Decision

The Catalyst Trust

Published 16 June 2017

This decision was withdrawn on 15 October 2019

This inquiry report has been archived because it is over 2 years old.

Applies to England and Wales

• Publication for Northern Ireland
• Publication for Scotland

A statement of the results of an inquiry into The Catalyst Trust (registered charity number 1122374) (‘the charity’).

Published on 16 June 2017.

The charity

The charity was governed by a declaration of trust dated 19 November 2007 (amended on 7 June 2013) and was registered as a charity with the Charity Commission (‘the Commission’) on 18 January 2008.

The charity’s objects were to promote any purposes recognised as charitable under the laws of England and Wales by:

(i) the making of grants, loans, guarantees or other financial assistance to charities or for charitable purposes, in particular (but not exclusively) to help fund charitable building projects which in the trustees’ opinion are likely to create new medium or long term employment opportunities

(ii) promoting the efficient and effective application of charitable resources by other charities and for charitable purposes by the provision of project management advice, financial support and related assistance to such charities and for such charitable purposes

The charity was removed from the Commission’s register of charities (‘the register’) on 10 November 2016, following its dissolution by its trustees.

Background to the issues under investigation

The Commission opened an operational compliance case into the charity in October 2013 following a complaint from a member of the public. The complainant informed the Commission that they were renting a property (‘the property’^{[footnote 1]}) from the charity but that the rental payments were being directed to a third party, rather than the charity. The Commission engaged with the trustees in order to fully understand this arrangement and to determine whether any unauthorised private benefit or any other regulatory concerns arose from the charity’s affairs.

During this case, the Commission identified further regulatory concerns regarding the management and administration of the charity and potential significant risks to the charity’s property. Specifically, the trustees stated their intention to sell the charity’s property, which had been gifted to the charity in June 2012 by one of the trustees. The Commission was informed by the trustees that they intended to sell this property and that the trustee who donated the property would be compensated from the sale. This raised concerns that the charity’s property was being put at undue risk which necessitated further investigation by the Commission.

In addition, a review of the charity’s books and records was undertaken which identified that the trustees had failed to prepare adequate annual accounts for the charity, which complied with the requirements of charity law, since the charity was established in 2007.

At this time, the Commission also identified that the charity had entered into loans with a company connected to one of the trustees. The trustees were unable to adequately explain or evidence what the purpose of these loans were or what activities the charity conducted which furthered the charity’s objects. Of additional concern to the Commission was an inability to effectively address and clarify these matters with the trustees.

Given the seriousness of these regulatory concerns, the Commission opened a statutory inquiry under section 46 of the Charities Act 2011 (‘the act’) on 10 June 2014. The trustees were informed of the opening of the inquiry on 16 July 2014.

Inquiry scope

The inquiry was opened in order to examine serious regulatory concerns over the governance and management of the charity and how the trustees were discharging their legal duties. In practice, the inquiry considered the following specific matters:

• the administration, governance and management of the charity by the trustees with particular regard to how the charity has been operated in furtherance of its charitable purposes for the public benefit
• whether the trustees had managed conflicts of interest, particularly regarding transactions and relationships between the charity and third party companies owned by or connected to the trustees
• the financial controls and management of the charity including loans to the charity and parties connected to the charity trustees
• the trustees’ failure to maintain and submit adequate accounting records to the Commission in accordance with the trustees’ legal duties
• the circumstances leading to the charity accepting the gift of a property and whether the acceptance was in the best interests of the charity
• whether the charity had been used for unauthorised private benefit

Findings

The administration, governance and management of the charity by the trustees with particular regard to how the charity has been operated in furtherance of its charitable purposes for the public benefit

During the course of the inquiry, it was established that the charity was primarily managed and administered by one of its trustees (‘the principal trustee’) and that the other 2 serving trustees played no active role in the day to day running of the charity. The inquiry found evidence indicating that the trustee body did not make collective or adequately informed decisions in respect of the charity’s management, with key decisions being made by the principal trustee. Key decisions were either not recorded or not adequately recorded by the trustees.

The inquiry established that the vast majority of the charity’s expenditure from 2009 to 2013^{[footnote 2]} was not spent in furtherance of the charity’s expenditure. An analysis of the charity’s accounts for this period showed direct charitable expenditure of £2,217 out of a total income of approximately £71k. However, the inquiry established that a significant proportion of this, £2,050, was provided to a private company. The inquiry found that this payment was not in furtherance of the charity’s objects and that the charity was not being operated for charitable purposes for the public benefit. The trustees were provided with sufficient opportunity to provide evidence and explanation to the contrary, which they failed to provide.

