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Charity board members have significant legal duties

Bermuda is well known for its charitable and philanthropic organisations. There are more than 400 registered charities in Bermuda, varying in size, reflecting a broad range of purposes. Between them and their unregistered counterparts, they make a vital contribution to the community, which would otherwise pull heavily on the Government’s purse strings.

Directors and officers of such organisations play a vital role in serving their causes and the community by ensuring that proper procedures and policies are in place to manage a charity’s resources effectively.

Bermuda charities can take the form of an unincorporated association, a company limited by guarantee, a company limited by shares, a company incorporated by private act, or a trust. The consequence of this dichotomy is that charities are subject to laws relating not just to registered charity status, but also to the laws relating to its structure. Although charities can take any of these forms, recent practice has been to establish them as companies, particularly companies limited by guarantee, as this is a more familiar model with both professionals and non-professionals and one that holds as its central feature the promotion of charitable purposes.

Many individuals, though often professionals, serve as volunteer directors or officers of registered charities. Such volunteerism comes with a certain prestige, hence there is a gravitational pull to join. However, many individuals might accept these positions unaware of the significant legal duties imposed upon them, perhaps on the basis of a mistaken belief that their election or appointment demands few legal duties.

This is the case even though a large number of charities are involved in high risk activities, such as working with vulnerable individuals, owning property and other assets, and organising events. However, the duties of directors and officers of for-profit companies mirror those of charitable companies in all material respects.

If you have been or will be elected or appointed a director or officer of a charity established as a company (i.e. a company limited by guarantee, a company limited by shares or a company incorporated by private act), you should be aware of the duties that govern your conduct and the conduct of your counterparts. These are set out in the Companies Act 1981 (“Companies Act”), as amended, common law and the charity’s constitutional documents (i.e. memorandum of association and by-laws).

As a director or officer of a charitable company, you must act honestly and in good faith with a view to the best interests of the company and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Accordingly, you must not act for a collateral purpose, exercise your powers for a purpose other than those that advance the interests of the charity itself nor be in a position where your duties to the charity and personal interests may conflict. You must also exercise your skills with reasonable care — the degree of skill is the standard required of a person of your particular knowledge and experience. Therefore, you can be held personally liable for your own actions or inactions, as well as jointly and severally with the other directors and officers.

However, unless you are an executive director, you are not expected to devote all of your time and attention to the management of the charity, or to be an expert in its field of business, but in performing your duties, you must display the “reasonable care …[that] an ordinary man may be expected to take in the same circumstances on his own behalf”. Accordingly, you will not be liable for the acts of other directors or officers solely by virtue of being a director. Rather, you may rely in good faith on executives who have been appointed specifically for the purpose of attending to the detail of management.

As a director, you are also expected to attend board meetings and meetings of committees on which you serve — to be held as prescribed by the charity’s by-laws — and are required to spend the time needed and meet as frequently as necessary in order to properly discharge your responsibilities. A proposed board meeting agenda, stating the date on which the proposed board meeting is due to be held along with all supporting documentation should be sent to all directors. Once the meeting has taken place, detailed minutes of all board meetings should be prepared by the secretary (and approved by the directors at the next board meeting) that summarise the attendance or absence of board members, decisions, discussions and points of further actions. Dissensions or negative votes should also be documented in terms acceptable to the dissenting person or negative voter.

To ensure proper practices by directors and officers, charitable companies can prepare a board manual that consolidates into one document the charity’s objects and powers, directors’ duties and powers, and internal arrangements for meetings and voting. However, a board manual should only be used as guidance. Directors and officers should review the by-laws and the Companies Act as and when necessary for complete information, and collectively obtain professional legal advice as and when necessary.

Although being a director or officer within a charity can offer a rare feel-good feeling and prestige, those who serve on a charitable company’s board should have regard for appropriate due diligence to ensure full compliance with the duties imposed upon them. This is essential for the success of any charity and is perhaps now more important than ever as charities are under more scrutiny and are likely to be subject to more stringent regulation.

Seth Darrell is a lawyer with Appleby (Bermuda) Limited and is currently with the Private Client and Trusts Practice Group headed by Vanessa Lovell Schrum. A copy of this column is available on the firm’s web site at www.applebyglobal.com.

This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.

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Published May 16, 2013 at 9:00 am (Updated May 15, 2013 at 7:24 pm)

Charity board members have significant legal duties

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