The Bersam Trust: Trustees failed to maintain adequate records
The Bersam Trust (‘the charity’) was registered as a charity with the Charity Commission (‘the Commission’) on 6 December 1966. It is a charitable trust and is governed by a declaration of trust dated 31 May 1955 which was last amended by a declaration of change of name dated 29 April 1965. Its charitable objects include “providing Jewish children with a strictly orthodox Jewish religious education”.
In practice the charity, which is based in Salford, leases a building to an independent Orthodox Jewish faith school (“the school”). The charity also meets some of the support costs of the school such as funding security at the school building.
Further details about the charity can be found on the register of charities.
Two of the charity’s five trustees were appointed in 2018 and were therefore not in office when most of the mismanagement and/or misconduct set out below occurred.
Issues under investigation
The Commission previously engaged with the charity after an Ofsted inspection in July 2016 rated the school as ‘inadequate’. It subsequently became clear that the charity did not operate the school and was not responsible for its performance. However, a Regulatory Compliance case (‘the compliance case’) opened by the Commission in relation to the charity in October 2016 found evidence of a range of regulatory concerns in relation to the charity including non-compliance with its governing document regarding the number of trustees and unmanaged conflicts of interest. On 7 November 2017 the Commission issued the trustees with an action plan (“the action plan”) under section 15(2) of the Charities Act 2011 (“the Act”). This action plan set out and explained measures aimed at improving the management and administration of the charity to ensure the trustees comply with their legal duties and responsibilities and act in the best interests of the charity.
The Commission continued to monitor the charity to assess the trustees’ compliance with the action plan.
Through its monitoring of the charity, the Commission identified concerns that the trustees may not have complied with the action plan. Conflicts of interest arising from one of the trustees holding a position of paid employment at the school did not appear to have been managed. Furthermore, loans made to the charity also did not appear to have been properly managed. The Commission also examined the charity’s annual accounts and obtained records from the charity’s bank. It was not possible to reconcile the financial activity recorded in the accounts and the values of funds entering and leaving the charity’s bank accounts, raising concerns that the trustees may have supplied false and misleading information to the Commission. The following table sets out the sums involved in the discrepancies identified for the four financial years ending (“FYE”) 2014 to 2017:
|Annual return / Accounts
On 14 January 2019 the Commission opened a statutory inquiry (‘the inquiry’) to examine issues which included:
- the financial management of the charity, and whether funds have been properly expended solely for exclusively charitable purposes and can be accounted for
- whether loans involving the charity are in accordance with its governing document and have been properly accounted for
- the trustees’ compliance with legal obligations for the content and preparation of the charity’s accounts and other information or returns
- whether the trustees may have knowingly or recklessly provided the Commission with information which is false or misleading
- if the trustees have avoided or adequately managed potential conflicts of interest, and if there has been any direct or indirect private benefit
- the extent to which the trustees have complied with previously issued regulatory advice and guidance
The inquiry was closed with the publication of this report.
Whether loans involving the charity are in accordance with its governing document and have been properly accounted for
In furtherance of the charity’s objects the trustees have in recent years endeavoured to provide an improved and modernised building for the school to operate from. The trustees entered the charity into significant borrowing agreements in order to finance this project. Whilst it is important that trustees obtain the resources needed to further their charity’s objects, in this case the trustees exposed the charity to undue risk.
During financial years ending 31 March 2014 to 31 March 2018, in addition to loans from a bank, the charity received 56 loans totalling £2.4 million. The inquiry found that 49 of those loans were not documented within a loan agreement. Those 49 loans accounted for £1.9 million of borrowing by the trustees on behalf of the charity and they were taken from various sources such as individuals and other charities.
In February 2019, the inquiry inspected the books and records of the charity at a pre-arranged meeting at its registered address (“the books and records inspection”). In advance of the books and records inspection the attending trustee was instructed to ensure that all of the charity’s records were available at the meeting for the inquiry to examine. However only 6 loan agreements, which accounted for borrowing of only £485,000, were made available. Of these 6 loan agreements, 2 record the borrower as being the school, rather than the charity; and 1 had no lender recorded. One further loan agreement, which accounted for an additional £31,500, was subsequently provided to the inquiry.
At the inspection the inquiry was informed that most of the charity’s loans did not have written agreements between the parties and were undertaken on trust. The trustees have not provided evidence that loan agreements were adequately documented, clearly setting out the details of lender and borrower, and the terms of the loan. Without such documentation the trustees were unable to evidence that the charity had an obligation to repay £1.9 million of funds. The inquiry found the trustees also failed to demonstrate that loans entered into were objectively reviewed to determine that they were in the best interests of the charity. These were failures on the part of the trustees to manage their charity’s resources responsibly. The Commission considers this to be a breach of trust or duty or other misconduct and/or mismanagement.
