A guide to third sector trading - WCVA

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It’s an idea, but is it business? A guide to third sector trading 1: Getting started 2: First steps 3: Business planning 4: Legal and governance 5: Funding and resourcing 6: Financial controls 7: Managing growth 8: Management and governance 9: Social enterprise 10: Sources of support • the directors’ terms of service, including any remuneration − the continuation or dissolution of the trading subsidiary. Directorships and employment: • Employment of charity trustees: − Charity trustees may not be employed by their subsidiaries unless this is permitted by their Memorandum and Articles of Association or the Charity Commission has given specific approval. − A subsidiary company cannot be used as means to circumvent the bar on trustees receiving payments from the charity. • Membership of the subsidiary’s board: − It is good practice for some of the trustees and/or employees of the charity to become directors of the trading subsidiary and to monitor its performance. This is to ensure that the subsidiary is managed in the interests of the parent charity. − Anyone involved with the administration of both boards has two distinct responsibilities, and it can at times be difficult to balance conflicting pressures. It can be important that this potential tension is clearly understood by all the board members not just the individual. Independent or ‘unconflicted’ directors: • As a matter of good governance, the Charity Commission recommends that there should be both: − at least one person who is a trustee, but not a director or employee of the trading subsidiary (called an ‘unconflicted trustee’) and − at least one person who is a director of the trading subsidiary, but not a trustee or employee of the charity. • Unconflicted trustees and directors should advise their colleagues when their dual responsibilities result in conflicts of interest. This is important to reduce the risk of challenges to transactions between the charity and its subsidiary. Handling financial problems in the trading subsidiary Protecting the charity’s interest: The interests of the parent charity must always come first. This will sometimes mean liquidating or selling a failing trading subsidiary. The Trustees’ obligation is to minimise any losses to the charity, irrespective of their loyalty or sense of moral obligation to the directors and employees of the trading subsidiary. 230
It’s an idea, but is it business? A guide to third sector trading 1: Getting started 2: First steps 3: Business planning 4: Legal and governance 5: Funding and resourcing 6: Financial controls 7: Managing growth 8: Management and governance 9: Social enterprise 10: Sources of support • Supporting a failing business: If the charity uses its funds to continue supporting an evidently failing subsidiary, this could constitute a breach of trust on their part. They risk being required personally to make good any losses to the charity. • The need for professional advice: It is unclear exactly what circumstances might result in such dire consequences for trustees because it is not unknown in Wales for a charity to incur huge losses by supporting a badly managed social enterprise trading company. But trustees are strongly advised to get professional advice if they have any inkling that something like this might happen. • Loan defaults: If a trading subsidiary defaults on a loan agreement with the charity, the trustees must consider enforcing the charity’s rights under the agreement. In deciding on their precise course of action, trustees must exercise their commercial judgement, based on appropriate professional advice. Their decision needs to be based on the best interests of the charity which owns the trading subsidiary. • The role as a shareholder: The Charity Commission advises that where a charity has invested share capital in its trading subsidiary it has responsibilities as a shareholder (probably the sole shareholder), Ultimately this can mean: − winding up the company or − selling the business as a going concern to a third party. Protecting the reputation of the charity: The Charity Commission advises that the law which safeguards a charity’s assets from trading losses must over-ride any instinct to protect the reputation of the charity. If trustees continue to use charity funds to prevent the trading company from going into insolvent liquidation they risk personal liability for the charity’s losses. Sharing the charity’s facilities Use of buildings: • The Charity Commission advises that any use of the parent charity’s land and buildings by a trading subsidiary should be covered by a formal lease or licence arrangement with the charity, and that for technical legal reasons this needs to be authorised by the Commission. The practical value of doing so may not be obvious to the charity when it owns both the property and the tenant. • The trading subsidiary must pay a rent or fee which is comparable to that which would be payable for letting the property on the open market. 231
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A guide to third sector trading - WCVA

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