Kids Company: Who Rules?

*P.C.B. 175 Keeping Kids Company, the charity founded by Camila Batmanghelidjh, which went into a high-profile liquidation in 2015, has been the subject of a Charity Commission report into the charity's administration and management. ¹ The conclusions of the report, published earlier this year, differ significantly from the conclusions drawn by the High Court after the culmination of a 10-week hearing in late 2020. ² This article considers the report and its key findings and compares them with the conclusions drawn by the High Court. In this article and its footnotes, in the interests of brevity, the Charity Commission report will be called the "CC Report" or "the Report" and the High Court judgment "Re KKC".

Background

The history of the charity has been rehearsed and repeated on numerous occasions in articles and commentary charting the rise and fall of the charity and the subsequent legal proceedings. In order to contextualise this article, a brief summary of the background is set out below.

The charity was put into voluntary insolvent liquidation in August 2015. In the same month, the Charity Commission opened a statutory inquiry under s.46 of the Charities Act 2011. The scope of the inquiry was to examine:

1. The administration, governance and financial management of the charity including concerns around allegations of inappropriate spending, breaches of financial controls and the conduct of the trustees and the CEO amid concerns about the future viability of the charity;
2. Any regulatory concerns arising from the investigation carried out by the Official Receiver as part of the liquidation process;
3. Whether or not the trustees had complied with and fulfilled their duties and responsibilities as trustees under charity law

In the same year the Official Receiver, pursuant to his statutory duties and following his appointment as liquidator of the charity, began his investigation into the charity. Both the Charity Commission and Official Receiver conducted interviews with each of

the trustees and the CEO, Ms Batmanghelidjh. Certain *P.C.B. 176 other senior employees were also interviewed. The Official Receiver had access to the books and records of the charity, which it reviewed, in part at least, in the course of his investigation.

The next key event was the announcement, in August 2017, that the Official Receiver had launched formal disqualification proceedings under s.6 of the Company Directors Disqualification Act (CDDA) 1986 against the trustees in office at the time of the charity's closure, one trustee who had resigned a few months beforehand, and the CEO. It was later confirmed that this inquiry had been placed on hold pending the outcome of the Official Receiver's attempt to disqualify the trustees and CEO. ³

The sole allegation made by the Official Receiver was that the trustees and CEO had allowed the charity to operate an "unsustainable" business model. ⁴ It is important to note that there were no allegations made of inappropriate spending of charity funds, dishonesty or bad faith. The claim was eventually heard, mid-pandemic, between October and December 2020. The lengthy and detailed trial, presided over by Falk J, was forensic in its assessment of the facts: it spanned the course of 10 weeks, heard evidence from 13 witnesses and the documents placed in front of the court totalled almost 20,000 pages.

Falk J's judgment was handed down in February 2021, just under two months after completion of the trial. Spanning 914 paragraphs and 218 pages, the judgment is comprehensive and enormously detailed. In summary Falk J was "wholly satisfied that a disqualification order is not warranted" against any of the defendants. ⁵ On the contrary, Falk J expressed a "great deal of respect for the care and commitment [the directors] showed in highly challenging circumstances". ⁶

Following the conclusion of the disqualification proceedings, the Charity Commission's delayed inquiry report was eventually published a year later on 10 February 2022. The key conclusion of the Charity Commission's investigation mirrors that of the High Court: the Charity Commission determined not to take any regulatory action against the trustees or CEO. However, the Charity Commission's findings differ from those of Falk J in two main respects, the charity's financial management and its reserves policy.

In general, the disparity is arguably surprising. It is acknowledged that the High Court and the Charity Commission were applying different tests. Specifically, the Official Receiver's claim under s.6 of the CDDA required it to satisfy the high bar for a director to be disqualified: that based on their conduct, the director was "unfit to be concerned in the management of a company". ⁷ The rationale being that any disqualification should be for the protection of the public. The Charity Commission examined whether there had been "misconduct and/or mismanagement" in the administration of the charity. ⁸ These are not terms that are defined in statute and, as such, are open to interpretation by the Commission. They are likely to constitute a lower threshold.

However, at heart, both tests require a judgment to be made of how the trustees and CEO managed the charity. The Charity Commission and the High Court were considering the same conduct. Critically, the High Court, having looked in detail at the same fact pattern as the Commission, went much further in favour of the trustees than simply stating that the high threshold for disqualification was not met. ⁹ It in fact praised the trustees for their management of the charity.

The two key areas of disparity and how they are dealt with in the High Court decision are discussed in more detail below. *P.C.B. 177

Financial management

The Charity Commission concluded that the charity operated a "high-risk" business model and made a formal finding of "mismanagement in the administration of the Charity". ¹⁰

The High Court proceedings gave significant attention to the issue of financial management and in particular payments to key creditors (HMRC, staff and self-employed contractors), which was the area the Commission chose to criticise in the CC Report. The Official Receiver's counsel cross-examined witnesses on this subject in detail. The core of this questioning, and the basis of the Commission's finding of mismanagement, was the timing of payments to HMRC. Until June 2014 the charity had broadly made payments to HMRC in line with HMRC's expectations. However, from July 2014 onwards the discussions between the charity and HMRC became more urgent as the debt increased and a payment plan was not met. The charity made regular payment to HMRC but, in some months, this was below the expected amount. The summer had historically always been a low period for fundraising for the charity, whilst major donors were on holiday and there were no significant fundraising events. The run up to Christmas was historically a high point for the charity in terms of donations.