The principal trustee informed the Commission that the focus of the charity and its primary activity was the development of a software project. The Commission requested additional information regarding this project from the trustees in order to assess whether the project was capable of furthering the charity’s purposes or had benefitted the charity, as claimed by the trustees. The Commission found that the project was non-charitable and had provided no tangible benefit to the charity. Based on the limited information available about the project’s business model, the Commission could not be satisfied that the charity would gain any real benefit from the project and that charitable funds applied to the project were a misapplication of the charity’s funds.

Whether the trustees had managed conflicts of interest, particularly regarding transactions and relationships between the charity and third party companies owned by or connected to the trustees

During its inquiry, the Commission became aware of loans and investments that the charity had entered into with connected parties and found that the charity trustees failed to recognise, acknowledge or adequately manage conflicts of interest, particularly in regard to companies connected to the principal trustee. The Commission found that the principal trustee was predominantly responsible for arranging these loans and investments and that adequate records were not kept which recorded the trustee’s decision making and the management of conflicts of interest.

The charity invested funds in a number of different companies in which the principal trustee had either an interest or a personal connection, including directorships and shareholdings. The trustees claimed that these investments were made for the eventual benefit of the charity by way of the software project. However, the inquiry found no evidence that the investments resulted in any tangible benefits to the charity.

When questioned about whether the charity had a conflicts of interest policy, the principal trustee stated that the charity did not have a policy because it had not identified any conflicts of interest. This demonstrated to the inquiry a complete failure by the trustees to understand their responsibility to both understand the concept of the management of conflicts of interest and to avoid putting themselves in a position where their duty to the charity conflicts with their personal interests or loyalty to any other person or body. The principal trustee, in particular, failed to exercise this duty which resulted in situations where their duty as a trustee conflicted with their personal interests. The inquiry found that the principal trustee repeatedly engaged in decision making regarding loans and investments when they were conflicted. The other trustees failed to fulfil their duty to both identify and to effectively manage these conflicted situations.

The financial controls and management of the charity including loans to the charity and parties connected to the charity trustees

The inquiry established that the charity entered into a loan arrangement with a private individual in February 2013. This loan was arranged by the principal trustee and was secured against the charity’s property. The inquiry established that the private individual was an associate of the principal trustee and that they had understood they were making the loan personally to the principal trustee, rather than to the charity.

The inquiry found that these loan funds, totalling over £115k, were not directed to or received in the charity’s bank account. The Commission understands that the total loan amount was distributed in parts and on different dates, at the direction of the principal trustee. Based on the limited information available the inquiry believes these funds were mostly applied in furtherance of the software project, which was not a proper application of the charity’s funds. Parts of the loan were sent to the principal trustee’s personal bank account, which the principal trustee failed to disclose to the inquiry team, when questioned about the loan.

The inquiry found that the funds directed to the principal trustees’ account were used to pay a creditor of a company of which the charity was the sole shareholder and the principal trustee was the sole director. The inquiry was not satisfied with the trustees’ explanation as to why these funds were directed to this company and considers that this was not a proper application of the charity’s funds.

The trustees were unable to provide the inquiry with evidence, such as minutes of meetings, to explain the decision to enter into this loan. There are therefore no records to show how the trustees decided that entering into the loan was in the best interests of the charity or what the loan would be used for or how it would help the charity in furthering its objects.

The inquiry established that the charity did not have a regular income stream or undertake fundraising activities which could have facilitated the effective repayment of the relatively high monthly repayments required by the loan terms. These repayments were at different times met directly by the charity, by the principal trustee in a personal capacity and by way of funds provided by a different third party company which was personally connected to the principal trustee. This demonstrates that the trustees did not manage the charity’s resources responsibly nor did they exercise reasonable care and skill when they entered into this loan. The inquiry found that the decision to enter into the loan put the charity’s assets at undue risk.

The inquiry established that the charity sold part of its interest in the property in May 2014 for approximately £190k. Following difficulties in receiving information from the trustees regarding this sale, the inquiry directed the charity’s conveyancer to provide certain information relevant to the inquiry. The inquiry was told that a portion of the sale funds partly redeemed the charity’s loan with the private individual (£102k). The remainder of the funds, minus standard conveyancing costs, were directed to the charity’s account. The inquiry understands that the original loan amount of £115k was subsequently increased, although was unable to verify this with the trustees or the individual who loaned the money.

During 2015, the charity was unable to meet the monthly payments required by the loan and as a result defaulted on it. As a result of this default, the charity lost the second part of its property, which reverted to the individual who provided the loan to the charity, which was valued at approximately £50k. The inquiry was told this effectively redeemed the charity’s loan. The inquiry found that in entering into the loan, the trustees over-committed the charity and exposed its assets to undue risk which resulted in a loss to the charity.

