Kids Company: legal lessons to learn

23rd February 2022

Kids Company is a case that the charities sector has been watching with great interest for a number of years now since its prominent collapse in 2015, and this has been brought back into the limelight with the recent publication of the Charity Commission inquiry report earlier this month.

The Charity Commission concluded, in agreement with the High Court, that there had been no dishonesty, bad faith, or inappropriate personal gain in the operation of the charity. However, it was criticised for its high risk business model and lack of reserves and continuance to operate in such a risky way despite receiving warnings of the risks. We look at the legal lessons to learn from Kids Company.

History of Kids Company

Keeping Kids Company (also known as Kids Company and Kids Co) founded in 1996 and registered in 1998 was aimed at stabilising, nurturing, and fostering the resilience of children and young people.

The Charity expanded rapidly with expenditure rising from around £2.5 million in 2004 to £23 million in 2013. By 2013 the Charity was a large charity and had nearly 500 paid employees and contractors spending over £15 million on staffing costs. As well as this, the Charity had over 10,000 volunteers which supported the Charity between 2011 and 2013. The Charity was well funded including receiving over £15 million of government funding between 2011 and 2013.

The CEO of the Charity contacted the Commission in February 2015 to inform it of several issues and request a formal discussion with the Commission. These issues included how the Charity was responding to adverse media coverage; how the trustees had resolved complaints from a donor relating to the Charity’s acknowledgement of a donation and report on how the money had been spent; the resignations of three senior staff at the Charity and the positive outcomes of two audits of the Charity commissioned by the Government. In response to these the Commission met with the Charity on 31 March 2015. From that meeting the Commission and the Charity were in regular dialogue surrounding the worsening of financial conditions for the Charity. After several urgent meetings in July and following an announcement that the Police were conducting a criminal investigation into allegations of sexual and physical abuse at the Charity the Charity ceased operations on 5 August 2015.

The investigation concluded in January 2016 with no actions being taken and the Police confirming they found no evidence of criminality nor any failings by the Charity in respect of their duty to safeguard children and vulnerable adults. Nevertheless the Charity’s collapse in August 2015 was a dramatic and significant event for the sector as a whole and attracted widespread publicity. The widespread negative publicity represented a risk of significant damage to the charity sector’s reputation.

In August 2017 the Official Receiver commenced High Court proceedings against all the directors who had been in office at or shortly before the date of the Charity’s collapse, together with its CEO (Camilla Batmanghelidjh). Ms Batmanghelidjh was, according to the Official Receiver, a de facto director. The Official Receiver was looking to disqualify each of them because of their role in causing or allowing Kids Company to “operate an unsustainable business model”. There was no allegation of dishonesty, bad faith, inappropriate personal gain or expenditure.

The High Court found that:

  • Although there were aspects of the Charity’s operating model that were high risk (including an over-reliance on continuing high value donations), it was not unsustainable in principle.
  • Although funding came under substantial strain during 2014. The trustees reasonably believed that additional funding could be obtained.
  • The trustees were (legitimately) relying on the expertise of a full-time permanent executive.
  • The Charity had formulated a restructuring plan which was likely to have been successful had the (unfounded) sexual assault allegations not been made.

Overall the Judge concluded that a disqualification order was not warranted against any of the trustees. The decision was issued on 12 February 2021.

Charity Commission inquiry

The Commission opened its inquiry in August 2015 (the Inquiry).The scope of the Inquiry was to examine:

  • the administration, governance and financial management of the Charity;
  • regulatory concerns arising from the investigation carried out by the Official Receiver as part of the liquidation process; and
  • the compliance of the trustees with their duties and responsibilities as trustees under charity law.

The Commission made a finding of mismanagement in the administration of the Charity over repeated failure to pay creditors on time, including its staff and HMRC, which in the Commission’s view would have resulted in undermined confidence in the Charity and its management by its trustees. A summary of key points is set out below:

Operating Model

The Charity operated under a predominantly demand-led model and therefore prized expansion highly. As such, the trustees decided to put raised funds it into expansion rather than building reserves and/or paying some of its creditors. The trustees allowed expenditure to increase without a secure stream of income or adequate reserves to cover the costs associated with expansion.