November 2014 represented a turning point for the management of the charity. It was at this moment that the trustees, for the first time, became concerned that the charity may not raise the required income to meet all outgoings for 2014. It was also around this time that the charity was one day late in paying payroll for staff. From the end of November 2014 onwards, the trustees were on a war footing—looking for ways to stabilise the charity (either through raising further funds or cutting costs) and secure its long-term future. Managing HMRC during this more parlous period became a key concern, with the trustees receiving regular updates. By this time the charity's scheduled payments to HMRC were approximately £350,000 per month but the charity increasingly struggled to pay this amount. The charity continued in the deficit position, albeit in constant communication with HMRC, managing the debt, until closure in August 2015 (except in April 2015 when a substantial payment was made, following receipt of a grant from central government).

The CC Report describes a "pattern of failure to pay monies owing to HMRC on time" from July 2014, based on "Records" that it had seen. However, the CC Report does not go into significant detail, dedicating just three paragraphs to addressing the issue of "Financial Management". The Report cites the failure to pay HMRC on time as "evidence of mismanagement in the administration of the charity" and suggests that it "illustrates the financial difficulties that the Charity was in and the failure to manage these effectively". ¹¹ No analysis of why payments to HMRC might have been delayed is included in the Report. Nor did the Report discuss in any detail the patience with which HMRC dealt with the charity and the willingness HMRC showed to wait for payment and allow the charity to "trade" out of its difficulties. Instead, the Report cites the fact that the charity made late payments to HMRC as prima facie evidence of financial mismanagement.

The High Court judgment dedicates 19 paragraphs to a chronological analysis of the charity's correspondence and relationship with HMRC. Falk J rejected the Official Receiver's suggestion that the relationship with HMRC and failures to pay were mismanagement or a cause for strong criticism of the trustees stating:

"My own assessment is that HMRC were indeed patient, but this would not have been based on simple altruism. Final demands were either met, or where they were not I infer that HMRC took the view that the debt was more likely to be paid by allowing the charity to continue to operate, as indeed *P.C.B. 178 proved to be the case in respect of all amounts other than the sum left unpaid at the point of liquidation." ¹²

"In summary, despite a number of difficulties HMRC allowed the company to continue to operate, never presenting a winding up petition. It is also not the case that Kids Company was continually overdue in its payments to HMRC. There were particular difficulties in 2013 but the charity made the required payments throughout most of 2014, and in 2015 substantially caught up following the government's grant payment." ¹³

Falk J's approach and conclusion on the issue of HMRC (and therefore the charity's financial management generally) is much more nuanced than that of the Charity Commission. When compared to the findings of the CC Report (that payments were late, ergo there was financial mismanagement), Falk J's conclusion is notably more holistic, and takes into account evidence of the charity's ongoing relationship and correspondence with HMRC. This evidence demonstrates that whilst HMRC was at times paid late, the charity maintained open and transparent lines of communication with HMRC and actively managed this relationship in light of the charity's cashflow difficulties. The position was therefore very closely managed, rather than mismanaged.

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Footnotes

1. Charity Commission, "Charity Inquiry: Keeping Kids Company" (10 February 2022), gov.uk, https:// www.gov.uk/government/publications/charity-inquiry-keeping-kids-company/charity-inquiry-keeping-kids

2. Re Keeping Kids Co; sub nom. Official Receiver v Batmanghelidjh [2021] EWHC 175 (Ch), hereafter "Re KKC". See also M. Herbert, Keeping Kids Company [2021] P.C.B. 123.

3. L. Kay, Charity Commission's inquiry into Kids Company "on hold" (12 February 2019), thirdsector.co.uk, https://www.thirdsector.co.uk/charity-commissions-inquiry-kids-company-on-hold/governance/article/1525436 [Accessed 13 June 2022].

4. Re KKC [2021] EWHC 175 (Ch) at [15].

5. Re KKC [2021] EWHC 175 (Ch) at [912].

6. Re KKC [2021] EWHC 175 (Ch) at [912].

7. Company Directors Disqualification Act 1986 s.6.

8. Charity Commission, "Charity Inquiry: Keeping Kids Company" (10 February 2022), gov.uk, https:// www.gov.uk/government/publications/charity-inquiry-keeping-kids-company/charity-inquiry-keeping-kidscompany [Accessed 13 June 2022], "Issues under Investigation".

9. Re KKC [2021] EWHC 175 (Ch) at [795]–[797], [877] and [911]–[912].

10. Charity Commission, "Charity Inquiry: Keeping Kids Company" (10 February 2022), gov.uk, https:// www.gov.uk/government/publications/charity-inquiry-keeping-kids-company/charity-inquiry-keeping-kidscompany [Accessed 13 June 2022], "Operating Model".

11. Charity Commission, "Charity Inquiry: Keeping Kids Company" (10 February 2022), gov.uk, https:// www.gov.uk/government/publications/charity-inquiry-keeping-kids-company/charity-inquiry-keeping-kidscompany [Accessed 13 June 2022], "Financial Management" and "Conclusions".

12. Re KKC [2021] EWHC 175 (Ch) at [334].

13. Re KKC [2021] EWHC 175 (Ch) at [825(k)].

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