Potential liabilities of trustees, members & governors
With great power, comes great responsibility. How true is this for governance of academies and schools?
A lot has been written on this subject, but it is still not well understood within schools and the sector generally. Most of the information has an agenda. On the one side there is guidance intended to reassure individuals that there is little to worry about. On the flip side there are the warnings and horror stories which tend to suggest that the academy programme creates extra risks and liabilities. It is also worth saying that it is still quite rare to see actions being taken against individuals, but it does happen occasionally.
It is very difficult to condense such a broad topic into a short article, so please bear in mind that this article merely scratches the surface. Please see the further reading section at the end for more information.
It is worth quickly recounting the governance roles:
Maintained Schools Governing Bodies
Maintained schools are run by a Governing Body which is a body corporate with a single tier of governance called the Governors. A body corporate is not a company, but both have a legal identity separate from the people who own and run it (note some other legal structures for organisations such as traditional partnerships and many membership associations don't have a separate identity).
Governors should not have the primary obligation under contracts, employment relationships (if relevant) etc as the body corporate itself should enter into these agreements not the governors. Unfortunately, the status of Governing Bodies is not very well understood. I would estimate that (excluding the Local Authority's standard SLAs) around 40-60% of the contracts and leases we see have been entered into by the Governors personally instead of the Governing Body, which puts them at risk.
There are several other ways that a Governor could potentially incur a personal liability. These include (not exhaustive):
- Statutory health and safety responsibilities
- Breaches of the Regulations setting out the Governing Body's constitution
- Transferring assets at an undervalue
- Actions taken against the individual rather than the Governing Body (examples include: employment issues such as an action for discrimination against an employee, the GB taking an action against an individual for stealing company assets, or a serious breach of procedures which may lead to the LA taking an action to recover losses incurred)
In law body corporates don't necessarily have limited liability for those who own and run it. This means if the body corporate's debts outweigh its assets then the individuals could be personally responsible for making up the shortfall. In relation to Governing Bodies the governors benefit from a partial protection in statute. In summary, the governors do not have any personal liability in respect of anything done in good faith in spending the school delegated budget and delegating responsibilities to the head teacher.
This should cover the majority of the governors' actions on the core school activities provided that they are acting in good faith. However, it does not cover any actions outside that remit. For example, fundraising activities and liabilities incurred from spending other grants or donations are outside this scope, so if a claim arises in relation to those activities then the governors could be personally liable.
Academy Trusts - Members
All academy trusts are charitable companies limited by guarantee and as such must have a tier of governance called the members. The members do not ordinarily have an operational role. They are vaguely like shareholders of a commercial company in that they appoint the directors of the company to run the company and can hold the directors to account, but unlike shareholders they do not receive a dividend and are not allowed to make profits from the company.
One of the main benefits of the limited company structure is that the members have limited liability. The members of an academy trust each personally guarantee the debts of the company if its debts outweigh its assets. Each member is personally liable for up to £10 of their own money, but no more.
Given their limited role it is unlikely a member would be liable for the other actions referred to in the bullet point list for governors.
Academy Trusts - Trustees
Trustees are not owners of the company, but they run it at a strategic level and are responsible for holding the staff and executive team to account.
Trustees should not have the primary obligation under contracts, employment relationships etc as the company itself should enter into these agreements not the trustees. This tends to be better understood in relation to academies than maintained schools.
However, as with governors of maintained schools there are several different ways that a trustee could potentially incur a personal liability. Some areas are the same, some are a bit different. These include (not exhaustive):
- Statutory health and safety responsibilities
- Breaches of the company's constitution
- Transferring assets at undervalue
- Wrongful trading
- Actions taken against the individual rather than the company
(for example employment issues such as an action for discrimination against an employee, or the company taking action against an individual for stealing company assets or a serious breach of procedures)
Trustees do not get their liability limited in the quite the same way as members. However, they are not liable for the debts of the company, so they don't need limited liability in that way. There is a power in the DFE academy trust model articles for trustees to receive an indemnity from the company. In summary, this is for i) any liability incurred in defending civil proceedings or criminal prosecution provided that judgment is given in their favour and ii) for obtaining relief from the court from a potential liability for negligence, breach of duty or breach of the constitution.
This power allows the academy trust to pay to cover court actions as long as the individual trustee is successful in the action. If they are not then the company cannot pay.
It is important to note that the provision in the articles provides a power for the academy trust to indemnify the trustee(s). It does not actually automatically indemnify them. If an academy trust wants to indemnify its trustees (in so far as possible) then it needs to do this separately in its policies and agreements with trustees.
Academy Trusts - Local Governors
This is not a formal role in the same way as trustees and members. Local Governing Bodies are committees established by the trustees.
A trustee who is acting on a Local Governing Body usually does so in their role as trustee, so has their normal responsibilities and liabilities in that role. Any person who is not a trustee and acts on a Local Governing Body should have less potential liability. Liability would generally be for actions taken against the individual rather than the company (for example employment issues such as an action for discrimination against an employee, or the company taking action against an individual for stealing company assets or a serious breach of procedures).
As with governors of maintained schools we sometimes see contracts and leases etc being entered into by governors of local governing bodies instead of the academy trust, which puts the obligation and the risks on the individuals.
The articles do not specifically cover what indemnities can be given to LGB Governors, this should be considered in the Academy Trust's internal policies.
In summary as long as you act:
- diligently (i.e. you know your constitution and policies and follow them)
- prudently (i.e. you act reasonably not recklessly) and
- in good faith (i.e. you act honestly with the best intentions)
then the likelihood of facing a personal liability is relatively low.
Governors of maintained schools need to know the local authority's scheme of financial delegation. If you breach those rules then you could face a personal liability and indeed may find the local authority itself taking action against you.
Academy trusts must have an internal policy setting out its delegations and areas of responsibilities. Trustees and local governors must know it. If you breach the rules then the other trustees may have to take an action against you.
Try to make sure everyone understands the legal structure and that either the GB or the Academy Trust should always be named on contracts, SLAs, leases, agreements etc not the "governors" or the "trustees". Consider arranging training sessions and make sure that those responsible know and follow the government guidance, the constitution and the internal policies.
You should also consider insurance cover (or the risk protection arrangement) for governors/trustee liabilities. This also has to be understood and assessed on a cost benefit analysis, because such cover also has limits and will not excuse criminal behaviour and normally won't cover actions that are in breach of the constitution.
There are some pro's and con's of the different structures between academies and maintained schools. People will have different opinions on which has less risk, personally I would rather be an academy trust trustee than a maintained school governor (unless your maintained school does no "extra curricular" activities at all).
If you would like to discuss any aspect of this article further, please contact Tim Wrigley on 0113 244 6100.
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The information in this article is necessarily of a general nature. Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors