Many of us will remember the dramatic collapse of the charity, Kids Company, in 2015 shortly after receiving a £3 million grant from the Government. Following the financial failure, the Official Receiver had sought disqualification orders under section 6 of the Company Directors Disqualification Act 1986 (CDDA 1986) against the seven trustees of Kids Company and its CEO.
The focus was on the single allegation of ‘unfitness’, meaning that the defendants had allowed Kids Company to operate in an unsustainable way. The case also looked at whether the CEO, Ms Camila Batmanghelidjh, was a de facto director and should also be disqualified.
One of the main criticisms was that they had allowed the charity to operate with such small financial reserves that it was tantamount to incompetence.
The legal test for disqualification
The test for disqualification under section 6 of the CDDA 1986, in addition to the principle of protecting the public under section 7(1) CDDA, has two stages to satisfy:
- An allegation about the defendant’s conduct must be proved; and
- The court must be satisfied that the conduct complained of, insofar as it has been proved,justifies a finding of unfitness. In the context of a case based on allegations of incompetence, this means demonstrating incompetence of a 'high degree'.
The presiding judge, Justice Falk, found that the single allegation of ‘unfitness’ had not been madeagainst the trustees and, therefore, no disqualification orders were made.
My own personal comment is that this judgement is a huge relief for those in the sector who, like me, have become increasingly concerned by the level of perfection that is expected from Trustees.
Trustees are volunteers who, without reward, give time and whatever skill they may have to serve their charity and without which it simply could not operate. The level of expectation on what they should do, the detail at which they are supposed to grasp ever increasing amounts of regulation on an enormous breadth of areas and the personal impact on them if something goes wrong is huge. Not only does this mean that it can become very onerous but it is increasingly difficult to recruit those that want to take on what appears a ‘thankless task’.
I will make no further comment but allow the judgements from Justice Falk to speak for themselves (highlights added).
“Reserves … would have been desirable …[but]… It is also important to note that there is no legal requirement for reserves”
…” and their absence did not prevent unqualified audit opinions being provided. Creating reserves would have involved diverting resources from meeting the increasing level of need that the charity existed to serve”.
“….The decision to prioritise spending on charitable objects is one that, in my view, the trustees could reasonably reach”
[Kids Company was also subject to allegations of sexual abuse in 2015 (which proved to be unsubstantiated) which had a significant impact on the funding of the charity. Justice Falk did not agree with the official receiver’s assertion that “if it had appropriate reserves, Kids Company would have been able to survive notwithstanding the unfounded allegations”.]
On disqualification of trustees
“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 [dissuading able and experienced individuals from becoming or remaining charity trustees], and great caution is therefore required.”
“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.”
Reference was also made to the longstanding position of the court in taking a “benevolent approach to charity trustees in circumstances where (as here) no dishonesty or wilful misconduct is alleged.”
On trustee supervision:
The expenditure on children was criticised by the official receiver, who argued that ‘the level of trustee scrutiny was inadequate and poorly recorded’. Justice Falk disagreed and found that the trustees exercised regular scrutiny of costs and (importantly) as volunteers could not be expected to oversee the spending on every single child which numbered tens of thousands a year.
The relationship between the trustees and the CEO was “very good” and while the CEO may have had a strong personality, it was arguably necessary for such a role and the trustees confirmed they felt able to challenge her. It was held that in this case the CEO was not a de facto director, and no disqualification order was made against her.
Other practical issues that were shown during the case (which suggested the trustees sought to ensure the best outcome for Kids Company and to manage the risks)
- The trustees and sub-committees met regularly (often monthly)
- There were several external independent reviews of the charity’s financial management and governance
- The trustees were appropriately skilled and held relevant expertise which could be applied to the charity’s needs and where necessary, this expertise was suitably relied upon
- The trustees regularly sought legal and financial advice
- The charity had stringent and appropriate policies relating to finance and governance
- The trustees held reasonable expectations of their voluntary responsibilities in comparison to paid members of staff
- The trustees understood the purpose of statutory accounts being fair and balanced
- The CEO’s job description clearly set out her managerial responsibilities in addition to the board’s overall control
- The board recognised the financial difficulties of the charity and took steps to improve its stability
- There was communication between the senior management team, the CEO and board of trustees despite disagreements.