The inquiry found that the charity’s property was being put at undue risk by this practice and that it was necessary and proportionate to take temporary protective action to ensure there was no further borrowing by the charity without written loan agreements being in place. Therefore, on 8 May 2019, the Commission issued an order (“the order restricting transactions”) to the trustees using its powers under section 76(3)(f) of the Act. The order restricting transactions prohibited the trustees from entering into transactions involving the borrowing and lending of money without the Commission’s prior approval. The trustees subsequently provided the Commission with an undertaking which gave a permanent assurance that the trustee’s failings in regard to documenting loan agreements would not continue. As a result, the Commission acted to discharge the order restricting transactions on 6 December 2019.
Whether the trustees may have knowingly or recklessly provided the Commission with information which is false or misleading
Knowingly or recklessly providing the Commission with information which is false or misleading is a criminal offence. The accounting discrepancies identified at the opening of the inquiry had given rise to serious regulatory concerns that, in submitting accounting information to the Commission that was not representative of the funds entering and leaving the charity’s bank accounts, the trustees may have knowingly or recklessly supplied false or misleading information to the Commission.
Following the books and records inspection the inquiry obtained further information from the independent examiner of the charity’s accounts, using powers under section 47 of the Act. The information obtained explained that loans, and in particular loans which were repaid within a 12-month period, were the cause of the apparent discrepancies between the amounts the Commission identified flowing through the charity’s bank accounts and the amounts recorded in its Annual Return and accounts. The inquiry did not find that the trustees had knowingly or recklessly provided the Commission with information which is false or misleading.
The extent to which the trustees have complied with previously issued regulatory advice and guidance.
On 7 November 2017, during the compliance case, the Commission issued the trustees with regulatory advice and guidance under section 15(2) of the Act in the form of the action plan. This action plan set out measures aimed at ensuring the trustees complied with their legal duties and responsibilities and acted in the best interests of the charity.
This action plan specified that the trustees must ensure that they are all aware of and capable of discharging their duties and responsibilities as charity trustees. However, on review of the charity’s records the inquiry found that the trustees had failed to discharge their duties in regard to holding trustee meetings. The charity’s governing document requires that the trustees “shall meet….at least once in every quarter.” Therefore, in the 6-year period from March 2013 to February 2019 the trustees were legally required to hold a minimum of 24 meetings. However, the inquiry found that in that 6-year period the trustees held only 11 trustee meetings.
The inquiry found that when the trustees did meet, they failed to document who was present at the meetings. The minutes do not document the significant financial decisions the trustees have made in the administration of the charity in that period. For example, during that period it is clear that the trustees entered the charity into significant financial commitments which included committing substantial charity funds to building works; committing the charity to borrow total funds in excess of £3.5 million; and the disposal of charity property to a connected party. The failure to document these decisions means that the trustees are unable to demonstrate whether or not they were made properly and lawfully and in accordance with the charity’s governing document; what factors were regarded or disregarded by them and whether or not professional advice was relied upon. The Commission considers this conduct to be a breach of trust or duty or other misconduct and/or mismanagement.
The action plan also specified that the trustees should ‘make sure there are policies and procedures in place on managing and or avoiding conflicts of interest/loyalty’ and that this action should be completed by May 2018. The trustees failed to do so despite the Commission having reminded the trustees (in correspondence on 16 May 2018) that this aspect of the action plan remained outstanding. The inquiry found the trustees had still not complied by the time the Commission conducted a books and records inspection at the charity’s registered address on 26 February 2019. The Commission considers the trustees’ failure to comply with regulatory advice and guidance in this regard to be misconduct and/or mismanagement.
On 21 December 2020 the trustees implemented a conflicts of interest policy after the inquiry issued them with notice of intention to issue three of them with an Official Warning. The Official Warning specified that the trustees should implement written policies and/or procedures to adequately and appropriately identify and manage conflicts of interest.
If the trustees have avoided or adequately managed potential conflicts of interest and safeguarded the independence of the charity
One of the trustees holds a position of paid employment at the school and is registered as being the school’s proprietor at Ofsted. Therefore a clear conflict of interest arose in relation to this trustee and the charity’s ongoing relationship with the school. This conflict was not correctly identified or managed by the trustees when they made the decision to lease the charity’s building to the school; when entering the charity, as borrower and lender, into loan agreements with the school. The failure to properly identify and manage the conflict arising meant that the trustees could not demonstrate that they were acting in the best interests of the charity when these decisions were made. The Commission considers this to be a breach of trust or duty or other misconduct and/or mismanagement, and one which is even more serious given the regulatory advice and guidance the Commission had previously provided to the trustees.
On 29 September 2016 the trustees of the charity leased the school premises for a period of 24 years to Talmud Torah Chinuch Neorim (registered company number 09255139 – “the company”). The inquiry obtained and examined a copy of the lease. The inquiry found that the party entering the lease is named as the charity (however, the charity itself is a trust and has no legal personality); the company was dormant at the time the lease was granted; and at the time of entering into the lease, three of the four directors of the company were also trustees of the charity. These were the only trustees of the charity at that time and it was not possible for them to manage the conflict of interest arising in this transaction.
