Decision

The Reb Moishe Foundation

Published 27 February 2018

This decision was withdrawn on 18 January 2022

This Inquiry report has been archived as it is over 2 years old.

The charity

The charity was registered on 12 November 2004 and is governed by a Trust Deed dated 25 July 2004.

The charity’s objects are listed as: “To such charitable purposes in such a manner and in such proportions as they shall from time to time in their absolute discretion determine”.

The charity’s entry can be found on the register of charities .

Background

On 18 November 2014 the Charity Commission (‘the Commission’) opened a compliance case into the charity regarding a loan made by the charity to a private commercial company - Gladstar Ltd (‘the company’), which was connected to one of the trustees.

Correspondence received by the Commission on 26 January 2015 from the charity’s accountants detailed that a loan facility for £2,000,000 was made by the charity to the company in March 2006 repayable at an interest rate of 24%, at a time when one of the then trustees (trustee A) was a secretary of the company.

The charity’s accounts for the financial year ending (‘fye’) 31 December 2011 indicated that the interest rate on the loan had reduced to 10% per annum, and this rate was reflected from that date onwards in the charity’s accounts. The charity’s accounts for the fye 31 December 2013 were submitted to the Commission on 22 January 2015. These accounts stated that the total figure due to the charity had increased to £2,236,401 as a result of interest accrued on the loan.

The Commission established that at the time of the filing of the accounts the charity was operating with just one trustee (‘trustee A’), and this had been the case since 15 October 2013 when the second trustee (‘trustee B’) had been removed from the charity’s online records (prior to trustee’s A notification of her death in February 2014).

Issues under Investigation

Given the lack of evidence that any attempt had been made by the trustees to protect the charity’s assets and recover the loan, the Commission opened a statutory inquiry into the charity under section 46 of the Charities Act 2011 (‘the Act’) on 1 May 2015.

The issues under investigation were whether the trustees had:

• put charitable funds at risk, and had failed to take sufficient steps to protect the charity’s assets
• complied with legal duties in relation to management and control of the administration of the charity
• managed conflicts of interest within the charity
• received any private benefit in breach of trust
• knowingly or recklessly provided the Commission with information which was false or misleading

The inquiry closed on 27 February 2018 with the publication of this report.

Factors affecting the inquiry

Throughout its engagement with trustee A the inquiry was mindful of trustee A’s age and made appropriate adjustments where necessary. Trustee A was represented during the inquiry by third parties, although he did also correspond directly with the inquiry.

Trustee B had passed away before the Commission had engaged with the charity in November 2014, and therefore there has not been an opportunity to hear her account of events and the findings should be read in light of this. However, trustee B was involved in the charity during the periods relevant to the inquiry.

Findings

Whether the trustees had put charitable funds at risk, and had failed to take sufficient steps to protect the charity’s assets.

Trustees must make decisions which are legally valid and to make sure that they exercise their discretion properly, they must avoid undertaking decisions that might place the charity’s funds, assets or reputation at undue risk. To assist in managing risk to assets, trustees must carry out appropriate and proper due diligence on any decision regarding loaning of charitable funds in order to generate an income.

Clause 11 of the charity’s governing document prescribes that trustees should seek professional advice before making investments, and must act within the parameters of section 1 of the Trustee Act 2000 and exercise relevant duty of care when acting as a trustee of the charity.

The original loan facility from March 2006 was considered by the inquiry. The agreement set out specific terms as to recovery of monies due to the charity in the “Event of Default”. Whilst the original loan agreement suggested a financial benefit for the charity in respect of income receivable at an interest rate of 24%, no payments were made by the company to the charity beyond 2008, and therefore that income did not come to fruition. The loan was guaranteed by a parent company based in Gibraltar. Given that this is outside UK jurisdiction this represented a risk to the charity regarding recovery of the loan should the company default in its repayments.

