Heritage Railway Governance

Agreed, votes being the important word.

 

That's a good example of the misunderstanding about the role and responsibility of Charity Trustees and why I used that example. The answer is the Charity Commission and the Courts with the Trustees facing the risk of sanctions if they get it wrong including personal liability. They could not plead the wishes or instructions as a defence. Some heritage railway charity members seem to assume that a charity exists to further their interests and wishes. It doesn't. The price of being a charity is that it must be run to provide a limited range of specific public benefit purposes (such as public education) and its Trustees must comply with charity law for which they are answerable to the Charity Commission and the Courts. Charities are not some magic trick that unlocks tax and fundraising benefits without a cost in the form of restrictions on their freedoms.
A similar situation can affect limited companies. Imagine a heritage railway that is running out of cash to pay its bills as they fall due. It may still be profitable and have substantial assets including some unique steam locos. As soon as it becomes clear that the cash will run out, and that there is no realistic prospect of enough being secured in time to pay bills when due, the duties of its directors change immediately. They must run the company for the benefit of its creditors i.e protect the assets, including the locos, so they can be disposed of by a liquidator to pay some or all of the debts. Outraged shareholders/members call an EGM and vote by a huge majority instructing the directors to squirrel away the locos in another company so they don't fall into the creditors' hands. The fact that the creditors intend to dispose of the locomotives for scrap wouldn't make any difference. If the directors followed that democratic instruction they would almost certainly be personally liable to compensate the creditors and quite possible face a substantial fine or even imprisonment. It wouldn't be the members , as the post suggests, that take on the consequences if it's a "wrong move". It would be the directors and their families.
Dare I suggest that examples such as these demonstrate why shareholders, members, and volunteers best interests are best protected by having cohesive, competent boards that can avoid such disasters materialising? Getting steamed up over the method of achieving that is far less important than the end result.

 

No, "how" matters at least as much as what. And that goes well before the extremes - if the only protection against this kind of scenario is in governance structures, then something's badly wrong.

 

Surely the situations you describe would be extremes and reasonably sensible and reasonably competent Trustees or Directors would resign in such an eventuality and would make it clear before it came to any vote that they would do so? Likewise, I find it difficult to envisage circumstances where anyone would want then to replace them.

 

Resignation would not necessarily protect them from personal liability.

 

Crikey! Why would anybody then ever want to be a Trustee or Director?

Could you expand on “not necessarily” please.

 

But the point about running an organisation is not about setting everything about the extreme position, but creating a structure that works towards success that avoids those extremes.

And that’s where setting a board up so that, whatever good practice it follows day to day, it is legally isolated from challenge undermines long term success.

It is also quite insulting to people to assume that they can’t understand and obey the law if they get to decisions that are constrained unless they are picked from a specific group.

Edit: I would also expect as a new director/trustee to undergo a level of induction to ensure that I understood the constraints I'd be working under. I know I found it useful, and of others likewise, to get that understanding of the different tier of responsibility involved. Again, I think it's insulting to assume that candidates, however "popular", would not be able to grasp this or act on the basis of that knowledge.

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I am sorry to hear that.

 

As others have commented, you do like to take the extreme view. In the above example the action of "hiding the assets" would not just be "wrong" but would be completely illegal, which is quite a different thing and would most certainly create personal liability if not criminal charges. Given the situation you describe, the most obvious course of action would be to sell sufficient assets to meet obligations before the liquidator is called in, preferably after explaining the situation to the members and seeking their approval to do so. This will usually release better value of the assets than a receiver's fire-sale.

It is also worth noting that actions against the Directors or Trustees of failed enterprises are comparatively rare and are usually brought where there is evidence of illegality or total dereliction of duty. Bad decision making does not, thankfully, fall into those categories.

As @35B has commented above "it's insulting to assume that candidates, however "popular", would not be able to grasp this or act on the basis of that knowledge " (an induction course).
Perhaps, rather than frightening the living daylights out of everybody with extravagant threats of unlikely scenarios ( see @62440's comment above ), would you care to lay out for us what you think is the best Club/Trust/Charity/Company combination for the various kinds of Preservation railways. We can recognise that many things have changed over the years we have been going and what might have been a sensible arrangement in the past is no longer optimal. However a "one size fits all" approach is not the answer; there needs to be flexibility in the regulations to suit different scenarios.

