Gillian Harkness-McKinlay
- Partner
Gillian Harkness-McKinlay
Insights | Charities & Third Sector
The Story of Kids Company: as one chapter ends, another begins…
18 March 2022
As any parent of small children will know, the bedtime routine is often a somewhat protracted affair with whining, pleading requests for one more chapter. Those directly involved in the Kids Company saga must feel frustration similar to that of an exasperated parent as what looks to have been a closed book, is re-opened to reveal an unexpected twist in the shape of the Charity Commission’s recently published inquiry report.
Prologue
For those who haven’t been following proceedings so closely, Kids Company was a high profile English charity which had, as its chief executive, the very charismatic Camila Batmanghelidjh together with high profile trustees and supporters – indeed, David Cameron’s government championed the charity as part of Big Society. The charity became insolvent in 2015 following unfounded safeguarding allegations which impeded financial rescue efforts.
Chapter 1
There then followed House of Commons parliamentary committees (scrutinising government support for a charity that ultimately failed) with the official receiver making an application to the High Court for director disqualification orders in respect of the charity’s trustees and its chief executive (due to her allegedly having behaved as a de facto director). This action by the official receiver was potentially unsettling, to say the least, for the UK’s many charity trustees, the vast majority of whom hold office on a voluntary basis without any form of remuneration.
Chapter 2
The next chapter was to conclude with the High Court dismissing the application of the official receiver on the basis that incompetence of the highest degree had not been demonstrated. The court found that, “in their roles as directors of Kids Company the Trustees were required to, and did, balance a range of factors. They were seeking to meet Kids Company’s charitable objectives, and in doing so not only to address the significant needs of the charity’s vulnerable clients for whom the charity provided a very real safety net, but to have proper regard to safety and safeguarding issues (which included ensuring that the work was properly staffed). They were required continually to assess whether sufficient funding could be obtained, both from the government and private sources, and whether the position with creditors could be appropriately managed. The decisions they made were matters of honest judgment, made in difficult circumstances in what they thought were the best interests of the charity.”
For those of us who are charity trustees, the above description will resonate, especially after living through the covid pandemic and consequent lockdowns. Over the last two years charity boards have had to take challenging decisions (in terms of the impact on service users/the raison d’être of the charity as compared with the interests of creditors). It has been a difficult balancing act albeit helped by the temporary suspension of the wrongful trading regime, courtesy of the Corporate Governance and Insolvency Act 2020. During the worst of the pandemic – and throughout 2020, the UK Government and charity regulators encouraged charities to take the time and space to seek out all possible sources of funding (such as the Third Sector Resilience Fund) with a view to continuing to operate.
As such, the High Court judgement could be seen to provide some comfort to charity trustees – the third sector relies on this army of volunteers and it is quite a daunting prospect to consider the implications of “getting it wrong.” Charity trustees are drawn from all sectors of society – some take on this responsibility during their retirement, others balance the responsibility alongside existing careers, family commitments etc. The action taken by the official receiver is one that could have proved extremely off-putting for charity trustees and caused them to question whether this role is something they can continue to commit to – and this could have major implications for the sector which relies so heavily on its volunteer trustees.
Chapter 3
Just when we thought the words of Mrs Justice Falck were the end of the story, the denouement came with the Charity Commission publishing its inquiry report into Kids Company. The Commission concluded that the legal test had not been met for it to take regulatory action against the former trustees or Chief Executive of Kids Company. However, the Commission did find that there had been mismanagement vis-à-vis the late payment of some creditors – specifically failing to make payments to HMRC when these were due and to make payments to employees constituted mismanagement in the administration of the charity.
The Charity Commission found “Kids Company operated a “high risk business model”, characterised by a heavy dependence on grants and donations, reliance on a key individual for fundraising, low reserves, and a demand-led service.” Again, that is a model that will probably sound familiar to many in the sector – not all charities are fortunate enough to have an abundance of reserves and those which are not dependent on grants may be dependent on services agreements which may, ultimately, amount to the same thing.
The former trustees of Kids Company have released a statement to the effect that “[we] are concerned that by disregarding or dismissing the importance of the findings of the High Court and criticising us with the benefit of hindsight, the Commission is doing exactly what the High Court warned against and discouraging good people from becoming charity trustees, contrary to one of its statutory functions.”
Epilogue
So what learnings are there for the wider sector from the Kids Company case? The Charity Commission has highlighted the following:
- Where a charity is expanding its operations, seek to ensure that there is a steady income stream to meet the costs of expenditure and that the level of reserves are commensurate with this;
- Ensure that appropriate skill-sets are represented on the board of the charity – Kids Company was criticised for having a board which lacked expertise in youth work and psychotherapy;
- Include provisions within a charity’s constitution allowing for rotation of board members i.e. do not allow positions such as the chair to become entrenched. This could be avoided by including caps on overall periods in office etc.
- No charity should be defined by a single individual – this is a more challengingt one, in our view. The report was critical of the CEO having held that position for many years… “a single person holding a senior leadership role in a charity for many years can reduce the level of challenge to long established methods of operating and prevent it from identifying and managing risks that flow from longstanding practice.” Evidently there are employment law considerations associated with this – provided that the board has appropriate checks and balances in place and ensures that its senior leadership team is ultimately answerable to it (rather than the board effectively rubber-stamping decisions of the CEO), then we consider that this can be appropriately managed.
If your charity would welcome advice on any of the issues outlined above, please do not hesitate to contact us.
You may also be interested in the following articles: