Keeping Kids Co, Re [2021] EWHC 175 (Ch)

The Official Receiver sought disqualification orders against eight former directors and the CEO of Kids Company, a children's charity that collapsed in 2015. The single allegation was that they operated an unsustainable business model. The court dismissed all claims, finding the trustees acted honestly and within a reasonable range of decision-making in challenging circumstances.

Facts

Kids Company was a children’s charity founded in 1996 by Camila Batmanghelidjh, providing support to disadvantaged young people through a self-referral model. The charity grew significantly, with turnover reaching approximately £23 million by 2013. It relied on a combination of private donations and government funding, with around 30% coming from public sector sources.

In August 2015, the charity collapsed following unfounded sexual assault allegations which caused the withdrawal of financial support for a restructuring plan. The Official Receiver commenced disqualification proceedings against eight former trustees (directors) and Ms Batmanghelidjh as an alleged de facto director.

The Charity’s Operations

The charity operated centres in London, Bristol and Liverpool, supporting vulnerable young people through counselling, practical assistance, food provision, and advocacy. Staff costs comprised approximately 73% of total expenditure. The charity experienced seasonal income patterns with significant cash flow challenges throughout the year.

Issues

The key issues before the court were:

• Whether Ms Batmanghelidjh was a de facto director
• Whether the defendants caused or allowed Kids Company to operate an unsustainable business model
• Whether the defendants’ conduct demonstrated unfitness warranting disqualification

Judgment

Mrs Justice Falk dismissed all claims against all defendants.

De Facto Director

The court held that Ms Batmanghelidjh was not a de facto director. Despite her significant influence as CEO, she was subject to the Board’s supervision and control, operated under delegated authority, and did not participate in the corporate governing structure on an equal footing with the trustees.

“My overall conclusion is that Ms Batmanghelidjh had significant influence but was not part of the ultimate decision-making structure. She was not on an equal footing with the Trustees and did not have the same, or equivalent, status or functions.”

Unsustainable Business Model

The court rejected the allegation that the business model was unsustainable. The charity had operated for approximately 17 years before collapse, and the trustees were well aware of risks and took reasonable steps to address them.

“The Official Receiver has not demonstrated that any of the defendants were aware, or ought reasonably to have been aware, that the model was bound to fail as at either of the dates specified.”

Unfitness

The court found no basis for disqualification orders. The trustees were described as highly impressive individuals who acted honestly, balanced competing considerations appropriately, and their decisions fell within a reasonable range of decision-making.

“The public need no protection from these Trustees. On the contrary, this is a group of highly impressive and dedicated individuals who selflessly gave enormous amounts of their time to what was clearly a highly challenging trusteeship.”

Implications

This judgment has significant implications for charity governance and director disqualification proceedings:

• The court emphasised the benevolent approach taken towards charity trustees where no dishonesty is alleged
• Non-executive charity trustees can properly delegate day-to-day management while retaining supervisory duties
• The charitable context is relevant when assessing director conduct and unfitness
• CEOs with significant executive authority are not necessarily de facto directors if subject to proper board supervision
• Disqualification proceedings require careful consideration of each individual director’s conduct

The judgment also made recommendations regarding the conduct of future disqualification proceedings, emphasising the need for balanced presentation of evidence and clear specification of allegations against individual defendants.

Verdict: All claims for disqualification orders against all defendants were dismissed. Ms Batmanghelidjh was found not to be a de facto director. The court found no basis for concluding that any defendant was unfit to be concerned in the management of a company.

Source: Keeping Kids Co, Re [2021] EWHC 175 (Ch)