The former trustees and CEO of high-profile charity Kids Company have won a High Court case against the Official Receiver, in its bid to disqualify them as directors for alleged mismanagement of the charity in the run up to its 2015 collapse.
Kids Company was established in 1996 and developed to provide a wide range of support to disadvantaged and vulnerable young people in London and throughout the UK. The charity’s development was driven by its charismatic CEO, Camila Batmanghelidjh, and other high-profile trustees and supporters.
As demand for the charity’s services grew, so did financial pressures, and by late 2014 there were indications of financial trouble. A proposed restructure (involving a £3m grant from the Government) was planned in early 2015, but unfounded safeguarding allegations at the charity hampered potential rescue efforts. In August 2015 the charity was declared insolvent.
- The claim by the Official Receiver
After a two-year investigation, the Official Receiver brought a case to disqualify Ms Batmanghelidjh and seven former trustees of the charity from being company directors. This was on the basis of a single allegation of unfitness, namely that “the defendants caused and/or allowed Kids Company to operate an unsustainable business model”.
Although Ms Batmanghelidjh was never a trustee of the charity, it was the Official Receiver’s position that through her role as founder, CEO and driving force of the charity, she was, in effect, a de facto trustee, and should also be subject to disqualification.
Despite the high level of notoriety this case has gained, there was no allegation of dishonesty, bad faith or other inappropriate gain, and the matter was limited to the single allegation of ‘unfitness’.
The case was heard at the High Court in November and December 2020, with Justice Falk presiding.
In its judgment, the Court dismissed the Official Receiver’s case for disqualification and found the trustees did not (either individually or collectively) allow Kids Company to operate an unsustainable business model.
While the Court found that elements of the charity’s business model (such as its ‘demand led’ approach, low levels of reserves and a high dependency on donations) made for a “potentially high-risk enterprise”, it did not mean the model itself was unsustainable.
When financial difficulties came to light in late 2014 (caused in large part by the costs of ever-increasing beneficiary services) the trustees took necessary action. This included the proposed re-structuring of the charity and the securing of additional Government funding. Had it not been for the subsequent safeguarding allegations, the Court concluded that these steps would “more than likely have been enough” to save the charity.
Despite her integral role in the charity, the Court also found that Ms Batmanghelidjh was not a de facto director. It disagreed with the Official Receiver’s argument of Ms Batmanghelidjh’s dominance, and concluded that while she had significant influence, she was not on an equal footing with trustees and was not part of the ultimate decision-making structure. Had Ms Batmanghelidjh been a de facto director, the Court concluded that no disqualification order would have been made against her, in any event.
- Disqualification orders
The decision is likely to be welcomed in the sector, and helps provide clarity on the approach the Courts are likely to take when considering disqualification orders for trustees.
The Judgment showed an appreciation for the unique, and often challenging, environments that charities work in, and was critical of the Official Receiver for not having a better understanding of how many charities operate in practice.
It also recognised the importance of charity trustees within the sector, and the detrimental impact that an unwarranted threat of disqualification might have, stating “it is vital that the actions of public bodies do not have the effect of dissuading able and experienced individuals from becoming or remaining charity trustees”.
The judgment suggests a high threshold will be set when considering disqualification orders for trustees in similar situations, and the particularities of the charity sector will be a relevant factor when doing so. This should help provide some reassurance for trustees, particularly those involved in naturally “high risk enterprises”.
- De facto trustees
In reaching its decision that Ms Batmanghelidjh was not a de facto trustee, the Court confirmed that it was necessary to look at all relevant factors and to assess any matter in the round. While from an outside perspective Ms Batmanghelidjh may have appeared a de facto trustee (given her leading role within the charity), in reality she had a distinctive status/function to the trustees and was ultimately “accountable to the trustees and subject to their supervision and direction”.
This suggests that, even in cases where a charity has a prominent leader, the determination of what status they have will be based on the facts of how they operate in practice, rather than any perceived role or position in the charity. While certain individuals, particularly CEOs and founders, may exert additional influence at charities, this does not automatically mean they are to be considered de facto trustees.
However, this judgement should not be taken as saying the risk of an executive being seen as a de facto or shadow trustee could not exist in other settings; trustees should continue to ensure that they are the people having general control and management of the charity and must provide oversight and strategic direction.
- Charity Commission Regulation
As a side note, the judgment also suggested that the Charity Commission, rather than the Courts, may be best placed to consider similar cases of this nature in the future, stating, “it might be thought that the primary means of regulating trustees’ behaviour, at least in practice, is and should be via the standards set by, and the enforcement powers of, the Charity Commission”. This may also provide some reassurance to trustees, who are perhaps more likely to be accustomed to the powers and procedures of the Commission, rather than the Courts.
- Charity Commission investigation
The Charity Commission opened its own statutory enquiry into Kids Company in 2015, though this has been on hold since the action of the Official Receiver began. The conclusion of these proceedings should now pave the way for the Commission’s report to be published soon. The report is expected to address concerns about the administration, governance and financial management of the charity, and identify wider lessons for other charities and trustees.