The trustees informed the inquiry that the charity and the school are separate entities. The inquiry found significant evidence that demonstrated the trustees have managed the charity in a manner which causes confusion regarding the degree of separation between the charity and the school. For example, charity records show that loans, for which the loan agreements record the school (rather than the charity) as the borrower, were paid into the charity’s bank account; were recorded as liabilities of the charity in loan schedules; and subsequently repaid from the charity’s bank account. Charity records also indicate that the charity was administrated using an email address and letter head pertaining to the school which caused a lack of clarity for third parties regarding the identity of the entity with which they were corresponding or transacting.
The inquiry also found the trustees entered the charity into a mortgage agreement with a bank in which they were required to achieve and maintain an Ofsted rating for the school that is acceptable to the lender and meet Ofsted standards. In the event an acceptable Ofsted rating for the school was not achieved, the mortgage agreement requires the trustees to engage with Ofsted to develop and implement a remediation strategy. Given that the Commission has been informed by the trustees that the school is a separate entity to the charity, this is further evidence that the trustees have failed to ensure clarity in the separation of the two entities when entering into transactions on behalf of the charity. In entering into this particular agreement, the trustees accepted terms on behalf of the charity over which they had no control since they pertained to the performance and remediation strategy of the school, rather than the charity.
The Commission considers these failures to ensure that activities, transactions and records of the charity are kept separate from those of the school to be a breach of trust or duty or other misconduct and/or mismanagement.
The Commission concluded that the trustees failed to maintain adequate records or recognise and manage conflicts of interest. Borrowing £1.9 million without any written agreements documenting the loans, were serious failings which exposed the charity’s assets to undue risk and meant the trustees could not evidence why the charity had an obligation to make the repayments. The trustees administrated the charity in a manner which risked compromising the charity’s independence. The trustees who were in office when the events and decisions referred to in this report occurred were responsible for these failings and they amounted to misconduct and/or mismanagement in the administration of the charity by the trustees and an official warning was issued to them to address this.
The Commission concluded that the loans, and in particular loans which were repaid within a 12-month period, explained the discrepancies between the amounts the Commission identified flowing through the charity’s bank accounts and the amounts recorded in its Annual Return and accounts.
Regulatory action taken
Throughout the course of the inquiry, the inquiry used its information gathering powers under section 47 of the Act to obtain information from the charity’s bank; from the independent examiner who prepared the charity’s annual accounts; and from the trustees.
The inquiry used temporary protective powers under section 76(3)(d) of the Act to issue an order on 17 January 2019. The effect of this order was that funds could not be expended from the charity’s bank accounts without the prior approval of the Commission The order afforded the charity’s funds the necessary protection whilst the inquiry further examined the issue.
On 8 May 2019 the inquiry used its temporary protective powers under section 76(3)(f) of the Act to restrict the trustees from entering into transaction involving the borrowing or lending of money without the prior approval of the Commission. The trustees subsequently provided the Commission with an undertaking which gave a permanent assurance that the trustee’s failings in regard to documenting loan agreements would not continue and as a result the Commission acted to discharge the 76(3)(f) order on 6 December 2019.
On 8 September 2020 the Commission issued the two trustees appointed during 2018 (who were not conflicted by or involved in the signing of the lease) with regulatory advice and guidance under section 15(2) of the Act in the form of a further action plan. The further action plan sets out steps the Commission considers those trustees should take to regularise the lease.
On 19 January 2021 the Commission used its powers under section 75A(1) of the Act to issue three of the trustees (those who were in office at the time the relevant events, which the Commission considers to be a breach of trust or duty, or other misconduct or mismanagement, occurred) with an Official Warning. The Official Warning includes action to be taken to rectify the breach of duty or other misconduct or mismanagement.
Issues for the wider sector
The purpose of this section is to highlight the broader issues arising from the Commission’s assessment of the issues raised publicly that may have relevance for other charities. It is not intended as further comment on the charity in addition to the findings and conclusions set out in the earlier sections of this report but is included because of their wider applicability and interest to the charity sector.
if a loan has been made to the charity, we would expect the charity to have some form of agreement in place to cover this arrangement. This should, as a minimum, set out the terms of the loan, when it was to be repaid and any interest to be added. This helps to protect charitable funds from potential abuse. As such, any failure by the trustees to take this action potentially puts charitable funds at risk and so would be a breach of a trustee’s duty to safeguard the charity’s assets
trustees must take decisions in a way that meets the requirements of charity law and their governing documents. This includes recording decisions properly, so there is no doubt about what was decided and why. Written records should be sufficient to allow someone to understand the issues involved, decisions made and the reasons for them, particularly for important or controversial decisions
trustees are expected to act on regulatory advice and instructions from the Commission as regulator. If they fail to do so and this mismanagement or non-compliance arises or continues, this may lead to regulatory action against the trustees
charity trustees should ensure that they have a conflicts of interest policy in place to ensure that they are fully aware of their responsibilities and that any conflicts that do arise are appropriately management
a charity’s connection with a non-charity can bring benefits and opportunities but it can also bring new risks. The level of risk to your charity from its connection with a non-charity will depend on the charity’s particular circumstances and the type of connection you have with the other organisation. Trustees can use the Commission’s guidance on charities with a connection to a non-charity to help them extract the full benefit of the connection for their charity and minimise the risks