 

Ps I thought this thread was for the GWSR, and wonder if recent posts should go onto a new thread…

PPs I now have my GWSR EGM papers thank you!

 

Goodness! where to start?
In no particular order Directors and Trustees can be held liable for their actions or inactions while they were in post even though they subsequently resigned. In the scenario suggested if all the Charity Trustees resigned and no one came forward management of the charity would probably be taken over by the Charity Commission. The Crikey! observation is appropriate especially where people volunteer for the roles. In normal companies they would expect to be handsomely rewarded for the risks they take but volunteers are still judged by the same standards and have the same personal exposure. Indeed it is remarkable that volunteers put themselves forward.
Selling assets to raise cash is fine if you have the time to complete the sale and the assets are of sufficient value. Cash flow crises can be sudden so it's not always practicable to raise cash when needed. Whilst I agree that instances of directors being liable for Wrongful Trading are rare the test for the offence is whether they switched to protection of creditors as soon as there was no realistic prospect of avoiding insolvency. They can't wait until an Administrator or Liquidator is appointed.
Induction and training of Directors and Trustees is essential both on taking office and during their terms. However it's highly unlikely that the full ramifications of the roles will be assimilated for some time which is one of the advantages of recruiting those with relevant experience. If they don't have the knowledge themselves directors must take appropriately qualified advice which can be very expensive. Having volunteer directors and trustees on the boards who have that experience or professional qualifications can be a substantial cost saving.
There's no single ideal corporate structure for heritage railways. It will depend on a number of factors but relevant considerations are likely to include fundraising and tax benefits as well as how best to reflect the interests of members and volunteers. There's also a need to consider the down sides of some structures. For instance if the railway is owned and operated by a company with shareholders that will eliminate the possibility of Gift Aid on donations to that company and on fares. Having a supporting charity rather than one that owns and operates the railway could mean the operating company could become insolvent but the charity might be unable to help ( even if it had the funds) where the debts were for things outside its public benefit purposes. If you're starting from a clean sheet there are considerable advantages in using a Community Benefit Society which can be charitable and has many similar characteristics to a members' preservation society. That option wasn't available when most of the preservations societies sought the protection of incorporated status.
61264' disapproval of the changes on the NYMR is at least consistent but I'm convinced that he's looking at the past through rose tinted spectacles. A Trust board dominated by railway professionals ended up in open warfare with the subsidiary board, similarly staffed, not to mention the railway facing near, if not actual, insolvency. He also misses the point that the parent Trust board is now made up of Trustees with the skills to run a charity. The operational, engineering, marketing and financial skills associated with running a railway are in the operating subsidiary. The NYMR has, with overwhelming member support, opted to change from a railway that paid lip service to its educational charitable purpose into a charity with a heritage railway at its heart. Some find that change difficult to accept but it's working. It resulted in a £750k LPO grant because of the wider charitable purposes. It's enabled the new simplified Gift Aided fare structure with initial indications on uptake way ahead of expectations.
Personally I doubt that many heritage railway Directors and Trustees are aware of their duty in the event of looming insolvency. After all they took on the roles to protect and develop their railways not to cut back or even shut them down. Given the financial pressures out there at the moment the HRA is so concerned about that it will be publishing guidance to help directors avoid falling into the personal liability trap of Wrongful Trading or, even worse, Fraudulent Trading.
Llangollen's re -incarnation is great news but it might induce complacency. It survived in large part because key assets, especially the railway operating licence, were in the Trust. It's also too easily forgotten that the insolvency of the subsidiary was at great cost to many in the heritage railway sector. The assets were worth only a fraction of the debts so many heritage organisations that had used the subsidiary for engineering services lost their shirts. I hope 61264's optimism is well founded but I suspect that if some other railways fail the wreckage will not be so easy to untangle.

 

Respecting that this (like similar discussions on other threads) possibly belongs elsewhere, I think this mixes several different aspects. However, the focus remains adamantly upon the assumption that the primary focus of a director or trustee needs to be on what to do if their organisation is about to go bust. It is that mindset that is the issue, not the specific advice that follows in terms of the individual scenarios. As such, and knowing my experience of seeing fellow trustees' reactions when told of their legal position, I hope that the HRA advice is very carefully drafted, and in a way that does not encourage boards of heritage railways to recoil - a result that would make failures more rather than less likely.

