion, and possibly liability for damages suffered by the charity.

We will continue to monitor the case law to determine whether Canadian courts will rely on this case or make a similar ruling.

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