The inquiry took steps to establish from trustee A’s appointed representative what other evidence was held regarding the loan facility. In a response, on 29 July 2015 the inquiry was informed that a decision was made to reduce the interest rate for the loan to 10%. The charity’s accounts for the fye 31 December 2011 previously submitted to the Commission indicated that the interest rate on the loan had reduced to 10% per annum, during that financial year.

The decision was recorded in the minutes from a trustees meeting from 21 March 2010 attended by both trustees which were provided to the inquiry. Those minutes related to the re-negotiation of the interest rate.

The minutes from the meeting held on 21 March 2010 reported that the company had made persistent losses over the previous few years, and that it had suggested to the charity a rate of 10% interest payable in place of the 24% previously agreed in the loan facility of March 2006. The minutes reflected that the trustees considered that given the very low rate of interest that was obtainable from the banks at the time it was in the charity’s best interest to agree to the reduction. There was nothing to demonstrate in the minutes that the trustees had considered recovery of the loan in line with the terms of the original loan agreement. The inquiry considered that the decision to reduce the interest was not a decision which had been made in the best interests of the charity as it represented a 14% loss of income, but conversely was a decision that was to the advantage of the company.

The inquiry met with 2 representatives acting for trustee A on 23 October 2015 (‘the meeting’) to discuss the regulatory concerns and a way forward regarding repayment of funds to the charity. The inquiry was informed that no other paperwork apart from the original loan facility agreement from March 2006, and the minutes dated 21 March 2010 existed in relation to the loan.

The inquiry was informed that the representatives had asked trustee A specifically whether or not external investment advice was taken before entering into the loan, and that he confirmed that it had not. The inquiry was informed that trustee A believed himself to have significant expertise in understanding what did or did not constitute a good loan agreement.

The inquiry asked why the trustees took no steps to recover the debt owed in March 2010 rather than taking the decision to decrease the interest rate to 10%. The inquiry was informed that it was considered to be a good deal for the charity, given the options of taking legal action against the company which was in significant financial difficulty at the time and unlikely to be able to repay the funds, which meant potentially the charity would see no funds returned.

Based on the information obtained, the inquiry considered that the charity’s trustees had

• placed the charity’s funds at risk from the point that the loan facility was made in March 2006

• failed to take sufficient steps to protect the charity’s interests or recover the charity assets particularly since the expected returns from the loan did not materialise

Whether the trustees had complied with legal duties in relation to management and control of the administration of the charity

Trustees have a legal duty to act in their charity’s best interests, manage their charity’s resources responsibly, and act with reasonable skill and care.

The only charity records held in respect of decisions made were those in relation to the loan. The charity held no records in relation to the application of funds.

The inquiry established that the charity’s bank account had closed on 24 August 2015 due to inactivity. A review of the charity’s bank statements which had been obtained under an order made under section 52 of the Act showed that the last income received to the charity’s bank account was on 17 January 2013 and the last expenditure was 28 November 2013.

When questioned how the charity had operated since 2013 the inquiry was informed by trustee A’s representative that the charity’s accountants had advised that the declared income related to interest receivable for the loan from the company, and that charitable donations were made by the company on behalf of the charity.

The inquiry obtained all working papers used by the accountants to independently examine ^{[footnote 1]} the charity’s accounts for the financial years ending 31 December 2011 through to 31 December 2015 in order to establish how charitable expenditure was being made given that the charity had no operating bank account. The review of those papers showed that not only had the company expended funds on behalf of the charity since the closure of the charity’s bank account but that this had been the case during the FYE 2011 and 2012 prior to the charity’s bank account being closed.

This demonstrated to the inquiry that trustee A had no clear distinction between his role within the charity and the company which owed the charity a significant amount of money. This in turn confirmed to the inquiry trustee A’s position of conflict and inability to act solely in the best interests of the charity.

Trustee A acted as the sole trustee of the charity from 16 October 2013, and as such was acting in breach of trust as the quorum for the charity was 2 trustees. The inquiry further established that despite confirming in annual returns submitted to the Commission for the fye 2014 and 2015 that the charity held a grant making policy, no such policy existed. This meant that there was no audit trail to demonstrate for what purposes grants were awarded, whether in making grants the charity was furthering its objects, or what risk assessment had taken place.

