High Court victory for Kids Company

Fiona Wharton and Daniel Lewis of Wrigleys Solicitors LLP dive deeper into what can be learnt.

Few cases involving a charity have been as widely reported, not only by the charity sector press but also the wider media, as that involving the collapse of the well-known charity Kids Company in 2015, with its connections to high profile figures and organisations in the media and politics.

Six years after the charity went into administration, the High Court issued its decision in February this year in response to the claim brought by the Official Receiver against its trustees and chief executive. The 225-page judgment, which was notably damning of the Official Receiver, in particular its knowledge of how charities are structured, found that the trustees were ‘highly impressive and dedicated’ and that disqualification from acting as directors which the Official Receiver had sought against the trustees and chief executive, the latter for acting as a de facto director, would be unmerited.

It is worth noting that at no point were there any allegations of dishonesty or wrongdoing or breach of duty.

Kids Company, like many charities, was established as a charitable company limited by guarantee. Its trustees were volunteers, as are the vast majority of charity trustees and were therefore both trustees for the purposes of charity law and company directors under company law. As a company it was also subject to the corporate insolvency regime.

The case raised several interesting points which the charity sector has been watching closely and Mrs Justice Falk, clearly mindful of the public policy interest, shed some useful clarity on these issues in her judgment.

Was Camila Batmangelidjh in her role as Chief Executive effectively a de-facto director?

There is no single test to establish this. The court examines whether the individual is on an equal footing with others in directing the affairs of the company and if they are involved in decision making, even if they are not formally appointed as a director. Batmangelidjh made recommendations to the trustees and attended trustee board meetings, was critical to the functioning of Kids Company and entered transactions on its behalf. Mrs Justice Falk concluded that while Batmanghelidjh did wield significant influence she was not part of the ultimate decision-making structure, was not on an equal footing with the trustees and did not have the same status. She cited a number of examples of instances where it was clear that the chief executive had been answerable to the trustees’ direction and had to follow their decisions.

The court also reassured trustees on their power to delegate authority to executive management, as it found Batmanghelidjh was always subject to the trustees’ supervision, even though she enjoyed substantial delegated authority.

For charities in a similar position, it is a good idea to have a clear scheme of delegation as well as decision making protocols and to review these regularly.

The question of an unsustainable business model

The judge examined whether the directors caused and / or allowed Kids Company to operate an unsustainable business model and did their conduct therefore make them unfit to be involved with the management of a company. The judgment highlights that unfitness means incompetence to a high degree, provided there is no allegation of dishonesty. Mrs Justice Falk dismissed this allegation, providing reassurance to trustees that if they act honestly there is a very high bar for their conduct to demonstrate unfitness.

She further commented on the structure common to many charities which might not be in a position to build up substantial reserves and are, in any event, obliged to spend charitable funds delivering their charitable purposes. Mrs Justice Falk’s view was that the Official Receiver was incorrect to make a direct comparison with the business model of a purely commercial company. Her view was that it was not possible to say that Kids Company might not have survived, if the (unfounded) allegation of sexual misconduct had not been made. The allegation was investigated in July 2015 by the Metropolitan Police and it led to the withdrawal of several offers of financial support.

The charity sector, while acknowledging the challenges it faces, breathed a sigh of relief that her judgment had not gone the other way.

Were the directors and Batmanghelidjh unfit?

The judgment states that the ‘public need no protection from these trustees’. Mrs Justice Falk did not find the defendants unfit to be concerned in the management of a company. The court confirmed that trustees of charitable companies are subject to the same duties as directors of other types of companies, however the charitable context should not be disregarded; again a clear distinction made between charitable and non-charitable companies. The judgment states that the conduct leading to a finding of unfitness in a commercial company director does not automatically lead to the same conclusion in a charitable company and therefore potentially provides charity trustees with a greater degree of protection, provided they make honest judgments that a reasonable person would have made and act in what they consider the best interests of the charity.

Trustees must continue to be mindful of the need for trustees to be clear in their decision making, for decisions to be justifiable and to make a written record of all decisions and reasons for them.

Further implications

The judgment heavily criticised the Official Receiver’s lack of understanding of the charity model, particularly the concept of non-executive boards. Mrs Justice Falk’s view was that the Charity Commission, as regulator of the sector, should be the body that deals with matters of this kind through the statutory powers it holds and standards it sets for the sector.

Charity trustees should therefore ensure they always familiarise themselves with the extensive guidance the Charity Commission has published on trustee duties and responsibilities.

The judgment notes that the charity sector depends on the voluntary commitment of individuals taking on trusteeships and that the threat of disqualification proceedings might negatively impact trustee recruitment. Charity trustees have fiduciary duties that sit alongside a wide discretion in determining how to advance their charity’s purposes within an increasingly regulated sector. This case suggests that in the event of an allegation, the conduct of the trustee, as much as their skills and experience, will be considered by the court. Mrs Justice Falks was complimentary about the Kids Company’s trustees and how they had stuck with Kids Company through such a difficult period. Trustees should be reassured that if they act honestly and in the best interests of their charity, their position will be upheld. Volunteer trusteeships remain in the interests of the public good following this judgment.

What happens next

The Official Receiver has stated recently that it will not seek to appeal the judgment. That case is therefore closed.

The Charity Commission had opened an investigation into Kids Company but this has been on hold, pending the case brought by the Official Receiver whose claim takes precedence over the Commission. It is expected that the Commission will issue its findings in due course. It has, however, said that it will not bring any regulatory action against the trustees but we await the findings with interest.

Fiona Wharton, Partner
Daniel Lewis, Assistant Solicitor
Wrigleys Solicitors LLP

The opinions expressed in this document are not necessarily the views held through Brewin Dolphin.