Following the charity’s insolvent liquidation in 2015, the Official Receiver, an officer of the Insolvency Service, carried out an investigation into the management and affairs of the charity and the causes of its failure. The investigation culminated in director disqualification claims being issued against Kids Company’s former trustees and chief executive, Camila Batmanghelidjh. The High Court heard the case at the end of 2020.
Bates Wells acted for five of the seven former trustees: Richard Handover, Francesca Robinson, Jane Tyler, Andrew Webster and Alan Yentob.
Click on our FAQs to learn more:
- What was the case about?
- Why did Kids Company close?
- Why has the High Court come to a different conclusion to PACAC?
- Is the outcome of the case good or bad news for charity trustees?
- Was the Court lenient on the defendants because they were trustees of a charity?
- Would the result have been different if the Official Receiver had not focused on a single allegation of failure to operate a sustainable business model?
- Should the Charity Commission take the lead on disqualification cases relating to charities in future?
- I am a CEO of a charitable company. How can I avoid becoming a de facto director?
- Does this judgment mean that my charity does not need to hold reserves?
- Will there be an appeal?
- What is happening with the Charity Commission inquiry?
- How do I know if my charity is insolvent?
- What should I do if my charity might be insolvent?
What was the case about?
The Official Receiver sought disqualification orders on the grounds that the chief executive (whom he claimed was a de facto director) and the actual directors (trustees) were unfit to be concerned in the management of a company.
The main allegation was that the defendants caused or allowed Kids Company to operate an unsustainable business model and this was supported by a wide-ranging web of ‘mini-allegations’ regarding Kids Company’s operations, from low levels of reserves to policy compliance. There were no allegations of dishonesty or self-serving conduct, or criticism of spending on any individual. Instead the case concerned the alleged incompetence of the board and chief executive in their management of the charity and its finances in particular.
After a ten week trial, the High Court dismissed all of the Official Receiver’s allegations. The Court found that the chief executive was not a de facto director and that the trustees had made honest judgements within ‘the range of reasonable decisions’ in difficult circumstances in what they thought were the charity’s best interests and were “highly impressive and dedicated individuals who selflessly gave enormous amounts of their time to what was clearly a highly challenging trusteeship”. The Court also concluded that it would not have found the chief executive unfit had it found that she was a de facto director.
Why did Kids Company close?
Kids Company’s finances had become severely stretched by late 2014 and the charity sought additional government and other funding to ensure its survival. Negotiations with government were positive but slow and they did not proceed entirely as hoped. Nevertheless, by the summer of 2015 the charity had agreed a new package of funding from the government and philanthropists, linked to a restructuring of the charity, which was expected by all involved to be successful.
Just as the agreed government funding was received, a highly publicised police investigation was launched into 32 allegations of rape, sexual and physical assault at Kids Company. After battling negative publicity about the charity for many months beforehand, the trustees realised that Kids Company would not be able to secure all the income it required while a lengthy police investigation was under way. They therefore put the charity into insolvent liquidation.
Six months later the Metropolitan Police concluded their investigation having found no evidence on which to take further action.
In the High Court case the Court concluded that were it not for the unfounded allegations, it is more likely than not that the trustees’ planned restructure would have succeeded.
Why has the High Court come to a different conclusion to PACAC?
The outcome of this case may be surprising to anyone whose understanding of Kids Company’s closure has been informed by the Public Administration and Constitutional Affairs Committee’s inquiry into it or by press reports at the time.
While parliamentary committees play an important role in overseeing the work of government and the Civil Service they provide no substitute for a court hearing with its high standards of judicial independence and impartiality, careful examination of the facts and cross examination of witnesses. This is particularly the case in matters, such as the Kids Company case, which have party-political sensitivities and concern complex company, insolvency and charity law issues outside the expertise of committee members.
As one member of PACAC later acknowledged, the committee did not have time to conduct a thorough investigation, as is often the case for select committees. Indeed, the committee only interviewed one of the eight trustees against whom legal proceedings were subsequently brought.
Is the outcome of the case good or bad news for charity trustees?
The very existence of this case has shaken the confidence of a sector already struggling with regulatory burden. The case regularly comes up as a cautionary case study in the context of trustee training and board discussions. Although it is difficult to quantify its impact on trustee recruitment, a case of this nature carries a high risk of deterring able and experienced individuals from becoming or remaining charity trustees, as the Court recognised.
The defendants’ resounding victory is good news for charity trustees. It sends a clear message that bringing proceedings against trustees other than in the clearest of cases is not in the public interest and that trustees will receive the protection of the Court when making honest and reasonable judgements in the interests of their charity.
We hope that the outcome will restore confidence on charity boards and give hesitant individuals the assurance they need to take up a rewarding role which is vital to the proper functioning of society.
Was the Court lenient on the defendants because they were trustees of a charity?
There is a long-standing principle that the courts will look benevolently on volunteer charity trustees so as to recognise the efforts of those who give unpaid public service and not to deter people from becoming trustees. This principle was recognised in the case but did not form the basis of the Court’s decision.
The Court did not hold the defendants to a lower standard because they were trustees of a charity. Rather, the Court recognised, in accordance with established case law, that the Court must take into account the context in which a director is operating. An unpaid, part time, non-executive director who primarily discharges their functions at intermittent trustees’ meetings will not have the same level of control, knowledge and oversight as a paid executive director who is working at a company on a day-to-day basis. This is relevant to the Court’s determination of what the director knew and should have known and their actions during the period in question.
