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22nd June 2021

Taxpayer faces large bill for Kids Company legal costs

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Kids Company was founded in 1996 and registered as a charity in 1998 with the object of supporting vulnerable and disadvantaged young people. In 2015, the charity faced financial difficulties following unfounded allegations of abuse and the trustees petitioned for it to be wound up. 

Two years later, the Official Receiver brought disqualification proceedings against the CEO, Camila Batmanghelidjh, and all eight trustees, alleging that they managed the charity incompetently in the two years before the charity was wound up.

The Official Receiver claimed that the defendants individually and collectively caused or allowed Kids Company to operate an unsustainable business model and that they knew or ought to have known that the charity’s failure was inevitable if corrective action was not taken.

The case concerned a novel issue, namely that Camila Batmanghelidjh should be disqualified even though she was not a trustee of the charity because the Official Receiver claimed that she acted as a de facto trustee.

Not only did the Official Receiver fail in its claims, but it attracted criticism from the judge, Mrs Justice Falk, for the way it conducted proceedings. In addition to its failed attempt to introduce further claims against the defendants for breach of directors’ duties under the Companies Act 2006 in its opening submissions, the Official Receiver was deemed to have conducted an “oppressive” case because it lodged large amounts of paperwork which were of little use or relevance to the proceedings.

In her decision, Mrs Justice Falk held that Camila Batmanghelidjh was not a de facto trustee because, although she did exert significant influence within the charity, she did not act on an equal footing with the trustees and was subject to their supervision, oversight and control. By extension, she could not, therefore, be disqualified.

As for the eight trustees, Mrs Justice Falk noted that the Official Receiver had brought claims for different periods of disqualification against each trustee and had not explained the basis of each claim. The Official Receiver must clearly show why disqualification is sought and why a certain disqualification period is appropriate, but it failed to do so.

Mrs Justice Falk found it highly relevant that Kids Company was a charity, rather than a limited company, and while she agreed with the Official Receiver’s submission that charity trustees are subject to the same duties as directors of limited companies, the court should adopt a benevolent approach towards charity trustees. The reasoning was that, since a charity operates for public benefit rather than private profit, charity trustees should be afforded more leeway before they can be deemed unfit to be trustees and therefore disqualified.

Furthermore, she held that in Kids Company’s situation, its “demand led” funding model, although high risk due to reliance on grants and loans, was not the direct cause of the charity’s insolvency. Instead, the charity’s failure was caused by reduced access to funding as a result of the unfounded abuse allegations, which was beyond the trustees’ control. They could not, therefore, be held responsible for the charity’s failure and would not be disqualified.

This case highlights two important points:

  1. Charity trustees will be held to a lower standard than company directors before they will be disqualified. This should serve as some comfort to trustees of smaller charities who are more likely to have to deal with limited resources and experience. However, it should not be used as an excuse for poor governance.
  2. The Official Receiver must bring substantiated claims, otherwise it will receive public condemnation of its actions. CEOs will not be deemed de facto trustees unless the Official Receiver can produce concrete evidence to support its case. Being influential in a charity is not enough – the CEO must be the sole person directing the affairs of the charity or holding themselves out to be a trustee and acting in the role of a trustee when they are not so entitled.

Unfortunately, the taxpayer now faces a large bill for the legal costs of this case, estimated to be in the region of £8 million. Given the strong condemnation directed towards the Official Receiver by the judge and subsequent negative press coverage, it is hoped that cases of this nature will not be brought before the courts unless there is a clear claim to answer.

If you would like to speak with a member of our charities team about trustees’ duties or charity governance, please contact us here.