Charity trustees in the dock: the decision in Kids Company

In the seminal 225-page judgment Official Receiver v Batmanghelidjh and others [2021] EQHC 175 (Ch), the High Court dismissed the Official Receiver’s case to disqualify the former trustees and chief executive officer of the well-known children’s charity, Kids Company.

Mrs Justice Falk rejected claims that the defendants operated an unsustainable business model that led to the charity’s demise and were unfit to serve as company directors. She also dismissed allegations that the CEO was elevated to the position of director by virtue of the authority she exercised over the charity’s affairs.

This case has been long-awaited and is of interest to anyone working in the charity sector, particularly charity trustees and senior executives.

Kids Company – a recap

Kids Company (a charitable company subject to both charity and company law) was a high-profile charity founded in 1996 by Camila Batmanghelidjh and registered as a charity in 1998 to serve vulnerable children and young people in the UK. The charity operated a demand-led model of self-referral, with a policy of “never turning a child in need away”. Broadly speaking, this policy drove the charity to increase its expenditure before seeing growth in its income.

Camila Batmanghelidjh worked full-time as the charity’s prominent CEO since its inception. The Trustees were all unpaid volunteers and met approximately six times a year, with additional meetings of the Finance Committee and Governance Committee.

Amidst mounting debts, the charity entered insolvent liquidation on 11 August 2015. Following a protracted investigation, the Official Receiver issued a claim for disqualification orders against the defendants.

Claims brought against the defendants

The Official Receiver claimed that:

• Camila Batmanghelidjh should be classed as a ‘de facto’ director as a matter of company law. To establish that a person is a de facto director it is necessary to prove that they undertook functions in relation to the company that could properly be discharged only by a director.
• The CEO and the former Trustees were unfit to serve as company directors, as they operated an unsustainable business model from September 2013 and knew or ought to have known that the charity would inevitably fail.

No allegations of dishonesty, bad faith, inappropriate personal gain or any other want of probity were made against any of the defendants.

No case for disqualification

Mrs Justice Falk rejected the Official Receiver’s claims. Finding in favour of the defendants, she held that:

• The CEO was not a de facto director. Ms Batmanghelidjh had a significant degree of delegated authority from the board, which she may have, at times, exceeded. However, she remained subject to the authority and supervision of the board at all times and was not part of the charity’s ultimate decision-making structure. This is an important aspect of the decision, and we explore this in more detail in our article on Charity trustees and delegation of authority.
• The defendants were not aware, or ought reasonably to have been aware, that the charity’s business model would fail. Mrs Justice Falk recognised that some of the charity’s activities were high risk and that some criticism was due in relation to the increase in expenditure without secured income. However, the model operated was not unsustainable in principle. The fact that Kids Company was a charity dependent on charitable donations was very relevant to this assessment.
• The defendants’ conduct did not give rise to incompetence of a sufficient degree to warrant disqualification as company directors. The board had taken appropriate steps to manage its cash flow challenges and the charity might have survived had its reputation not been tarnished by unsubstantiated allegations in the run up to its collapse.

What does this mean for charity trustees?

This case reflects the benevolent approach historically taken by the courts towards charity trustees where there are no allegations of dishonesty or misconduct. Trustees of charitable companies are subject to the same test for disqualification as directors of other companies, but their non-executive function has to be taken into account.

Importantly, Mrs Justice Falk recognised that the essential and often challenging function exercised by charity trustees should have some degree of public protection (paragraph 911):

“The charity sector depends on there being capable individuals with a range of different skills who are prepared to take on trusteeship roles. Most charities would, I would think, be delighted to have available to them individuals with the abilities and experience that the Trustees in this case possess. 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. 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, and great caution is therefore required. This is particularly so for individuals otherwise involved in the management of businesses, and professionals for whom additional regulatory issues may arise: in fact, the sorts of individuals whose experience is often most needed. The result of proceedings being brought in other than the clearest of cases is likely to be to deter many talented individuals who take the trouble to understand and appreciate the risks either from charitable trusteeship at all, or at least from all but the most wealthy, well endowed, charities which are likely to have least need of their skills.”

Although the charity operated with recognised financial risks, Mrs Justice Falk carefully considered the decision-making process taken by the Trustees at the time and it is clear from the judgment that the test she applied was whether or not the decisions were reasonable. This is an illustration of the care taken by the court not to consider historic actions with the benefit of hindsight, and it also demonstrates that what matters is whether the Trustees can demonstrate the reasonableness of their decision-making at that time.

The Charity Commission launched a separate statutory inquiry into Kids Company in 2015, which has been on hold pending the outcome of this case. It will be interesting to see how the regulator will approach its inquiry and whether its views will fall in line with those of Mrs Justice Falk.

For now, this outcome will be a relief for many charity trustees and senior executives, already facing increased regulatory and compliance demands. However, while the judgment is positive for the sector, there remains a risk that the publicity surrounding the case could still have the effect of deterring people from becoming charity trustees.

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 governance arrangements, please get in touch with Liz Brownsell or another member of Birketts’ Charities Team.