What can we learn from the Kids Company judgement?

10 January 2022 | By Naomi Chapman

In February 2021, the High Court gave judgement in the Kids Company trial, which saw seven directors and the chief executive of the charity defended against a motion to have them disqualified as company directors – essentially meaning they could not take on future Trusteeships or senior roles at charities for 15 years.

In the end, the judge ruled that no disqualification was necessary.

In December 2021, it was announced that £10million of public funds were spent on this failed case, with the scale of this expense attributed to the complexity of the issues, and the impact of the collapse of Kids Company on public confidence in charities.

The prosecutors claimed that disqualification was in the public interest and that “it is important that lessons are learned for the future”.

So after such significant expense, what can we as charity Trustees learn from this case and judgement?

 

The Facts Around Disqualification

The Charity Commission sets out numerous automatic disqualification rules, which prevent an individual from becoming a Trustee, such as unspent convictions for offences involving dishonesty, misconduct in public office, or money laundering.

However, the Charity Commission also possesses a discretionary disqualification power, which can disqualify an individual from being a Trustee if they are deemed unfit, or if their disqualification is in the public interest.

It was through a discretionary disqualification that the Official Receiver – a branch of the Civil Service working on behalf of the Insolvency Service - sought to disqualify Kids Company founder Camilla Batmanghelidjh and seven Trustees.

The case raised numerous contentious points regarding Trusteeship and the charity sector:

  • Governance vs Executive Function: the case against Batmanghelidjh was that in fulfilling her role as CEO, she was acting as Trustee, and thus should be disqualified from future Trusteeship roles. This argument was rejected.

    It is crucial that Trustees understand the difference between governance and executive functions. While a CEO can be the figurehead for an organisation, they are only ever carrying out a role under delegated authority from the board, and with proper oversight. As such, Batmanghelidjh could not be considered to have decision making powers akin to a Trusteeship.

    In your governance role, consider which decision areas are delegated to the CEO and executive leadership team, and where decisions are retained for the board. Where Trustees take on executive roles – for example in small charities with limited paid staff capacity – ensure it is clear where they are acting in their Trustee role, and where they are taking on an operational volunteering role.

 

  • The Importance of Trustee Indemnity Insurance: while the case cost the public purse £10million, the Kids Company Trustees and Founders did not receive any financial support for their defence from public funds. It is for situations like this which Trustee Indemnity Insurance is crucially important – while Trustees may hope to never need to use it, this covers against claims including breach of duty or trust, negligence, and error or omission.

    It will not, however, provide protection where Trustees have acted recklessly or dishonestly, or to cover an unsuccessful criminal defence.

    Trustee Indemnity Insurance can now be paid for with charity funds if costs are reasonable and in the best interests of the charity unless a charity’s governing document explicitly forbids its purchase. In these instances, Trustees can buy insurance out of their own pockets if they wish.

 

  • Lack of Understanding of the Charity Sector: the claim being made against the charity Founder and Trustees was that they had failed to oversee the charity properly, causing its 2015 collapse. Arguments used in support of this claim were that the Trustees had allowed an unsustainable business model to operate, where the charity was largely dependent on donations.

    The Official Receiver who brought the claim against the defendants is a government body that acts on behalf of the Insolvency Service across all sectors, but primarily in the private sector. The judge in the trial said:

    “incompetent conduct which might merit a finding of unfitness in a director of a commercial company would not necessarily lead to the same conclusion in a different, charitable, context”

    This is an interesting – and potentially contentious – remark, that links to the increasing expectations of voluntary Trustees and debate around what is reasonable to expect from those taking on this role.

    The judge also highlighted that the Official Receiver had a lack of knowledge about charities’ business models, as displayed by its criticism of Kids Company being reliant on donations, and its allegations that in working as a CEO, Batmanghelidjh was adopting a Director (or Trustee) role.

    The differences between charities and commercial businesses is becoming increasingly nuanced as earned income provides an increase proportion of income to the sector. However, the status retains a unique position and any commercial activity undertaken by charities should be clearly defined as either primary purpose (furthering the mission of the charity) or non-primary purpose (raising money for the charity but not furthering its mission).

    While there isn’t a key lesson to learn here, it is also a reminder of the importance of minuting and recording decision making and the processes which a board has gone through to come to a decision. This will help explain and defend decisions should the Charity Commission or another stakeholder seek explanation.

 

The Charity Commission inquiry into the case was paused while the court case led by the Official Receiver was conducted, and as such, more than six years after the collapse of Kids Company, its report has still not been published.

However, before we can learn more from the report: check Trustee disqualifications when onboarding new board members; ensure you have clear schemes of delegated authority in your charity; and do take out Trustee Indemnity Insurance or ensure that your existing policy is fit for purpose.

Have you learnt anything else from this case? Please let us know @TrusteeLeaders.

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Blog index

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