All is fair in (love) charity and (war) divorce

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On 29 July 2020, the UK Supreme Court turned corporate governance heads, exposing decision-making members to the level of statutory scrutiny normally reserved for directors and trustees.

What’s the story?

The case involved a charitable company, the Children’s Investment Fund Foundation (CIFF), which was founded by a couple whose subsequent divorce looked to threaten the very existence of the company. To avoid any more mayhem (than would ordinarily be expected in divorce proceedings), the parties agreed that Ms Cooper would resign and that CIFF would make a grant to her new philanthropic endeavour. This constituted “a payment for loss of office.”[1] This is effectively a payment to the member themselves.[2]

However, as is good practice, the CIFF Constitution prohibits members from receiving personal benefits from the Company (except in extraordinary circumstances).

The grant needed approval by the members of the company, as well as the Charity Commission. As CIFF only had three members, two of which were the conflicted couple, Dr Lehtimäki was the sole voter. The situation became even more complicated when the Charity Commission surrendered its discretion to the Court and the Court directed Dr Lehtimaki to vote in favour of the grant.

And so, the litigation began.

Can members have fiduciary duties?

In the UK, the fiduciary duties are codified in Chapter 2 of the Companies Act 2006, much like sections 180-190C of the Corporations Act 2001 in Australia. CIFF has a two-tier governance structure; members, and directors (called trustees). Until now, fiduciary duties were reserved for the trustees.

The Court unanimously decided that Dr Lehtimäki was in a fiduciary relationship with CIFF,[3] on the basis that a charitable company is analogous to a charitable trust. The Court reasoned that a fiduciary relationship could be fashioned by the parties themselves and would therefore be subject to the nature of the form of the corporation.[4]

This is highly interesting for corporate governance enthusiasts: companies can self-determine some aspect of fiduciary relationships.

Can courts compel fiduciaries?

It was held unanimously that courts have jurisdiction to direct members’ votes, in special circumstances. In this case, there was a differentiation in the reasoning. The majority found that Dr Lehtimäki was bound to the decision of the Court, as a member of CIFF, because the Charity Commission deferred their decision on what would be in the best interests of the company. In such a circumstance, the fiduciary duty is to implement that decision.[5]

The other view was that the fundamental principle of non-interference was paramount in considering this type of order, but that this case was exceptional.

Why do we care?

Although there is no uptake of this decision in Australia, UK cases are certainly relevant to Australian courts, if not persuasive. While the UK Supreme Court allowed for a level of self-determination of CIFF, the classification of Dr Lehtimäki’s role as that of a fiduciary was not explicitly known at the time of the inciting incidents. This means that members of any company with significant decision-making power should reconsider their roles considering this potential expansion, and governance documents everywhere may soon need to face review.

At Board Matters, we offer a range of corporate governance review and development services including Constitutional drafting, preparation and advice and risk management and compliance support.    We work WITH you to develop governance solutions that suit your organisation.

To learn more, please call us on 1300 619 600 or send an email to bmadmin@boardmatters.com.au.  We would love to talk you through our governance review services.

[1] per s 217(2) of the Companies Act.

[2] per s 215(3) of the Companies Act.

[3] [78].

[4] [81].

[5] [206]-[208].

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