Key takeaways for trustees: Kids Company judicial review

In the recent High Court judicial review, the Court found that aspects of the Charity Commission’s report detailing various regulatory findings on the collapse of Kids Company were ‘extremely unfair’, but ultimately found that the remainder of the report, which outlined serious governance failures, was not, as a whole, “irrational” in making the findings that it did.

What happened to Kids Company?

Keeping Kids Company (Kids Company), was founded in 1996 by Camila Batmanghelidjh and provided support to disadvantaged and vulnerable young people in London, Bristol, and Liverpool. Backed by significant government grants and high-profile donors, the charity grew rapidly in scale and visibility, and at its peak, it claimed to support over 36,000 young people.

In August 2015, Kids Company went in administration. Despite years of large-scale public funding, including a £3 million government grant, the charity folded amid serious allegations of financial mismanagement and improper governance.

The Charity Commission Inquiry

In 2022, the Charity Commission published a report concluding that although the trustees had not acted with dishonesty, bad faith or inappropriate personal gain during their operation of the charity, there had been mismanagement in the administration of the charity by the trustees and the CEO. It found:

• Trustees failed to ensure that the charity had sufficient reserves;
• There was inadequate financial control and forward planning;
• The board did not sufficiently challenge the executive;
• The charity was over-reliant on the founder, who exercised significant influence without being a trustee.

In response to the report, the charity’s former clinical director, Michael-Karim Kerman, in substitution of the late Ms Batmenghelidjh, brought a legal challenge to parts of the Charity Commission’s report. Although the majority of the challenge was dismissed, the Court nevertheless held that two of the report’s paragraphs were unlawful:

1. Irrational criticism of Kids Company’s reserves policy

The Court ruled it was irrational for the Charity Commission to criticise the charity’s low reserves, without adequately considering evidence from the judgment after the 2021 case brought by the Official Receiver against Kids Company. This case found that unforeseen reputational crisis, not poor financial planning alone, had led to its collapse. The Court found this to be a clear criticism of the trustees which would have negatively impacted them.

2. Unfair inherence regarding payments to beneficiaries

The Charity Commission had suggested without adequate evidence or balance, that payments to the top 25 beneficiaries were excessive or improper. The Court found this “to give rise to the innuendo that the payments to the ‘top 25’ may not have been justified” and this view was “unbalanced and one-sided” and ‘extremely unfair to the charity and the trustees”.

Mismanagement of the charity

The Court upheld the central finding of mismanagement confirming that the trustees had presided over an unstable financial model; they failed to ensure sustainable governance; and there was a lack of robust board challenge and independent oversight. The Court agreed with the Commission’s report that there was no dishonesty, bad faith, or personal gain. However, repeated late payments to staff and creditor evidenced systematic mismanagement.

Key takeaways for charity trustees

The case highlights how well-intentioned but weak governance can result in regulatory findings by the Charity Commission, therefore, trustees should always consider the following key points:

• Board independence matters – A charity founder / CEO may be passionate and charismatic but they are not a substitute for robust board governance. It is essential that trustees maintain appropriate independence and exercise oversight of the operations of the charity.
• Reserves and risk management – It is important that trustees document the rationale for their reserves policy, and ensure that this is regularly reviewed, and aligns with any risk management frameworks.
• Record decision-making – Expenditure on beneficiaries, should be transparently documented and justified through needs assessments and board-approved policies, particularly where expenditure is high or discretionary.
• Prepare for scrutiny – Trustees must ensure accurate record-keeping, in particular to aid them during times of pressure or crisis. This prevents any well-intentioned decisions being undermined.
• Trustee duties are legal duties – Fundamentally, trustees are expected to act with care, skill and due diligence. Passion and mission alignment are not enough without compliance, oversight, and sound judgment.

Overall, the judicial review highlights the high standards that trustees are held to and the Charity Commission’s requirement for trustees to be proactive in its governance methods.

How we can help

If you require advice relating to charity governance matters, please do not hesitate to get into contact with our charities team.