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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> The Official Receiver v Atkinson & Ors  EWHC 175 (Ch) (12 February 2021)
Cite as:  EWHC 175 (Ch)
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BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
IN THE MATTER OF KEEPING KIDS COMPANY
AND IN THE MATTER OF
THE COMPANY DIRECTORS DISQUALIFICATION ACT 1986
Fetter Lane, London, EC4A 1NL
B e f o r e :
| THE OFFICIAL RECEIVER
ERICA JANE BOLTON
RICHARD GORDON HANDOVER
FRANCESCA MARY ROBINSON
Rupert Butler (of Leverets) and Natasha Jackson (instructed by Leverets) for the Second Defendant
Daniel Margolin QC and Daniel McCarthy (of Joseph Hage Aaronson LLP) for the Third Defendant
George Bompas QC and Catherine Doran (instructed by Bates Wells) for the Fourth and Sixth to Ninth Defendants
Andrew Westwood (instructed by Maurice Turnor Gardner LLP) for the Fifth Defendant
Hearing dates: 19-22 and 26-29 October, 3-6, 9-12, 16-20, 23-26 and 30 November, 1-4, 7-9, 11 and 14-17 December 2020
Crown Copyright ©
|BACKGROUND: A BRIEF HISTORY||4|
|THE ISSUES IN OUTLINE||51|
|The documentary evidence||61|
|The witness evidence||65|
|Contacts between ex-employees: impact on evidence||131|
|Similarities between defendants' affidavits||136|
|De facto director||153|
|FACTUAL FINDINGS: GENERAL||168|
|Kids Company's business model||172|
|Seasonality of income||185|
|Increasing scale: general||186|
|Increasing scale: Bristol||189|
|Financial position from 2012 onwards||199|
|Warning signs in 2012?||201|
|Financial position during 2013: general||212|
|Approval of the 2012 accounts (September 2013)||219|
|January to September 2014||233|
|Approval of the 2013 accounts (September 2014): going concern issue||246|
|October to December 2014||267|
|The outturn for 2014||282|
|January to March 2015||289|
|April to July 2015||307|
|Relationship with the bank||335|
|Dependence on loans||347|
|Mr Spiers' loan||360|
|Income: projections and accruals||369|
|Findings relating to the departure of senior managers||389|
|History: NAO report||437|
|Interactions with Ministers and other senior figures||445|
|Government commissioned reports: PKF Littlejohn and Methods||501|
|Support from donors: risk of donor fatigue?||509|
|Client spend (kids costs)||541|
|Allegation of dominance: general||579|
|Alleged preferences in April 2015||595|
|Whether the restructuring would have succeeded||602|
|Non-implementation of a contingency plan before the July 2015 restructuring||616|
|Timing of change to Ms Batmanghelidjh's role||624|
|FACTUAL FINDINGS SPECIFIC TO MS BATMANGHELIDJH||633|
|Role as CEO: financial aspects||634|
|Ms Batmanghelidjh's approach to creditors and overoptimism||642|
|Failure to accept seriousness of deteriorating financial situation||648|
|Contacts between staff and Trustees: general||660|
|WAS MS BATMANGHELIDJH A DE FACTO DIRECTOR?||669|
|The Official Receiver's case||669|
|The case as put in Mr Hannon's first report||669|
|The case as developed by Counsel||676|
|The corporate governance structure||682|
|The Articles of Association||683|
|Ms Batmanghelidjh's employment contract||688|
|The Financial Procedures Manual||690|
|The CEO role and the role of the Board||704|
|The functions relied on by the Official Receiver||712|
|Negotiating with donors||723|
|The case as developed: Discussion||732|
|Centrality of role||736|
|Ms Batmanghelidjh being "indispensable"||747|
|Implied authority, in particular for loans, indicating overall responsibility||749|
|Taking on additional staff||753|
|Deciding priority of payment||776|
|Operating policies being disregarded||780|
|Did Ms Batmanghelidjh join in decisions?||782|
|Conclusions on the de facto director allegation||785|
|THE "SINGLE" ALLEGATION: DISCUSSION||795|
|"Unsustainable" and paragraph 6 Schedule 1 CDDA||811|
|The real issue in this case||823|
|The significance of discussions with government (and donors)||827|
|Allegations of inadequate control, dominance and resistance to change||836|
|Allegations in respect of senior management||845|
|WHETHER THE DEFENDANTS WERE UNFIT||846|
|The relevance of Kids Company being a charity||847|
|The role of the Board, delegation and non-executive directors||856|
|Section 174 Companies Act 2006||864|
|Trading at risk of creditors and unfitness||870|
|Application of the legal test||874|
|The individual Trustees||882|
|APPENDIX: DRAMATIS PERSONAE||Appendix|
Mrs Justice Falk:
BACKGROUND: A BRIEF HISTORY
THE ISSUES IN OUTLINE
"…caused and/or allowed Kids Company to operate an unsustainable business model …"
"…knew or ought to have known that failure was inevitable without immediate material change…"
(At some points the report refers to failure being "highly likely" as an alternative to "inevitable". The two are of course not the same.)