The inquiry found that the trustees had not discharged their legal duties in terms of the governance and administration of their charity, particularly in relation to protection of its funds and how they were expended.

Whether the trustees had managed conflicts of interest within the charity

Trustees have a legal duty to act only in their charity’s interests when making decisions, this includes managing conflicts of loyalty. Even if a trustee does not stand to gain any benefit the trustees’ decision making could be influenced by their other interests for example if they held a role with another organisation entering into a loan agreement with the charity.

The charity’s governing document made no provision as to how conflicts of interest should be managed, however the trustees still had a legal duty to declare, document, and manage any conflicts that arose.

At the time that the original loan facility was agreed in March 2006 the board of trustees consisted of trustee A and trustee B. The quorum to make decisions was 2. Companies House records showed that at that time trustee A was a secretary of the company, and whilst the extent of that role was not known by the inquiry, trustee A was conflicted, and that conflict had not been managed.

When the loan facility interest rate was reduced by 14% to 10% in March 2010 the same dynamics in terms of the charity’s trustee board and trustee A’s role in the company existed and therefore the conflict remained. When questioned at the meeting the charity’s representatives stated that trustee A was not aware that he was conflicted in either of the 2 significant decisions in relation to the loan facility made by charity to the company. The inquiry found that there was an unmanaged conflict between trustee A’s duty as a trustee of the charity and his duty or responsibility to the company.

Whether the trustees received any private benefit in breach of trust

Trustees must only act in the best interest of their charity, and must not use their position of trust to further their own interests.

As detailed earlier in this report trustee A was conflicted in his position as a trustee due to his role within the company, and the decisions made to lend charitable funds to the company, and subsequently reduce the interest rate were both made in breach of trust, and not in the best interests of the charity.

The inquiry did not find that trustee A had directly benefitted financially from the decisions he had made as a trustee, or that there had been direct misappropriation of funds. However, those funds had been misapplied by the decisions made which favoured the company rather than the charity.

Whether the trustees knowingly or recklessly provided the Commission with information which was false or misleading ^{[footnote 2]}.

As already detailed in this report, the annual returns for the fye 2014 and 2015 contained information which the Commission considered to be false or misleading in that trustee A had advised that the charity had relevant policies and procedures in place. During the course of the inquiry it was established that no such policies existed.

Whilst the Commission is concerned that it has been provided with information which is both false and misleading, it acknowledges that trustee A is elderly and that this may not have occurred knowingly or recklessly, and as a result no further action (i.e. referring the matter to the police) was taken.

Conduct of the inquiry and regulatory outcomes

Repayment of charity funds

The inquiry received a proposal on 29 July 2015 on behalf of trustee A in his capacity as Director of the company that in order to repay funds due to the charity, the proceeds of sale of 6 properties could be transferred to the charity. The inquiry agreed that the sale of the properties and return of funds to the charity from the proceeds of sale would go some way to meet the debt owed to the charity.

Trustee A maintained to the inquiry that charitable funds obtained from the proceeds of sale from the 6 properties owned by the company would be “ring fenced” in favour of the charity. The Commission understood that this meant that as soon as the proceeds of sale were available then they would be transferred to the charity. Trustee A did attempt to transfer £449,000 from the company account to the charity’s bank account on 10 February 2016 following the sale of one of the properties. However, the funds were returned to the company account due to the charity’s bank account being closed.

Following unsuccessful attempts by trustee A to both re-activate the closed account and open a new bank account, the inquiry suggested to trustee A on 14 April 2016 that a way forward would be to transfer the funds to a bank account held by the Official Custodian for Charities (‘the OCC’) on trust for the charity until such time that a new bank account could be opened. The inquiry explained that this would entail the issuing of an order by the Commission to the company. Trustee A confirmed on 5 May 2016 that this was an acceptable way forward.

