The realities for trustees of the Kids Company judgment
The judgment by Mrs Justice Falk in the High Court in February this year is the latest event in the Kids Company saga. The charity itself went into insolvent liquidation in August 2015 when its funding sources collapsed.
The founder and CEO of the charity was a colourful and high profile character who attracted a great deal of publicity for the charity. The downside of the high profile nature of the charity meant that when matters went badly wrong there was a great deal of press attention and vilification.
The recent judgment is in respect of a case brought by the Official Receiver, part of the Government’s insolvency service, against the former trustees and CEO of the charity for disqualification orders resulting from how they had run the charity.
The Official Receiver had alleged that they were unfit to manage a company because they had allowed the charity to operate an unsustainable business model and ought to have been aware that the charity’s failure was therefore inevitable. The Official Receiver also alleged that the former CEO had been acting as a defacto director of the charity and as such should also be disqualified.
In summary the High Court rejected the Official Receiver’s assertion that the former trustees and CEO were unfit to be directors and found in their favour. The judge made the point that the actions of public bodies such as the Official Receiver should not dissuade “able and experienced individuals from becoming or remaining charity trustees”. The judge also found that there had been “no dishonesty, bad faith or person gain” on the part of the former trustees and CEO and the former CEO had not been acting as a defacto director.
Negative publicity
Whilst the judgment was strongly in favour of the former trustees and CEO, the apparent vindication of the trustees has to some extent been lost in the extreme negativity publicity the charity attracted by its demise and the subsequent parliamentary investigation and critical parliamentary report. A Charity Commission report into the charity is still awaited.
For those already involved in the charity sector as trustees of charities, the decision of the Court in this case should provide significant reassurance that provided they act honestly and reasonably in their roles and do their best to comply with their duties and responsibilities, trustees should generally be protected by the law.
In general provided charity trustees have acted honestly without any wilful misconduct but have been mistaken in how they have dealt with matters then the courts are unwilling to punish charity trustees. The courts have consistently taken the view that to do otherwise would deter individuals from acting as charity trustees.
The Kids Company decision reinforced the lenient and benevolent approach the courts take to charity trustees. If this had been a commercial company and the trustees simply directors then there may well have been a very different outcome.
It should also provide reassurance in that Mrs Justice Falk warned public bodies against taking action against charity trustees who had acted honestly. So in many respects this judgment has strengthened the position of charity trustees and provided them with greater reassurance and protection. But the question remains whether the general public perception will take account of this.
Significant risks
The possible perception for individuals not already involved in the charity sector and for many potential trustees is that the case emphasises the significant responsibilities and risks of being a trustee if matters go wrong albeit the fact that the court will often take a lenient approach to charity trustees and those acting as directors of charitable companies. A large proportion of people will not want to take such risks for what is a voluntary unpaid role.
The decision of the court also does not alter the fact that before taking on the role of a charity trustee, you must have a clear understanding of what the charity does and the likely scope of your role as a trustee of that charity including your duties and responsibilities.
This decision has shown that it is incredibly difficult to show that a CEO of a charity has acted as a defacto director of that charity with the additional potential liabilities associated with that role.
This should be a reassurance to CEOs that provided there is a clear structure of governance within the charity and they abide by the decisions of the charities trustees they should be safe from any allegations they are acting as a defacto director of the charity.
Corporate governance
The decision should also be viewed as a wake-up call to charity trustees to ensure they are exercising appropriate oversight and control over the charity’s senior management and that appropriate internal reporting and corporate governance structures are in place and operate effectively. With Kids Company the Court found that there was a clear corporate governance structure in place which ensured that the CEO was not part of the ultimate decision making structure of the charity and was accountable to the trustees.
To minimise risks to both the charity and its trustees, charities need to ensure that they take professional advice on issues where relevant as part of their decision making processes and that they pay more than lip service to such advice.
Trustees should also try and ensure that they are adequately protected if things do go wrong. It would seem prudent if the rules of the charity allow it, particularly as it is arguable there is no direct benefit to the charity itself, for charity trustees to ensure they have insurance in place in respect of their work in those roles. This would serve to encourage individuals to act as trustees
Whilst the former trustees in this case have been vindicated they have had to go through a huge amount of stress and incredibly expensive court proceedings to achieve that vindication. It is worth noting that one of the trustees, Sunetra Atkinson, did a deal with the Official Receiver and accepted a disqualification to settle the claim the Official Receiver brought against her some time prior to the trial.
More cautious
It would seem to be prudent when taking account of the demise of the Kids Company and this case for those charities which have not been previously risk averse to adopt a more cautious approach to risk. Wherever possible, particularly if a reasonable proportion of their income comes from unrestricted monies, charities should ensure that they build and retain reasonable cash reserves to take account of reasonable eventualities.
The trustees adopted a high risk strategy in the Kids Company case but it was not an unlawful strategy. The demise of Kids Company highlights the challenges of running a charity, and the significant responsibilities of a charity trustee, and the need for charities to be run on a sustainable and business-like footing.
