The committee decides to commit to expenditure on redecoration that exceeds the amount of funds they have held in reserve in the firm belief that the balance will be forthcoming from other sources once they let it be known it is needed:
- This is not a prudent course of action and could lead to the hall not being able to meet its commitments making the trustees not only liable but open to prosecution under the Charities Act
- Whilst there is a risk, provided the trustees take a reasoned view and feel that the risk is very small then they could not be held responsible if the additional money is not forthcoming
- The committee decide that there is no real problem because they have Trustee Indemnity insurance in place that would fund the difference that they themselves would otherwise have been responsible for
Hall management committees, the trustees of the charity, have a duty of financial prudence imposed under the Charities Act legislation but what is financial prudence? Prudence, in my dictionary, is defined as 'caution in practical affairs'. Prudence is not about calculated risk it is about caution, about being careful.
Regardless of what has always been the case before or what expectations of income are it would not be prudent to to take option 2 here. There is a small risk involved and that is not exercising care.
A possible example might be getting a quote from a contractor do some work on the hall and it coming out at more money than was currently available. The contractor says "I am free next week and would like to get the job done, I can give you two bills, one for the amount you have available and one for the extra. You can pay the first now and the other one when you have the money." This could be so tempting but totally imprudent! Option 2 should never be taken.
Option 3 touches on a misconception about Trustee Indemnity insurance. This cover does not pay out if and when you become liable under law for something. Using the little illustration above, if you did enter in that arrangement with the two invoices and then could not pay the second when the contractor subsequently demanded payment then Trustee Indemnity insurance would be of no use at all because the trustees had intentionally got in to a debt situation, not innocently. Indeed it is difficult to envisage what sort of circumstances Trustee Indemnity actually does address!
Option 1 is the correct answer here. Breach your duty of prudence and if all goes 'pear shaped' then you only have yourselves to blame and the trustees will corporately have to take the consequences.