Mrs Justice Falk stated that what this case is, or should properly be, about is whether the trustees did “too little too late”.
This was a case brought by the OR following the insolvent liquidation of the children’s charity the Kids Company in 2015 against all trustee directors and the CEO alleging that they caused or allowed the company to operate an unsustainable business model. That they knew or ought to have known about this and took insufficient action to address this and that they knew or ought to have known that failure was inevitable without material change.
The case deals with the responsibility of the OR to present the case against the defendants in a balanced manner and the need for the OR to state his case clearly in addition to considering the evidential burden placed on the OR to establish his case.
From a charities perspective the case provides a useful summary of the standards expected of charity trustees. The case highlighted the fundamental differences between companies run for profit and companies run for the benefit of the public (i.e. corporate charities); the differences between what is expected of a paid director and an unpaid trustee/director.
In reaching her conclusion Mrs Justice Falk accepted that trustee directors of charities incorporated under the Companies Act are subject to the same duties as directors of other companies and that the test or standard for disqualification under the Companies Director Disqualification Act 1996 (CDDA) is the same. But these standards must be considered in context taking into account the nature of the company and its activities. It could mean that incompetent conduct which might merit a finding of unfitness in a director of a commercial company would not necessarily lead to the same conclusion in a different charitable context.
There is a general principle that courts should be prepared to sanction wilful misapplication by trustees of charities but should be less willing to sanction an honest mistake. Her Honour quotes Sir Richard Scott V-C from a case in 2000 where he said “I do think that individuals who have given long periods of their time to unpaid public service – and that is what becoming a trustee of a charity involves – do deserve to have their efforts recognised by not being sued for mismanagement unless the proposed action against them is one which anyone can see cannot be resisted”.
The public policy reasons for this approach are in essence that to hold trustees of charities to an unrealistically high standard of legal skill, financial analysis or detailed factual knowledge could have the effect of discouraging people from volunteering to be charity trustees. Indeed, the impact of the action against at least one of the defendants was not only to cease all charity trustee roles but also to prevent him from taking on other roles in the financial sector.
I should say at this point that none of the director trustees or CEO were found to be unfit for office such as to require disqualification. The primary purpose of section 6 CDDA being to protect the public. On the contrary the judge found that the trustees were a group of highly impressive and dedicated individuals who selflessly gave enormous amounts of their time to what was clearly a highly challenging trusteeship. The fact that the trustees stuck it out rather than taking the path of least resistance and walking away was commended.
What is again useful for trustees of charities to note is that they are not required to make the best or right decision with hindsight. They are not required to even guarantee the success of the charity. They are simply required to make decisions which are within a reasonable range of decisions that the trustees could have made. This is consistent with the guidance given by the Charity Commission in “CC27: it’s your decision: charity trustees and decision making”. In this case the trustees were held to have made honest judgments in difficult circumstances in what they thought were the best interests of the charity. The fact that they were not able to turn the charity around and save it from insolvency did not in this case make them unfit for office.
The case also considers where the buck stops. The trustees are ultimately responsible for the decisions made in their name but the trustees are entitled to delegate their responsibilities and in so doing are entitled to rely on the skills and experience of those to whom they delegate. Proper delegation does not however mean abdication. There is always an overall duty to supervise. Trustees need to be able to identify material risks and manage these. In order to be able to do this they need to have sufficient knowledge and understanding of the relevant facts to ensure issues identified are monitored and actions plans followed up. This was a theme expanded at length in the Charity Commission inquiry into Oxfam – another high profile case. In the Kids Company case the point was made that the fact the trustee director is an unpaid volunteer, in circumstances where there is a paid executive team with responsibility for the day to day management, must affect the part that the trustee director could reasonably be expected to play.
Conclusions from a charity law perspective:
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