As a charity trustee, the professional advice I've been given is that the personal consequences of failure would not lie in connection with the failure, but in the quality of decisions taken based on the information available to take them. Or, in other words, we would not only have to make a bad decision, but to do so in defiance of information and advice that it were a bad decision. I believe the same basic test applies to Directors. The key implication therefore is that my duty as a trustee or director would not be met by digging in and avoiding anything bad happening, but requires me to go beyond to try to make "good" things happen. The Parable of the Talents very much applies here.

That leads to the questions about skills and experience. Where I'm a trustee-cum-director, I'm definitely in the category of "external" - though elected to that board, that election is not based on my specific knowledge of the charity but the electorate's trust in me to fulfil the role requirements for the duration of my term. However, that board is balanced by "internal" members with specific accountabilities, and all members (including co-options) are recruited on the basis with at least basic familiarity and involvement with the wider organisation.

Finally, I am far from convinced by the arguments for dramatic change as essential to success. The NYMR has achieved some good results, but from afar I can't see how either that grant or (especially) the Gift Aid on fares were essential to those results. Elsewhere on here, I've commented on another railway which faces challenges, and where it's far from clear that constitutional change is at the heart of resolving its challenges. My experience is that a great deal can be achieved within existing structures, without incurring the costs of structural change, and that where changes are essential, that they can be done without damaging the existing cultures of engagement or advancement. For example, Bluebell seem from my armchair to have managed this balance relatively successfully, with an especial focus on maintaining member democracy.

 

Again, this is not the right place to continue the argument, but the points have been made here and do perhaps have some relevance. It is said that the NYMR in the past has paid only lip service to its charitable aims, but I can't see that a great deal has changed in that respect, other than the recognition that there is money to be had from those charitable aims! I've yet to see any significant commitment or action to modify what the railway offers in order to reflect those aims. Heritage is seen as a commercial goal and little more.

 

Lineside conservation ( one of the new charitable purposes) for which the team, including a lot of new keen volunteers, won the Environmental Conservation Award at the HRA Dinner and Awards event last weekend?

 

.... but it has very little to do with running a heritage railway! Obviously the railway's linesides do need to be maintained, but it's a peripheral activity at best that can't and, really doesn't count, towards the financial performance.

 

It's all part of the wider heritage picture. Those who do not share the rallfan's enthusiasm often consider the railways effect on the natural world. Many heritage lines do take conservation matters seriously.

 

Indeed and the wider charitable purposes have resulted in the NPO grant of £750k so the assertion that conservation has no financial benefit is manifest nonsense.

 

£750k sounds like a lot but does that do anything beyond covering the cost of the conservation work (I.e., share of the overheads)?

The work is worth doing - which is valid reason for accepting the grant alone - but it’s not truly financial benefit (other than funding the work itself) unless is contributes more than the direct costs involved. Otherwise is an income and expense stream that doesn’t actually aid the bottom line in challenging times. The NYMR’s core purpose is never going to be maintaining a lineside that it can’t afford to run trains through!

 

The question that makes me curious is what difference this has made to the overall sustainability of NYMR as an organisation. It is clear (a) that grant givers have responded to conservation being a purpose and (b) that this has led to valuable income and (c) that a worthwhile project has resulted. What I can't tell from afar is whether this has made existing work happen better and in a better funded way, or whether it is effectively new money for new activity, or somewhere in the middle.

The relevance to this thread is not so much the specific answer - that will depend on some very specific facts and circumstances - but the wider implications for governance. If this is at the "existing work" end of the spectrum, then it raises questions about whether the governance is actually focusing on the heritage railway at the core of the operation, or would actually be a diversification, adding workload but without meaningfully contributing to the underlying operation.

That then comes back to the question of the purpose that the governance serves, and whether changes adequately represent the views and needs of the supporter base of the railway.

And then, coming back full circle, that then raises the important question of how members/shareholders can exercise their rights as part of holding that board to account if the effect of their policies is to the detriment of what those members/shareholders judge to be the primary purpose of the organisation (always assuming that they are working within it's legal purposes).

 

Grants are rarely given for the thing that we as railway operators might directly want. For example it would be hard to persuade a grant body to provide funds for a loco overhaul. However, obtaining funds to provide training opportunities or to educate an underprivileged group of people or something similar would be grantable. If the vehicle (pardon the pun) to delivery that objective is the overhaul of a steam engine then ….

I imagine the conservation project will needed a lot of tree maintenance or fencing work to be done.