Mismanagement of a grant-making charity – a cautionary tale

28 January 2022

In a recent judgment (Knightland Foundation v Charity Commission [2021] UKFTT 0365), the First-tier Tribunal (Charity) upheld a Charity Commission decision to appoint interim managers for the Knightland Foundation (the “Foundation”), due to serious concerns surrounding the charity’s governance and finances.

The Foundation was established in 2011 as a charitable company for the relief of hardship in the Jewish community, the advancement of the Jewish religion and the education of Jewish pupils, and is funded from donations made by companies which are owned by one of the trustees, Mr Friedman. The Charity Commission has engaged with the Foundation since 2016, after the charity failed to file certain accounting information and various governance concerns emerged. In March 2017, the Commission issued the trustees with an “action plan” and continued to monitor the Foundation. Due to ongoing concerns, it opened a statutory inquiry and appointed interim managers to oversee the Foundation’s affairs in early 2021. 

The Foundation challenged the appointment of interim managers; however the Tribunal concluded that there had been mismanagement by the trustees in the administration of the Foundation and so the appointment of interim managers should be upheld. The Tribunal based this decision on two key issues:

  • a “long standing failure to document decisions and decision-making processes in relation to the investment and other use of the charity’s funds”; and
  • Mr Friedman’s dominance over the operation of the Foundation and the unwillingness or inability of the other trustees to exert any control.

Examples of mismanagement are as follows.

  • The transfer of charitable funds to a company owned and controlled by Mr Friedman: whilst the Tribunal accepted that there had been no misapplication of funds (as the transfers were made to enable the Foundation to make use of the company’s online banking facility and to provide proof of funds to purchase a property), the trustees “did not take reasonable and proper precautions to ensure that they fully understood the level of risk to the funds once those funds had been transferred out of their control”. They did not take any legal advice on the basis on which the funds were held by the company for the Foundation, nor did they create a paper trail with the appropriate documentation and minutes recording the trustees’ decision. Indeed, there is some evidence that one of the transfers of funds to Mr Friedman’s company took place without the involvement of the other trustees.
  • Interest free, unsecured loans to the Foundation’s subsidiaries (of which Mr Friedman is the sole director): Charity Commission guidance notes that loans which are not secured and not on commercial terms may be deemed as non-charitable expenditure by HMRC (which could affect the availability of tax exemptions to the charity), and so such loans put the Foundation’s funds at risk. Furthermore, the trustees failed to document the loans when they were originally made, and there are no minutes of any meetings at which the decisions to make the loans were discussed and approved. There is also no evidence that potential conflicts of interest were discussed.
  • Payment of a developer fee (regarding a property development carried out by one of the Foundation’s subsidiaries) to a company owned and controlled by Mr Friedman: various issues were identified in relation to this payment, including in particular the lack of management of the clear conflict of interest between the Foundation and Mr Friedman and the fact that the trustees did not consider the fee until after Mr Friedman had authorised its payment.

Despite its decision, the Tribunal accepted that Mr Friedman and the other trustees “genuinely believe that they have, at all times, acted in the interests of the Charity and that each has a genuine desire to continue to do so”. It noted that “one can well understand Mr Friedman exercising control of the governance of the Charity because it is his generosity and business know how which has made the Charity such a success”. Nevertheless, it emphasised the importance of maintaining transparency and openness in the Foundation's operations, procedures and decisions (particularly given the close relationship between the Foundation and Mr Friedman’s private business operations) so that the Charity Commission could ensure that the Foundation is complying with the regulatory framework. 

This case is a cautionary tale for wealthy individuals who wish to establish their own charity to channel their philanthropic aims, serving as a reminder that they must maintain a clear separation between the charity and their personal finances, as well as ensuring that proper decision-making processes (with a paper trail and proper management of any conflicts of interest) are in place. 

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