Would the result have been different if the Official Receiver had not focused on a single allegation of failure to operate a sustainable business model?
The Court made it clear that the claim failed as a matter of substance and in whatever manner the Official Receiver’s allegations were initially put or developed in the trial.
Should the Charity Commission take the lead on disqualification cases relating to charities in future?
The Court commented that it might be thought that the primary means of regulating charity trustees’ behaviour should be via the standards set by, and the enforcement powers of, the Charity Commission.
There are potential downsides to the Charity Commission adjudicating over this type of matter. The Commission’s procedure for making disqualification orders lacks some of the safeguards of proceedings under the Company Director Disqualification Act 1986 – the absence of a time limit for the making of an order and the oversight of a judge (unless the Commission’s decision is appealed to the Tribunal), for example. The effect of the Charity Commission’s disqualification power is wider than the effect of a disqualification under the Company Director Disqualification Act 1986. When a person is disqualified by the Charity Commission as a trustee, unless the Commission orders otherwise, they are also disqualified from holding an office or employment with senior management functions (in the charity concerned or in charities generally).
On balance, however, we would agree with the Court that the Charity Commission provides the better forum for disqualification cases. The Court remarked on the lack of experience that the Official Receiver had in relation to charities and how this inexperience led to inappropriate assumptions being made as to how charities operate and the contributions that trustees make. As the regulator for charities in England and Wales, the Charity Commission is charged by statute with the function of investigating and taking remedial action in connection with misconduct or mismanagement in the administration of charities and is equipped with the expertise, experience and resources to fulfil this function.
The Charity Commission also offers a quicker and less costly forum than the court. Director disqualification court proceedings are getting longer and a very high number of claims are settled before they reach court by individuals unwilling to face the uncertainties and potentially ruinous costs of litigation.
I am a CEO of a charitable company. How can I avoid becoming a de facto director?
It is acceptable (and common) for chief executives to attend board meetings, advise trustees and play an influential role in board decision-making but if a chief executive participates in the trustees’ decisions or acts on an equal footing with them in directing the affairs of the charity overall, there is a risk that they will have inadvertently assumed the role of a director. If you have concerns and would like to review your position, we offer a Role of the CEO: health check package which you may find helpful.
Does this judgment mean that my charity does not need to hold reserves?
No. Of course more liquid reserves would have been desirable and this was noted by the Court. However, it also recognised that:
- There is no legal requirement for reserves and their absence did not prevent unqualified audit opinions being provided to the charity;
- In this particular case, creating reserves was more easily said than done. The charity’s donors (including the government) were not willing to fund reserves and creating them would have involved diverting resources away from the rising demands of a children’s social care crisis;
- The trustees had made efforts to build up reserves and in the absence of cash reserves it sought to build up its asset base and obtained short-term, interest-free loans from supporters to manage cash flow issues. As part of the restructure plan, the trustees had made a cautious plan to build reserves from future income; and
- The charity would not have been able to survive even if it had had three months’ worth of reserves – that would have been “well short of what was required”.
In summary, not having reserves involved risks but it did not mean that the model was unsustainable.
Will there be an appeal?
No. The Official Receiver has not appealed the judgment and the deadline for an appeal has expired.
What is happening with the Charity Commission inquiry?
Shortly after the closure of Kids Company in August 2015 the Charity Commission opened an inquiry into the charity with a view to addressing ‘concerns about the administration, governance and financial management of the charity’ and identifying ‘wider lessons for other charities and trustees’.
The Charity Commission put its inquiry on hold pending the conclusion of the High Court proceedings and the outcome is now awaited.
How do I know if my charity is insolvent?
There is no statutory definition of “insolvency” but, in broad terms, an incorporated charity (such as a charitable company or CIO) is deemed under the Insolvency Act 1986 to be insolvent when either:
- It is unable to pay its debts as they fall due – the cash flow test; or
- The value of its assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities – the balance sheet test.
If either test applies, the charity will be insolvent.
Technically, an unincorporated charity (namely, a charitable trust or charitable unincorporated association) cannot become insolvent because it has no separate legal personality and liabilities will sit with those who incurred them – generally the trustees.
If the assets of an unincorporated charity are insufficient to meet its liabilities, the trustees may have unlimited liability to meet the shortfall from their personal assets. If they are unable to meet the liabilities personally, bankruptcy legislation will apply.
What should I do if my charity might be insolvent?
In many cases trustees should have sufficient information and processes in place to be able to identify the risk of insolvency at an early stage and manage the charity’s finances so as to put them back on a sound financial footing or take other action such as merger or an orderly winding up.
In some cases, however, insolvency can happen for charities in a matter of days. A charity’s finances might be struck by an unexpected blow, for example, where a charity is entirely (or almost entirely) dependent on income that is cut at short notice and cannot be readily replaced.
We have produced a short guide for trustees who are concerned about the solvency of their charity which sets out some of the key issues to consider.
If your charity is facing financial uncertainty and you are looking for guidance on the options available, our Crisis Decision Tool will provide you with a free, tailored guide to help you to think through the next steps.
This information is necessarily of a general nature and doesn’t constitute legal advice. This is not a substitute for formal legal advice, given in the context of full information under an engagement with Bates Wells.
All content on this page is correct as of April 27, 2021.