The judgment in this case includes some interesting and important commentary on delegation of authority by charity trustees, which will be of particular relevance to large and incorporated charities (including charitable education sector bodies, such as academy trusts and independent schools), where the board of trustees delegates a significant degree of responsibility to individuals within the organisation.
Ms Batmanghelidjh founded Kids Company (a charitable company subject to both charity and company law) in 1996 and worked full time as its CEO since its inception. She devoted her life to helping vulnerable children and was widely recognised as “a compelling advocate for vulnerable young people”. The charity was large with a significant number of employees, including a senior executive team reporting to Ms Batmanghelidjh. The charity went into insolvent liquidation in 2015 and a case was brought by the Official Receiver to disqualify the former Trustees and CEO as company directors.
The Official Receiver claimed that Ms Batmanghelidjh was accorded a significant degree of authority by the board, and made many of the charity’s decisions, including entering into significant transactions on its behalf and making recommendations to the Board. It was alleged that she exercised a dominant role in determining and operating the business model and would always prioritise the needs of the charity’s beneficiaries.
In addition, it was alleged that the Trustees failed to exercise sufficient oversight over the charity’s decisions and affairs, and that Ms Batmanghelidjh had effectively assumed the role of director (de facto) of the charitable company. The Official Receiver claimed that the Trustees were “taking her lead, deferring key decisions to her and relegating themselves to reading reports, imparting advice and attempting to persuade her to allow the business to change tack”.
What is a ‘de facto’ director?
The term ‘director’ has a wide definition in the legislation and includes any person occupying the position of director. This encompasses a ‘de facto’ director i.e. any person that has not been validly appointed as a director but is held to have assumed that role.
To establish that a person has assumed the role of a director there is no single test applied by the court. It is necessary to consider the capacity in which that person was acting, the governance structure of the company (i.e. which functions were the sole responsibility of the board of directors), and what the individual actually did. It is necessary to prove that they undertook functions in relation to the company which could properly be discharged only by a director, and that they were on an “equal footing” with the properly appointed directors. As Mrs Justice Falk states at paragraph 167:
“There is a distinction between being consulted about, advising on or otherwise being involved in, decision-making in some other capacity (even in circumstances where real influence is exerted) and actually participating in making a decision as a director.”
It is a question of fact and degree, and the test is objective; the court may find that a person is a de facto director even if they believe in good faith that they are not.
What is delegated authority?
Charity trustees are ultimately responsible for the affairs of the charity and must ensure that the charity is properly administered and delivers the charity’s purposes. However, they may delegate authority to other individuals and committees within the charity where such delegation is permitted in the governing document.
In practice, charity trustees are usually unpaid volunteers and (particularly in larger charities) delegate a high degree of authority to the senior executive team to ensure the proper delivery of the charity’s purposes. However, there is often uncertainty around what degree of delegation is acceptable and what happens when that authority is exceeded.
What happened in practice within Kids Company?
It is clear from the evidence summarised in the judgment that Ms Batmanghelidjh was a strong CEO and a forceful character. She took responsibility for a number of important strategic decisions and there was also evidence that, at times, she exceeded her authority, acted without consulting the Trustees and failed to appropriately report material matters to the Trustees. For example, she agreed the (onerous) terms of a £500,000 loan without reference to the Trustees, and failed to notify them of material matters in connection with that loan.
Mrs Justice Falk comments at paragraph 641:
“Overall, I conclude that, consistently with her role as CEO, Ms Batmanghelidjh did take overall responsibility for expenditure as well as income. Furthermore, there was plenty of evidence that at times she got heavily involved in determining which creditors to pay and how much, for example in relation to HMRC, the self-employed and supporters who provided loans.”
The evidence considered by the court showed that Ms Batmanghelidjh operated under a very broad level of delegated authority, which resulted in her making the majority of decisions. Mrs Justice Falk comments at paragraph 588 that “the executive team, led by Ms Batmanghelidjh, had the most significant role in developing strategy, with the Board being less involved in its formulation than at least some Trustees would have preferred”. There was also evidence that there was room for improvement in relation to the rigour of challenge by the Trustees on major issues.
What did the court decide?
Notwithstanding the significant role performed and functions undertaken by Ms Batmanghelidjh, Mrs Justice Falk rejected the Official Receiver’s claim that her delegated authority was excessive and had elevated her to assume the duties of a ‘de facto’ director. At paragraph 788 she states:
“My overall conclusion is 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. On the contrary, each of Ms Batmanghelidjh and the Board had a distinctive status and functions. In short, Ms Batmanghelidjh did not have an equality of ability to participate in decision making at the highest level. She was accountable to the Trustees and subject to their supervision and direction.”
