In setting out the context, the consultation paper notes that, as charity trustees, governors have a duty to act with reasonable care and skill. They must act responsibly, reasonably and honestly; they should put appropriate procedures and safeguards in place. The paper also notes that trustees can be held personally liable to their charity for any financial loss they cause or help to cause by their wrongful action although charity law protects trustees who have acted honestly and reasonably from personal liability.
The paper does not make a strong case for the extension of governor liability. Indeed, it concedes: “Indeed, in the event that [governors] were to breach wrongful and fraudulent trading provisions it is likely that they would, through the same conduct, also already be in breach of their duties as charitable trustees.”
The liabilities put in place by the Insolvency Act 1986 were intended to deter and punish “rogue directors” who enriched themselves through running failed or fraudulent companies. There does not appear to be evidence of rogue or “fly-by-night” governors in the college sector. The financial problems in the sector arise from an extended period of funding reductions and changes.
The unstated rationale of the proposed extension of governor liability is to provide a bigger stick in the Area Review process.
The law firm Eversheds note in a briefing: “In our view, the introduction of the wrongful trading provisions in the context of colleges does heighten the risk for Governors as it makes it explicit that the duty to act in the interests of the creditors is a higher priority than the delivery of the charitable purpose.”
The extension of governor liability may have serious effects on college governance. Existing and potential governors may be discouraged from taking on the already heavy responsibilities of the voluntary position of governor. It’s a hard sell: “you can give up your time, you don’t get paid and you could lose your house!”
It would be a particularly perverse outcome of the proposals if accountants, lawyers and other professionals were increasingly wary of joining college governing bodies.