Lucy Rhodes, Bates Wells

Charity Kids Company spectacularly hit the news in 2015 when it fell into insolvency, stating its finances had become stretched because of the numbers of children “pouring” through its doors for help. Fingers were pointed at flamboyant chief executive Camila Batmanghelidjh who, pictured in the coverage in her trademark multi-coloured turban and kaftan, was compared to a “torrent of verbal ectoplasm” by a Tory MP.

Alarmed by stories of alleged mismanagement, the charity was unable to raise funds from donors and so permanently shut its doors. The Official Receiver carried out an investigation into the management and affairs of Kids Company and the causes of its failure.

Charity specialist Bates Wells acted for five of the seven former trustees including the chair of trustees, Alan Yentob, led by deputy managing partner and charity and social enterprise lawyer Philip Kirkpatrick, head of dispute resolution Robert Oakley, senior associate Lucy Rhodes and associate Charlie Miller (Official Receiver v Atkinson and others).

“As we dug into the detail of the case, I was struck by the level of misunderstanding in the public domain about the circumstances that led to the collapse of Kids Company in August 2015,” states Lucy Rhodes, who joined the firm as a real estate paralegal in 2010 before moving to the employment team and starting her training contract in 2012. It was nonetheless Bates Wells’ charity & social enterprise team that was a natural home for Rhodes.

“Observers of The Public Administration and Constitutional Affairs Committee and the media frenzy that surrounded it might have assumed that this was a clear-cut case of trustee negligence,” she continued. “Five years later, after 10 weeks of careful examination of the evidence (including hearing from thirteen witnesses under cross-examination), the High Court’s judgment vindicated the former trustees and brought some much-needed clarity to the public’s understanding of what really went on.”

What had really gone on at Kids Company? The investigation culminated in director disqualification claims under the Insolvency Act 1986 being issued against Kids Company’s former trustees (who were directors of the company) and Batmanghelidjh. Although she was not formally a member of the board, the receiver argued Batmanghelidjh’s importance as the charity’s founder and chief executive made her a “de facto” trustee.

The accused trustees had accepted disqualification undertakings instead of going to trial. The tests of “unfitness” in respect of a volunteer charity trustee, and when a charity chief executive may be a “de facto” director, had not been tried in court before the Kids Company case.

The headline allegation was that the defendants caused or allowed Kids Company to operate an unsustainable business model, as well as alleged financial mismanagement. An additional difficulty was that the remaining three defendants were each separately represented. Given that each of those three defendants had different perspectives and interests to Rhodes’ and her team’s clients, it would have been easy for the defendants’ legal teams to work in silos. However, Rhodes argues that a particular strength of the defence was that the legal teams communicated and co-operated throughout, including by co-ordinating cross-examination.

“Thankfully, this also avoided the need for the same questions to be asked four times!” she says.

Bates Wells’ based its defence around the following key points:

• The charity’s business model was not unsustainable – the charity had sustained itself on its business model for 19 years, and it could never be said that the charity was highly likely to fail as a result of operating that business model.
• It was the completely unexpected body blow of unsubstantiated criminal allegations that sank the charity, and not its financial position, the trustees’ financial management or the charity’s business model.
• As charity trustees, the directors were non-executive volunteers who were expected to attend periodic meetings and exercise a supervisory role over those appointed to run the company, not to run the company day-to-day. The Official Receiver had a fundamental misunderstanding of the management of charitable companies.

“The Official Receiver’s case was that Kids Company’s status as a charity had no bearing on the proceedings,” says Rhodes. “While it is correct that its trustees were subject to the same duties as directors of non-charitable companies, in order to determine whether someone is unfit to be concerned in the management of a company the test for unfitness must be applied to the facts.”

The judge agreed with Bates Wells’ case – that Kids Company’s charity status was a relevant part of the factual matrix.
“An unpaid, part-time, non-executive director who primarily discharges their functions at intermittent trustees’ meetings will not have the same level of control, knowledge and oversight as a paid executive director who is working at a company on a full-time basis. If the same level of oversight was required, no one would be a charity trustee,” Rhodes added.

The High Court decided, after a 10-week trial, that the de facto director allegation had not been proved and the charge of unfitness was entirely unjustified against all the defendants. The former trustees and Batmanghelidjh were exonerated.
Rhodes worked against a backdrop of intense media scrutiny and pessimism; few seemed to believe Bates Wells’ clients stood much of a chance, with the media swaying the public mood towards the trustees’ guilt.

Had the case not been won, it could have had dire consequences for the charity sector, potentially causing many people to consider the risk that taking up a trusteeship was too great. Rhodes’ hard work has meant that the judgment went a long way in restoring confidence in the current systems of charity governance and the protection that the courts will give to volunteer trustees.

“A trial of charity trustees of this kind is unprecedented and the message that volunteers doing their best to save a charity in difficult circumstances might be pursued by the State was a cause of great concern in the sector,” Rhodes says. “As the High Court judge recognised, the charity sector is dependent on individuals with a variety of skills and experience (particularly of those involved in managing businesses and professionals such as lawyers) being prepared to take up trustee roles. We hope that as a result of our clients’ win, they will continue to do so.”