In March 2016 the Commission was advised by trustee A that 4 of the remaining 5 properties had been sold. Trustee A informed the inquiry on 9 June 2016 that he would transfer the funds once the 6th property had been sold. The inquiry informed trustee A on 17 June 2016 that transfer of the funds could not be delayed.

Trustee A appeared to the inquiry to be acting in the best interests of the company rather than in those of the charity in relation to the proceeds of sale which was delayed and being held in the company account. The proceeds of sale at that time totalled £1,682,884, as a result the inquiry made an order (‘the first order’) on 5 July 2016 to trustee A in his capacity as Director of the company. The effect of that order was to direct the transfer of property held on trust for the charity in the company’s bank account which totalled £1,682,844 to the OCC by 12 July 2016. Trustee A did not comply with this order. However, following further engagement by the inquiry with trustee A, £500,000 was transferred to the OCC on 13 July 2016.

The inquiry was subsequently informed by trustee A that the proceeds of sale of the properties were now required to form part of the company’s operating capital. In order to accommodate this the inquiry engaged further with trustee A and was provided with an assurance that the remaining funds would be vested in the OCC by 31 October 2016.

The Commission made a further order (‘the second order’) on 21 July 2016 to trustee A in his capacity as Director of the company to transfer to the OCC by 31 October 2016 the property held on trust for the charity in the company’s bank account which totalled £1,182,844 plus the proceeds of sale from the 6th property if sold by that date.

The orders were the subject of reviews carried out by the inquiry on 9 September 2016 in respect of the first order, and 25 October 2016 in respect of the second order. Those reviews were subsequently appealed by trustee A on 11 October 2016 and 8 November 2016.

Following submission of the appeals, the Commission and trustee A came to an agreement regarding repayment of the funds and the regularisation of the charity’s governance and financial administration. As a result of that agreement funds owed to the charity were transferred to the OCC to the amount of £454,484.50 on 18 August 2017 and £1,182,884 on 13 September 2017. This took the total funds recovered to £2,137,368.50, which represented the full amount of the loan facility originally made and some interest. Given the financial position of the company, the inquiry did not consider it proportionate to seek payment of the outstanding balance on interest payments which were owed to the charity under the terms of the loan agreement.

Resignation of Trustee A

As part of the agreement, the Commission obtained a written undertaking from trustee A that he would resign from the charity and not take on any trustee position in another charity in the future. The inquiry considered that this was a proportionate action taking into account trustee A’s age. Trustee A resigned from his position on 23 August 2017.

Appointment of new trustees

As part of the agreement, 2 new trustees were appointed to the charity by the settlor ^{[footnote 3]}. The new trustees have now opened a new bank account and adopted policies for grant making, investment, and conflicts of interest. The Commission will monitor the new trustees’ application of these policies going forward.

Return of Funds to the charity

The trustees opened a new bank account in the charity’s name on 7 October 2017. As a result of this the Commission directed the Official Custodian for Charities pursuant to s.85(1) on 19 October 2017 to transfer funds to the Charity’s bank account. Subsequently funds totalling £2,137,736.39 which represented the funds originally transferred and the interest accrued, less £30.00 bank charges were transferred back to the charity’s bank account on 31 October 2017.

Conclusions

The Commission concluded that there was serious misconduct and mismanagement in the administration of the charity because:

• there was evidence of both poor governance and poor financial management of the charity and its affairs

• the charity had been inquorate since October 2013

• conflicts of interest within the trustee body were not identified or adequately managed

• the trustees failed to comply with or fulfil their legal duties as trustees, particularly in respect of the provision of a loan facility to a connected company without seeking proper professional advice. As a result £2 million of charity funds were placed at unnecessary risk

• the trustees failed to act with prudence to protect the charity’s interests and recover the funds due to the charity when the company failed to make the expected level of interest payments

As a result of the Commission’s engagement over £2.1 million has now been paid to the charity, representing the original loan amount with interest, and the charity has been reconstructed to enable these funds to be properly applied in furtherance of the charity’s purposes.

