The Charity Commission has concluded that former trustees of Coventry City of Culture Trust failed to maintain effective oversight of the charity’s finances, amounting to misconduct and/or mismanagement in the administration of the charity.
However, the administrators who subsequently examined the Trust’s affairs decided not to pursue legal proceedings against former directors because of the associated costs and risks.
The case illustrates an important distinction for directors and trustees. Regulatory criticism, governance failures and a potential civil claim are not necessarily the same thing. Even where serious shortcomings are identified, an insolvency office-holder must still consider whether there is a viable claim and whether pursuing it is commercially justified.
For directors whose decisions are later scrutinised following insolvency, criticism does not therefore automatically mean personal liability will follow.
What did the Charity Commission find at Coventry City of Culture Trust?
Coventry City of Culture Trust entered administration on 28 February 2023. The administration lasted almost two years while the administrators examined the circumstances of the charity’s closure, reviewed financial records, dealt with creditors and considered whether further legal action should be taken.
The Charity Commission subsequently examined the conduct of the former trustees.
Its findings included
- inadequate budgeting and financial planning during the COVID-19 pandemic,
- overreliance on the executive team for financial decision-making; and
- insufficient scrutiny of the charity’s financial sustainability.
The Commission also found that material financial risks and the loss of important funding had not been reported to it sufficiently promptly. It concluded that the trustees had failed to manage the charity’s resources responsibly and that this amounted to misconduct and/or mismanagement.
The Commission did, however, recognise the significant effect of the pandemic on the charity. Reduced footfall and ticket sales contributed materially to its financial difficulties.
Importantly, the regulator found no evidence that charitable funds had been misused or that payments had been made to connected parties.
The distinction matters. Poor financial oversight can be serious without necessarily involving dishonesty or personal enrichment.
What duties do trustees and directors have when finances deteriorate?
Those responsible for an organisation cannot simply delegate financial management and assume that responsibility has passed to employees or professional advisers.
Trustees are expected to understand the organisation’s financial position, scrutinise significant decisions and maintain appropriate oversight of its resources. Where an organisation is experiencing financial difficulty, the need for informed decision-making becomes particularly important.
The Coventry findings demonstrate the risks of relying too heavily on an executive team without sufficient challenge at board level.
The Trust had obtained a £1 million loan from Coventry City Council in October 2022. The Charity Commission later concluded that the charity may have been insolvent before entering into the loan and identified doubts about whether it could repay the money in full. When the charity subsequently entered administration, it owed the Council just over £1.5 million.
The Commission did not state that taking the loan was inherently unlawful. The concern was part of a wider picture about whether the organisation’s financial sustainability had been adequately considered.
For company directors more generally, our Directors Duties Guide explains the responsibilities that can arise when making decisions on behalf of a company.
A charitable company can create an additional layer of responsibility because those responsible for its management may need to consider obligations arising under both charity and company law. The precise duties depend on the organisation’s legal structure and the individual’s role.
Why did the administrators decide not to pursue former directors?
The administrators ultimately decided that legal action against former directors would not be pursued because of the associated costs and risks.
That does not mean the Charity Commission withdrew or reversed its findings.
The two exercises addressed different questions.
The Charity Commission considered whether the trustees had properly fulfilled their responsibilities in administering the charity. The administrators had to consider separately whether legal proceedings against former directors should actually be pursued.
A potential claim can involve evidential uncertainty, legal risk and substantial litigation costs. Even where concerns exist about previous management decisions, an office-holder must consider the practical benefit that litigation might produce for the insolvent estate.
A legally arguable claim is therefore not necessarily a commercially sensible claim.
In this case, the published information does not identify precisely which potential causes of action the administrators considered, the value of any possible claims or the detailed advice they received. It would therefore be wrong to speculate about why particular legal claims were rejected beyond the administrators’ stated concern about costs and risks.
Directors facing actual or threatened office-holder proceedings can read our Defending Liquidator Claims Guide for more information about how claims following insolvency can arise.
Does a regulatory finding automatically make a director personally liable?
No. A regulatory finding and a civil claim involve separate legal questions.
A regulator may conclude that governance standards or particular legal responsibilities were not met. A civil claimant must separately establish the requirements of the particular cause of action being pursued.
That may involve proving a breach of duty, establishing that the breach caused loss and demonstrating what remedy should follow.
This distinction can become particularly important following insolvency.
Liquidators and administrators may examine payments, transactions, accounting records and the conduct of management. Depending on the circumstances, that investigation may lead to a claim against a director. In other cases, the office-holder may conclude that no proceedings should be pursued.
FWJ’s Claims Against Directors service explains some of the different claims that directors may face following insolvency.
The Coventry case demonstrates that even where a regulator has made serious criticisms, later litigation is not automatic.
Equally, the absence of civil proceedings does not erase an earlier regulatory finding.
Directors should therefore avoid assuming either that criticism inevitably creates personal liability or that a decision not to litigate means there were no governance shortcomings.
What should directors and trustees do when an organisation faces financial difficulty?
Financial difficulties often develop gradually rather than appearing on a single identifiable date.
That makes board oversight particularly important.
Directors and trustees should ensure that they understand the organisation’s current financial position rather than relying solely on historic budgets or optimistic forecasts. Material funding changes, unexpected liabilities and deterioration in cash flow should be considered as part of the organisation’s overall financial sustainability.
Significant decisions should also be properly recorded.
- Contemporaneous board papers, financial reports, professional advice and minutes explaining why a decision was taken can become important if the organisation later enters insolvency and those decisions are examined with hindsight.
- Seeking professional advice is also not a substitute for decision-making by the board. Advisers can provide specialist input, but those responsible for the organisation must still understand the advice, consider the available options and make their own properly informed decisions.
The Coventry City of Culture Trust case shows how the same circumstances can subsequently be examined from different perspectives. A regulator may consider governance standards, while administrators consider potential recovery action and the commercial interests of creditors.
For directors and trustees, the practical lesson is to maintain informed financial oversight, question assumptions when circumstances deteriorate and preserve evidence showing how important decisions were reached.
Early attention to these issues can help protect both the organisation and those responsible for its management if financial difficulties later lead to administration or liquidation.
Francis Wilks & Jones advises directors throughout England and Wales on directors’ duties, insolvency investigations and claims arising from decisions made before a company enters formal insolvency.
