In an environment where the Charity Commission says that charities and trustees must be held to a higher standard, the Kids Company case showed a strikingly different approach by a High Court judge.
What was the case about?
In August 2015 the Official Receiver (the Government body that deals with company insolvencies) brought disqualification proceedings against the directors/trustees of Kids Company and its CEO, Camila Batmanghelidjh. The proceedings sought to disqualify them from acting as directors or managers of a company on the basis they were “unfit to be concerned in the management of a company”.
The Official Receiver alleged that the CEO was a “de facto director”, in other words she acted as a director despite not being formally appointed as one. The court considered this in the context of the overall governance structure of the charity, its schemes of financial delegation, the fact she was held out as “CEO” and her attendance at board meetings. Many charity CEOs will be comforted by the judge’s comments: “I do not agree with the suggestion… that any CEO of a charity doing a role that can be compared to that of a CEO of a commercial company is likely to be a de facto director”. The judge concluded that Ms Batmanghelidjh “had significant influence but was not part of the ultimate decision-making structure. She was not on an equal footing with the trustees and did not have the same, or equivalent, status or functions”.
The case against the trustees focused on whether they, and the CEO, were unfit because they had “caused and/or allowed Kids Company to operate an unsustainable business model” and knew that failure of the charity was inevitable without substantial action. The Official Receiver sought to demonstrate this by reference to Kids Company’s “demand led” model, alleged governance failings, a lack of reserves and inadequate financial controls as the charity grew, demonstrated by persistent cash flow difficulties. There was no suggestion that the trustees or CEO had acted dishonestly or in bad faith, or that there had been any inappropriate personal gain or inappropriate spending.
What did the court decide?
The court considered extensive evidence around the business model and the charity’s cash flow position, as well as the charity’s relationships with donors and Government. The Official Receiver asserted the charity was insolvent for much of the relevant period. The judge stated: “what this case is, or should properly be, about is whether the trustees did “too little too late” to address the financial risks associated with the model, particularly in terms of controlling expenditure and cutting costs”.
Ultimately the judge decided that although aspects of Kids Company’s business model were high risk, it was not ‘unsustainable’. There was a recognition that this business model was common in a sector that relies heavily on donations. She did not believe that it was unreasonable for trustees to carry on relying on the hope of future funds brought in by very effective fundraising, which the CEO had undertaken over the course of the charity’s life. In fact, had it not been for sexual assault allegations against the charity in July 2015, which turned out to be unfounded, it was likely that the charity would have survived.
The court, therefore, decided that the trustees and CEO were not unfit and should not be disqualified. On the contrary, the judge had “a great deal of respect for the care and commitment they showed in highly challenging circumstances”.
What are the implications?
Many of the issues discussed in this case are common for many charities, though perhaps not all at the same time. The judge was “struck” by the Official Receiver’s apparent lack of understanding of the charity sector. She also raised concerns about the way the case was brought and the penalties sought against the trustees. The judge was clear that the court would follow earlier legal decisions which suggested that, except where trustees were dishonest, they should be treated with a lighter hand, even when they made quite serious mistakes. This was a robust judgment and it seems unlikely that the Official Receiver will take action again in similar circumstances given the fairly firm rebukes against them.
The judge clearly recognised that the charity sector depends on the voluntary efforts of hundreds of thousands of trustees and that imposing unduly high standards on them and not treating them with a general approach of benevolence will have serious consequences in terms of recruiting appropriate people. She particularly pointed out that the sort of skilled and experienced individuals most needed to run complex and difficult charities were likely to be those most discouraged from acting as trustees if a tough approach was taken when things went wrong. She said that the purpose of her jurisdiction was to protect the public and that the public needed no protection from the trustees of Kids Company but instead praised them for getting involved and not walking away when things got difficult.
It will be interesting to see what impact the court’s approach will have on the Charity Commission’s increasingly tough regulatory stance. This stance involves substantial increases in the level of detailed guidance given to trustees, particularly in regulatory alerts, and suggestions that failure to follow Commission guidance could be a breach of duty which, like the alleged breaches of the Companies Act in this case, brings potential personal liability. It is to be hoped that the judgment will moderate the Charity Commission’s approach on the nature and extent of trustee duties.
Although the case is reassuring, it’s also a useful reminder of the importance of:
- as always, having accurate and up-to-date financial information available when making decisions;
- being clear on the role of trustees, and what is and what is not delegated to the CEO and staff team and within what boundaries;
- keeping careful minutes of decisions especially where the charity’s finances are challenging and in particular to consider the reasonableness of the assumptions trustees are basing decisions on; and
- having trustee indemnity insurance, which has its uses in exactly these sorts of cases.
Overall, this decision will be a relief to charity trustees, the vast majority of whom are unpaid volunteers who take on an already complex set of duties and responsibilities, as well as to many charity CEOs.