The inquiry found that the trustees failed to exercise reasonable care and prudence to protect the charity’s interests in respect to this loan.

The trustees’ failure to maintain and submit adequate accounting records to the Commission in accordance with the trustees’ legal duties

The inquiry found that the trustees failed to prepare annual statements of account for each of the financial years from 2008 to 2012. Whilst the charity’s annual income in each of these years fell below the threshold (£25,000) required to submit accounts to the Commission, the trustees remained under a duty to prepare accounts irrespective of whether the charity’s income fell below this threshold. Following the identification of this matter, the Commission initially requested that these accounts be prepared and submitted in March 2014. The trustees failed to meet a deadline set by the Commission and were subsequently directed by the inquiry to prepare these accounts under section 47 of the act. The trustees had no reasonable explanation for their failure to prepare annual accounts for the charity.

The inquiry also established that the trustees had failed to prepare annual reports in respect of the financial years ending in December 2012 and December 2013. In addition, the trustees failed to arrange for those years accounts to be independently examined in accordance with section 145 of the act.

The inquiry found that the trustees had failed to maintain adequate accounting records to show and explain the charity’s transactions, including the proceeds of loans to the charity, and to allow it to disclose with reasonable accuracy, at any time, the financial position of the charity.

The circumstances leading to the charity accepting the gift of a property and whether the acceptance was in the best interests of the charity

The charity accepted a gift of a residential property from the principal trustee in August 2012. The public complaint, which triggered the Commission’s engagement with the charity, was from an individual who rented a part of this property from the charity, but was concerned that the rent was being paid to a third party rather than for the benefit of the charity. The inquiry substantiated this claim, establishing that rent was directed to an individual connected to the principal trustee.

The inquiry found that the decision by the trustees to accept the property was not in the best interests of the charity, due to the charity being liable for any repairs to the property and because the charity did not receive any income from the rental of the property.

Whether or not the trustees had complied with and fulfilled their legal duties and responsibilities as trustees under charity law and whether the charity had been used for unauthorised private benefit

The inquiry found a number of breaches of their legal duties by the trustees as evidenced in the previous sections of this report. For example, the trustees failed to prepare annual accounts in accordance with section 132 of the act, as well as failing to prepare annual reports in respect of the financial years ending in December 2012 and December 2013 in accordance with section 162 of the act.

The trustees failed to arrange for the accounts for December 2012 and December 2013 to be independently examined in accordance with section 145 of the act. Also for these financial years, the trustees failed to send to the Commission, in accordance with sections 163 and 164 of the act copies of the annual reports, annual statements of account2 and independent examiner reports.

The inquiry also found that the trustees failed to comply with the provisions of the charity’s governing document. As required by the charity’s trust deed, the trustees failed to prepare and retain full meeting minute records that adequately detailed the proceedings of the trustees and failed to vest the charity’s property in the required 3 trustees.

In addition to the above, the inquiry also found that the trustees failed to fulfil their duties as trustees, including failing to act in the charity’s best interests, failing to ensure the charity is accountable and failing to manage the charity’s resources responsibly.

The inquiry found that the charity was not applying its income in furtherance of its charitable purposes and that the application of the charity’s resources was almost entirely linked to a software project being run by the principal trustee. The principal trustee claimed that this project would potentially give rise to significant benefits to the charity and that no private benefit was received.

The inquiry found no direct misappropriation of charitable funds by the principal trustee but found that the charity’s funds had been misapplied by repeated investment in a project that was not capable of furthering the charity’s purposes. The trustee’s actions resulted in a significant loss to the charity when the charity defaulted on its loan with the private individual.

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 was not being actively operated in furtherance of its charitable purposes for the public benefit
  • 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 their failure to prepare and submit adequate annual accounts for the charity

The Commission concluded that the charity was not being operated in furtherance of its charitable purposes or for the public benefit. The charity’s income, which included loans from individuals and companies connected to the principal trustee, was predominantly applied in furtherance of a non-charitable software project which involved a number of different companies which were also connected to the principal trustee. The Commission saw no evidence that this project had provided any tangible benefit to the charity or that there was a realistic prospect of the charity benefitting in the future.

The Commission concluded that the principal trustee exercised almost complete control over the management and administration of the charity, with the other trustees appearing to have little or no involvement in key or strategic decisions about the charity.