(a) an overarching criticism of the operation of a demand-led model of "self-referral" and a policy of "never turning a child in need away", whilst being dependent on ad hoc grants, donations and loans, without sufficient reserves for the eventuality that they were not made, and a failure by the directors to take adequate action to alter the business model so as to control expenditure in the context of rapid and uncontrolled growth and increasing financial difficulties, or adequately to address the risks that it involved;
(b) inadequate governance or control by the Trustees of the CEO, Ms Batmanghelidjh, who exercised a dominant role in determining and operating the model (a model which was also dependent on her fundraising activities), was resistant to any change in the model and would always prioritise clients' needs;
(c) failing to implement adequate procedures or controls to address the increasing risk of failure, including financial controls to control expenditure, to enable Kids Company to meet its obligations as they fell due and to address anticipated income shortfalls;
(d) trading at an increasing deficiency of income to expenditure, becoming increasingly reliant on short-term loans, bringing funding forwards (meaning asking for donations or grants early), circulation of credit (meaning using loans to pay off other creditors, including other lenders), delaying payments to creditors and year-end accruals, without the Trustees exercising adequate oversight and with Ms Batmanghelidjh resisting it;
(e) relying on overoptimistic statutory funding projections and failing adequately to consider the risk caused by "donor fatigue";
(f) failing to build up reserves;
(g) failing to take adequate action to oversee and scrutinise the propriety of, clinical need for, or level of expenditure on clients, test adherence to policies or consider any need to adjust them, resulting in ever increasing financial demands;
(h) failing to plan for increasing risk as the charity's business and client base continued to grow;
(i) inappropriately treating amounts received in 2014 as accruals in 2013, giving a misleading impression; and
(j) in the case of Ms Batmanghelidjh, failing to adhere to written policies.
(a) Kids Company had only been meeting payroll for several months by bringing donations forward from 2015 and borrowing money;
(b) the bank had regularly raised concerns and refused to allow payment of payroll without adequate cleared cash;
(c) the November payroll had been a day late and payments to self-employed staff and to HMRC were in arrears;
(d) there was a significant year-to-date deficit and expenditure had increased;
(e) the charity had tripled its reliance on short-term loans over a twelve-month period, with increasing numbers of donors raising concerns;
(f) there was no government funding commitment past the first quarter of 2015; and
(g) from 1 December 2014 the defendants failed to take adequate steps to implement contingency plans or to restructure.
The documentary evidence
The witness evidence
Contacts between ex-employees: impact on evidence
Similarities between defendants' affidavits
"(1) The court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied-
(a) that he is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently), and
(b) that his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) makes him unfit to be concerned in the management of a company."
"The extent of the director's responsibility for the causes of the company becoming insolvent."
"…shall not be a director of a company, act as receiver of a company's property or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company unless (in each case) he has the leave of the court."
