Member Article

Many people will be aware of the collapse of Kids Company from press coverage in the last five years or so but may be surprised by the outcome of the court proceedings involving the individuals who ran it.

What has just been decided?

Kids Company was a well-known charity which provided support to vulnerable children and young people. After nearly 20 years of operation it closed in August 2015 following the launch of a police investigation into allegations of sexual abuse at the charity, which subsequently proved unfounded. On the same day the allegations emerged, the Cameron government had released £3 million for an emergency restructure.

In the following months, the House of Commons Public Administration and Constitutional Affairs Committee (PACAC) held an inquiry into the collapse of Kids Company, interviewed its CEO Camila  Batmanghelidjh and chair of trustees Alan Yentob, three professionals who had audited or reviewed the operation of the charity and several government ministers, before producing a hard-hitting report in January 2016 entitled “The collapse of Kids Company: lessons for charity trustees, professional firms, the Charity Commission and Whitehall.”

The report stated:

“Primary responsibility for Kids Company’s collapse rests with the charity’s trustees… if the trustees had not allowed the charity’s weak financial position to persist for so long, Kids Company would not have been so vulnerable to the impact of the allegations. The board failed to protect the interests of the charity and its beneficiaries, despite its statutory responsibility to do so….The Charity Commission’s guidance to trustees warns that trustees should not allow their judgement to be swayed by personal prejudices or dominant personalities, but this is what occurred in Kids Company. This resulted in trustees suspending their usual critical faculties [in respect of Ms Batmanghelidjh’s operation of the charity]… The chief executive and trustees relied upon wishful thinking and false optimism and became inured to the precariousness of the charity’s financial situation.”

Fast forward just over five years to the conclusion of proceedings brought by the official receiver seeking to disqualify the Trustees and the CEO from acting as company directors under section 6 Company Directors Disqualification Act 1986. There are two sides to every story and after more than seven weeks of submissions and witness cross-examination late last year it is difficult to recognise the same situation described by PACAC in the judgment of Mrs Justice Falk released on 12 February, dismissing the claim:

“…The public need no protection from these trustees. On the contrary, this is a group of highly impressive and dedicated individuals who selflessly gave enormous amounts of their time to what was clearly a highly challenging trusteeship. I have a great deal of respect for the care and commitment they showed, and the fact that they did not take the much easier path of not getting involved in the first place or walking away when things got difficult.

“…there were…plenty of examples of the trustees questioning Ms Batmanghelidjh’s actions and seeking to ensure that controls were adhered to. The Trustees did not simply acquiesce. They obviously recognised that care and some sensivity was required in dealing with Ms Batmanghelidjh, but that is far from atypical in relation to key members of an organisation. It did not prevent robust challenge, and the imposition of controls, when they considered it to be necessary.

“…I have concluded that in all the circumstances the trustees did not act unreasonably in taking account of an expectation of support from the government. In particular [at the relevant time] the trustees were still genuinely, and not unreasonably, hopeful of substantial additional statutory funding being found…”

What accounts for these very different narratives?

PACAC is the principal select committee to which cabinet ministers are accountable. As such, it wanted to understand why ministers agreed to provide further, emergency, funding to one particular charity despite civil servant advice to the contrary, at the time the charity collapsed.

It gathered evidence from eight people and reported five months after Kids Company was wound up.

On the other hand, the court proceedings were the culmination of a two-year investigation by the Insolvency Service. That investigation resulted in allegations that the trustees caused/ allowed Kids Company to operate an unsustainable business model and were therefore unfit to be concerned in the management of a company.

The judge highlighted that unfitness (with no allegation of dishonesty) meant incompetence of a high degree. The burden of proof on the official receiver was a heavy one, bearing in mind the serious nature of a disqualification order. The official receiver sought to disqualify these Trustees for periods ranging from 2 ½ to 6 years. It is clear from the judgment that Mrs Justice Falk considers the official receiver overreached himself in bringing these disqualification proceedings.

She said she was “struck by the lack of experience that the official receiver had had in relation to charities, in particular the failure to give full recognition to the fact that it is common for charities to be heavily dependent on donations…”

The Judge set out a series of recommendations for consideration by the official receiver before bringing future disqualification cases. These include a recommendation that the primary means of regulating trustees’ behaviour in practice should be via the standards set by, and the enforcement powers of, the Charity Commission, being the regulator with the most appropriate expertise.

What next?

The Charity Commission opened its own statutory inquiry into Kids Company the day after the charity was wound up in August 2015. This was put on hold pending the outcome of these court proceedings. It will be interesting to see the Charity Commission’s conclusions in light of this judgment.

For now, the judgment brings relief not only to Ms Batmanghelidjh and the seven former charity trustees of Kids Company, but to everyone who serves on a charity board or who may consider becoming a charity trustee.

The judge was alive to considerations of public policy. She noted that the charity sector depends on capable individuals with a range of different skills taking on trusteeship roles and that it is vital the actions of public bodies do not dissuade able and experienced individuals from becoming or remaining charity trustees. Disqualification proceedings, or the perceived risk of them, based on wide ranging but unclear allegations of incompetence rather than any want of probity, carry a high risk of having just that effect. Great caution is required before initiating them.

She reminded us that, while the responsibilities of charity trustees are significant, as fiduciaries they are afforded wide discretion over how they discharge them in deciding how to best advance their charity’s purpose. The decisions the trustees of Kids Company made “…were matters of honest judgement, made in difficult circumstances in what they thought were the best interests of the charity. The official receiver has not demonstrated that decisions that the trustees took, or failed to take, in the factual context were outside a range of reasonable decision-making…”

At a time of great strain for many charity trustees doing their best in very difficult circumstances to discharge their duties this judgment will provide some welcome reassurance.

 

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