The Commission experienced difficulties in adequately addressing its concerns with the trustees during the inquiry. Information provided by the trustees was frequently incomplete or of poor quality. The principal trustee failed to provide adequate detail about the purpose of the loan entered into with the private individual or where the loan funds were deposited. This required the Commission to use its information gathering powers to fully understand how the funds were used and for what purpose. The lack of transparency demonstrated by the principal trustee significantly hindered the effectiveness and timeliness of the Commission’s inquiry. The Commission’s expectations of full cooperation by charity trustees were not met during this inquiry.

The principal trustee also failed to adequately account for a portion of the proceeds from the sale of a portion of the charity’s property in May 2014, despite repeated requests, including under a section 47 direction.

The Commission concluded that the conduct of the principal trustee placed the charity’s assets at serious risk and resulted in significant losses to the Charity. The principal trustee demonstrated a lack of proper diligence and prudence in relation to the decision to enter into the loan. The Commission identified mismanagement and misconduct by the principal trustee and considered that conflicts of interest precluded them from taking the necessary decisions regarding the future of the charity and potential recovery of losses. The Commission also identified significant risks to possible future property or assets coming to the charity if the principal trustee were to be allowed to remain as a trustee of the charity.

Whilst each of the trustees are jointly responsible for ensuring that a charity complies with its accounting duties, the Commission concluded that the principal trustee was primarily responsible for the day to day administration of the Charity and its practical accounting processes. The Commission found that the other trustees depended on the principal trustee to manage the charity’s activities and relied on his judgment when making financial and investment decisions. Based on these factors, the Commission removed the principal trustee from the charity using its permanent proactive powers. As a result of the Commission’s action the principal trustee is disqualified from serving as a charity trustee.

Following the principal trustee’s removal, the remaining trustees confirmed their intention to wind the charity up. At this time, the charity was not operating and had minimal assets. The remaining trustees oversaw the formal winding up of the charity, which was communicated to the Commission in November 2016. The charity was subsequently removed from the register on 10 November 2016.

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 the trustees, third parties who loaned funds to the charity, the charity’s legal adviser and Independent Examiner.

The Commission also used its powers under section 47 of the act to direct the trustees to prepare the charity’s accounts for the financial years from 2008 to 2012, which had not been prepared on an annual basis by the trustees.

Based on the inquiry’s findings, in March 2016 the Commission exercised its permanent protective powers by removing the principal trustee as a trustee, officer or agent of the charity under section 79(2)(a)^{[footnote 3]} of the act. The Commission considered that the principal trustee was primarily responsible the misconduct and mismanagement identified within the administration of the charity. As a consequence of the removal order, this individual is now permanently disqualified from acting as a charity trustee under the provisions of section 178 of the act.

Following the removal of the principal trustee, the inquiry liaised with the remaining trustees regarding the future of the charity and considered the necessity of using further regulatory powers in order to either regularise the charity’s governance or to wind the charity up. The decision was taken by the remaining trustees to dissolve the charity, which took until November 2016 to fully action. The charity is now dissolved and was removed from the register on 10 November 2016, with the remaining assets being directed to a charity with similar purposes.

Issues for the wider sector

Charity trustees are responsible for governing the 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. The Commission’s guidance on trustee decision making can be accessed on GOV.UK.

The trustees of a charity are collectively responsible for its proper management and need to make decisions about the charity together. They should act together, in accordance with the requirements of their governing document and the general law, and they must always bear in mind their overriding duty to take decisions that are in the best interest of the charity. Trustees need to critically and objectively review proposals and challenge assumptions in making decisions in the charity’s best interest. Trustees who simply defer to the opinions and decisions of others aren’t fulfilling their duties. Things can go wrong when trustees place too much reliance on individuals, and don’t implement sufficient safeguards to ensure accountability.

Trustees must ensure that the charity complies with charity law, and with the requirements of the Commission as regulator; in particular ensuring that the charity prepares reports on what it has achieved and annual returns and accounts as required by law. There are legal requirements for charities, relating to the maintenance and retention of accounting records; the preparation of charity accounts and annual reports; the audit or independent examination of accounts; and the submission of these to the Commission. Trustees must familiarise themselves with the appropriate requirements.

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. Section 41 of the Charities Act 1993 requires trustees to keep accounting records for their charity irrespective of their income level. Every charity’s accounting records must be sufficient to show and explain its transactions and disclose with reasonable accuracy its financial position. Therefore, in order to show that they are complying with their legal duties, trustees must keep records and an adequate audit trail to show that the charity’s money has been properly spent on furthering the charity’s purposes for the public benefit.

1. This property formed 2 separate flats in the same building. The rental of the smaller of these flats was the subject of the original public complaint. ↩

2. Note: the charity had no income in its first reporting year (2008). ↩

3. Now section 79(4) following the implementation of the Charities (Protection and Social Investment) Act 2016. ↩