Regulatory Action Taken

During the course of the inquiry, the Commission used its information gathering powers under sections 47 and 52 of the act to obtain information relevant to the regulatory concerns. The Commission directed information to be provided from a third parties including banks, and the Independent Examiner of the accounts.

The Commission used its power under section 84 of the act on 19 June 2015 and issued an order to trustee A in his capacity as sole trustee of the charity directing that independent legal advice be obtained on recovering the funds loaned by the charity to the company. Trustee A complied with this order.

The Commission exercised its power under section 76(3)(c)(ii) of the act on 5 and 21 July respectively ordering trustee A in his capacity as Director of the company to transfer the funds from the company’s account to the OCC to be held on trust for the charity.

The Commission also used its power under section 337(6) of the act to vary the second order on 25 October 2016, 30 November 2016 and 29 March 2017 in order to extend the due date for compliance.

Following the transfer of the funds in August and September 2017 the Commission further used its power under section 337(6) of the act to revoke both the orders made under the section 76(3)(c)(ii) of the act.

The Commission issued an order under section 85 of the act on 19 October 2017 to the OCC to transfer the funds it was holding on behalf of the charity (including interest) to the charity’s new bank account. Those funds were transferred on 31 October 2017.

Issues for the wider sector

Charity trustees are responsible for governing their charity and making decisions about how it should be run. Making decisions is one of the most important parts of the trustees’ role. Trustees can be confident about decision making if they understand their role and responsibilities, know how to make decisions effectively, are ready to be accountable to people with an interest in their charity, and follow the 7 principles that the courts have developed for reviewing decisions made by trustees.

Trustees must:

• act within their powers

• act in good faith and only in the interests of the charity

• make sure they are sufficiently informed

• take account of all relevant factors

• ignore any irrelevant factors

• manage conflicts of interest

• make decisions that are within the range of decisions that a reasonable trustee body could make

It is important that charity trustees apply these 7 principles when making significant or strategic decisions, such as those affecting the charity’s beneficiaries, assets or future direction. Trustees’ must be able to show that they have followed these principles and keep adequate records to evidence that their decisions have been properly made, particularly for important or controversial decisions.

Further information can be found in the Commission’s guidance It’s your decision: charity trustees and decision making (CC27)

Conflicts of interest are more likely when there are only a small number of trustees on the board, when trustees are closely related, or when the charity has dealings with organisations in which the trustees have interests. It is vital that trustees avoid becoming involved in situations in which their personal interests may be seen to conflict with their duties as trustees. The trustees should put in place policies and procedures to identify and manage such conflict.

Further guidance and advice on conflicts of interest can be found on GOV.UK.

Trustees are under a legal duty to ensure that their charity’s funds are applied solely and reasonably in furtherance of its objects. They must also be able to demonstrate that this is the case. This is particularly important in grant giving charities where a charity should be able to demonstrate that a clear audit trail exists from application through to decision making and award (if granted). In order to show that they are complying with their legal duties, trustees must keep records to show that the charity’s money has been properly spent on furthering the charity’s purposes for the public benefit.

1. CC32 – Independent examination of charity accounts: examiners ↩

2. Section 60(1) states that “It is an offence for a person knowingly or recklessly to provide the Commission with information which is false or misleading in a material particular if the information is provided (a) in purported compliance with a requirement imposed by or under this Act; or (b) otherwise than as mentioned in paragraph (a) above but in circumstances in which the person providing the information (i) intends, or (ii) could reasonably be expected to know, that it would be used by the Commission for the purpose of discharging its functions under this Act.” ↩

3. Paragraph 8 of the charity’s Trust Deed dated 25 July 2004 states: “The power of appointing new and additional Trustees hereof shall be vested in the Settlor during his lifetime and after his death in the remaining Trustees or Trustee or in a majority of them.” ↩