The governance failings leading to a potential conflict of interest were first raised by newly appointed solicitors to the unnamed charity, who were seeking the current and former trustees’ relief from liability for the unauthorised payments, as well as permission to sell 99% of its shares in the subsidiary limited company.

A subsequent inquiry looked into the administration, governance and management of the charity, specifically regarding decision making and conflicts of interest; whether the proposed sale was in the best interests of the charity; whether there had been any private benefit to the current and former trustees; and whether restitution of funds was necessary.

The inquiry found that the consultants were conflicted as they had been trustees of the charity at the time of the payments, and had failed to identify or adequately manage this conflict of interest. The trustees were also unable to demonstrate that adequate records of their decisions had been maintained.

The inquiry considered the payments amounted to significant private advantage and financial benefit, as well as a direct breach of the charity’s governing document and the trustees’ legal duties.

Although the inquiry recognised that the trustees had made ‘honest mistakes’, there was a strict prohibition against private benefit in the governing document. The Commission therefore engaged further and the trustees agreed to seek recovery of some £650,000.

After reviewing the charity’s records the Commission was satisfied that the trustees had correctly managed conflicts of interest around the sale of the shares; the conflicted trustees had been removed from decision making and a new independent trustee appointed. The trustees had also sought independent professional advice and negotiated better terms to ensure that the sale was in the charity’s best interest.

The Commission therefore granted consent to authorise the share transaction, resulting in a further £350,000 going to the charity.

In total the charity received approximately £1mas a result of the Commission’s involvement arising from the repayment of the unauthorised remuneration and the authorisation of the transaction to sell 99% of the trading subsidiary’s shares.

Harvey Grenville, head of investigations and enforcement at the Charity Commission said: ‘Actively managing conflicts of interest is a fundamental principle of trustee decision making. We recognise that trustees are human beings who may make honest mistakes, but the bottom line is that you must always act in the best interests of your charity.

‘Our intervention has allowed this charity to claw back a significant amount of money that can now go to charitable causes. I hope this will encourage other charities to be mindful of their duties and consult our guidance when making important decisions.’

Charity Commission report into a grant making charity is here.

Report by Pat Sweet