In her judgment, Mrs Justice Falk held that:
- Ms Batmanghelidjh occupied a prominent role in the charity and had a significant degree of delegated authority from the board. However, “centrality would be typical of an effective and committed CEO”. When carrying out executive functions a CEO is carrying out functions delegated by the Board, and is subject to supervision and control by the Board as a whole. This is the case even if the extent of delegated authority is significant.
- While Ms Batmanghelidjh did not always comply with the delegated authority laid down by the Trustees, this finding was not sufficient to put her on an equal footing with the Trustees.
- A higher degree of delegation is often required for incorporated charities (which are usually comprised entirely of volunteer directors) and larger charities, to effectively manage the charity’s operations.
- The Trustees rightly delegated responsibility for the running of the charity to the CEO and staff, in accordance with the charity’s governing document and scheme of delegation. The Board’s supervision and control was exercised in a “light touch” manner, but supervision was exercised and, where considered necessary, controls were imposed. The way in which supervision was managed was reflective of Ms Batmanghelidjh’s importance to the charity and its operations.
- The fact that the Trustees are unpaid volunteers and there is a paid executive team with responsibility for day to day management must affect the part that the Trustees could reasonably be expected to play.
In her judgment, Mrs Justice Falk commented as follows at paragraph 706:
“Whilst many smaller charities will have Board members who take on day-to-day management roles, larger charities, and certainly those on the scale of Kids Company, routinely have full-time paid management teams, and in reality can only function with them. A CEO can properly provide leadership of the management and operations of the charity on a day-to-day basis, and the directors can properly rely on his or her judgment, information and advice, provided that he or she is supervised and (ultimately) controlled by the Board.”
What does this mean in practice?
This judgment is likely to provide reassurance for many charity trustees (including education sector charities, such as academy trusts and independent schools) who delegate significant responsibilities to senior staff to run the organisation, and for senior executives exercising those delegated powers. However, it is important to note that a key feature of Mrs Justice Falk’s judgment was supervision.
Mrs Justice Falk agreed that it is entirely appropriate, particularly for larger charities, for the charity trustees to delegate authority to committees and senior management, and to rely on those individuals to implement decisions on the ground. She was also clear that exercising and even, at times, exceeding that authority was not enough to elevate an individual to the position of director. However, this does not absolve the charity trustees of responsibility, and they must ensure appropriate oversight, supervision and control over all persons to whom functions are properly delegated.
It is also important to note the context in which the issue of de facto directorship was considered in this case. The Supreme Court decision in Revenue and Customs Comrs v Holland, In re Paycheck Services 3 Ltd  1WLR 2793 (which is the leading case) makes it clear that the concept of a de facto director need not be given the same meaning in every context. In this case, the issue was considered in the context of disqualification legislation, and it does not necessarily follow that the same tests will apply in other situations.
The other key point to consider in respect of this decision is that it related solely to the question of whether or not the CEO was a de facto director as a matter of company law. Although the charitable nature of the company was relevant to the decision, Mrs Justice Falk did not have to consider the legal definition of “charity trustee” under s177 of the Charities Act 2011 or the extent to which Ms Batmanghelidjh might be deemed to be a charity trustee in accordance with that definition, and therefore owe duties to the charity as such. The Charity Commission launched a separate statutory inquiry into Kids Company in 2015, which has been on hold pending the outcome of this case. The inquiry will be considerably broader in scope than the specific decision considered in this case. It will be interesting to see how the regulator will approach its inquiry and, in particular, whether the outcome will be different in view of its broader scope.
Whilst the judgment does provide helpful guidance and reassurance for charity trustees that significant levels of delegated authority does not necessarily result in senior executives being deemed to have assumed the position of a trustee (appropriate supervision and controls being of central importance in this regard), care should always be taken to consider what is appropriate for your particular charity. The sector is incredibly diverse, and what is appropriate for any given charity will depend very much on the activities, risks and circumstances that apply. Charity trustees always need to ensure that any delegations are within their powers, appropriate for the charity, and do not compromise their ability to satisfy their duties as charity trustees. For some exempt charities, it is also important to consider any additional regulatory requirements of the principal regulator. For example, academy trusts are subject to additional regulatory requirements from the ESFA, so it is important for the charity trustees to ensure that they are following the latest guidance in the Academies Financial Handbook and Governance Handbook, and prepare a robust scheme of delegation in line with these requirements.
The content of this article is for general information only. If you have any concerns about the implications of this case for your charity, or you require advice on any aspect of your delegations arrangements, please get in touch with Liz Brownsell or another member of Birketts’ Charities Team.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at May 2021.