Although the Inquiry noted that this demand-led model was not a wholly abnormal business model to operate for smaller charities, it was almost unique for a charity of the size of Kids Company. The risks were highlighted by the Charity’s auditors for the financial years ending 2011, 2012, and 2013 and the trustees maintained the Charity’s low level of reserves. In the view of the Inquiry the Charity prioritised the immediate and urgent needs of its beneficiaries at the expense of its longer-term sustainability. The Commission notes that although the slowing down of donations was due to an unforeseen event (the sexual abuse allegations affecting donor confidence in the charity), this was precisely the reason for keeping reserves which would have helped the Charity navigate the allegations. Although the High Court’s Judgment found that the trustees’ decision to expand rather than build reserves was within the range of reasonable decisions the trustees could make the Inquiry noted that it would have instead been prudent for the Charity to seek to build up reserves.

Financial Management

The Charity regularly failed to make some PAYE payments to HMRC on time. By June 2015 the Charity owed over £1,000,000 to HMRC. The Inquiry also saw evidence that payments to some workers were not made on time with the reasons given including the fact that the Charity’s income was variable. These failures were seen by the Inquiry as evidence of mismanagement in the administration of the Charity.

The Trustees and CEO

Whilst some of the trustees had previous experience of being trustees of other charities, the Inquiry found that given the size of the Charity the board would have benefitted from having someone on the board with experience of running a large charity. As well as this, the Chair of trustees had been in post for over 10 years and the CEO had been in post since the Charity’s foundation.

Rotation of the trustee board including the chair usually allows for new ideas, new approaches, and challenges to the usual operation of a charity.

Keeping of and maintaining records

Whilst the Inquiry was able to review substantial documentation there was much evidence of the destruction of the Charity’s records at the time of its collapse. The Inquiry concluded that this was not in the best interests of the Charity or its beneficiaries and should not have taken place.

Lessons to be learnt for the sector

  • Consider operating models and measure the impact – Although diverse and innovative operating models can help keep the sector relevant and dynamic these must be balanced by management of the commensurate risks. The demand-led model can lead to a rapid expansion of a charity but charities should be prepared for the seasonality and unpredictability of donations.
  • Planning reserves – Trustees should undertake financial planning and recording including maintaining a reserves policy. This should be based on factors such as the seasonality of donations and account for all possible worst case scenarios. This may include potential for any bad publicity for the charity which might diminish potential donations, and unforeseen events (including a pandemic). Trustees should ensure that they have sufficient reserves in the event of sudden cessation of finances and/or donations.
  • Responsibility of and composition of board of trustees – The Commission reiterated the best practice guidance in the Charity Governance Code, longer appointments of trustees should be subject to review, should take into account the need to refresh the board, and should be explained in the trustees’ annual report. There may be good reasons as to why charities may feel it is in the charity’s best interests to have longer terms of office for some trustees, but this should always be considered and where deviating from the norm (provided they are able to do so in accordance with their constitution), considerations and reasons are recorded in writing. The Inquiry also reaffirmed the key point that all trustees have shared responsibility for their charity and that responsibility sits with them (even where they may delegate some duties and decisions).
  • Managing growth – One of the largest issues for Kids Company was the rapid scale of expansion. This is a case study to highlight the importance of ensuring infrastructure, governance and resources keep pace with growth. Policies need to be scaled to reflect the needs of expanded and newly introduced beneficiaries and governance needs to be robust. The experience and expertise of the board should be consistently reflected to ensure it is able to deal with the size of the charity.

Lessons for the Charity Commission

Such was the size of this case that the closure of Kids Company raised questions about the Commission’s regulatory role, facing political and public scrutiny into its ability to hold high-risk charities to account.

The Public Administration and Constitutional Affairs Committee (PACAC) published a report in 2016 which contained recommendations aimed at strengthening the Charity Commission’s regulatory impact. The report recommended that:

  • The Commission improve in its identification and scrutiny of charities operating in high-risk areas.
  • The Commission review and improve its guidance to allow charities to more easily understand their legal responsibilities.
  • The Commission expand its complaints process and signpost it more effectively.

In response to these recommendations the Commission is/has:

  • Investing in technology that should help them be better able to be proactive and help identify risks sooner and mitigate factors, this includes being better able to identify indicators that form a financial risk including significant or rapid growth.
  • Strengthened their reserves regulatory toolkit, blogged about charities facing financial difficulties, and published guidance for auditors and independent examiners relating to their duties to report matters of material significance to the Commission.
  • Building in the “Better handling of complaints” into its 2018-2023 strategic plan to ensure a timely, risk-based assessment of complaints.
  • Introduced new questions as part of the registration process for charities to identify and engage with prospective charities that are wholly or partially reliant on central or local government funding to help them consider and manage the risks inherent on that dependence.

The full Inquiry report was published on 10 February 2022 and can be found here.

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