(a) Section 6 CDDA imposes a duty on the court to make a disqualification order where the conditions are satisfied, in contrast to the discretion conferred by s 8 (disqualification after investigation) which applies in circumstances where a company may not have become insolvent.
(b) Although on the face of it the expression "unfit to be concerned in the management of a company" would appear to mean unfit to be concerned in the management of any company without qualification, the court's ability to grant a respondent leave to be concerned in the management of a company under s 17 CDDA means that s 6 cannot have the wholly unqualified meaning that it appears to have.
(c) The primary purpose of the jurisdiction under s 6 is to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown them to be a danger to others. The fact that s 6 imposes a duty to disqualify, coupled with the fact that any disqualification under that section must last for a minimum of two years, highlights the significance attached by Parliament to the fact that the company in question has become insolvent.
(d) Jonathan Parker J described the test of being "unfit" as follows:
"'Unfitness' may be shown by conduct which is dishonest (including conduct showing a want of probity or integrity) or by conduct which is merely incompetent. In every case the function of the court in addressing the question of unfitness is to 'decide whether [the conduct of which complaint is made by the Secretary of State], viewed cumulatively and taking into account any extenuating circumstances, has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies' (see Secretary of State for Trade and Industry v Gray  1 BCLC 276 at 284, sub nom Re Grayan Building Services Ltd (in liq)  Ch 241 at 253 per Hoffmann LJ). This has been described as 'a jury question' (see Re Sevenoaks Stationers (Retail) Ltd  BCLC 325 at 330,  Ch 164 at 176 per Dillon LJ)." (p.483a-c)
(e) The court is required by s 9 CDDA to have regard to the various matters listed in Parts I and II of Schedule 1 to the CDDA. However, the list in Schedule 1 is not exhaustive. In relation to paragraph 6 of Schedule 1, the relevant enquiry is to what extent were the respondent's failings responsible for the causes of the insolvency, rather than applying a test based on legal concepts of causation.
(f) Conduct must be evaluated in its context. It follows that the only extenuating circumstances which may be taken into account in addressing the question of unfitness, as opposed to the length of any disqualification order, are those which accompanied the conduct in question.
(g) Where a case is based solely on allegations of incompetence, the burden is on the Secretary of State to satisfy the court that the conduct complained of demonstrates "incompetence of a high degree". The burden is a heavy one, as explained by the serious nature of a disqualification order.
(h) The requirement to assess conduct in context (or "in its setting") means that:
"…the court will assess the competence or otherwise of the respondent in the context of and by reference to the role in the management of the company which was in fact assigned to him or which he in fact assumed, and by reference to his duties and responsibilities in that role. Thus the existence and extent of any particular duty will depend upon how the particular business is organised and upon what part in the management of that business the respondent could reasonably be expected to play (see Bishopsgate Investment Management Ltd (in liq) v Maxwell (No 2)  BCLC 1282 at 1285 per Hoffmann LJ). For example, where the respondent was an executive director the court will assess his conduct by reference to his duties and responsibilities in that capacity." (p.484c-d)
(i) It follows that, while the requisite standard of competence does not vary according to the nature of the company's business or the respondent's role in management, and may therefore be said to be a "universal" standard, the standard must be applied to the facts of each particular case.
(j) It is no defence to a charge of unfitness based on incompetence for the respondent to contend that, even if the director was grossly incompetent in discharging the management role in question, he or she has not been shown to be unfit to be concerned in the management of any company, that is a "lowest common denominator" approach. The issue is not whether the respondent could have performed in some other management role competently: the court is concerned only with the conduct in respect of which complaint is made, set in the context of the actual management role that the respondent had in the company.
(k) It is not a prerequisite of a finding of unfitness that there has been some misfeasance or breach of duty, and nor does misfeasance or breach of duty necessarily make an individual unfit. In particular, the fact that errors could be characterised as errors of judgment rather than negligent mistakes is not necessarily an answer to a charge of unfitness based on incompetence, because it might be demonstrated that the individual has shown him or herself "so completely lacking in judgment as to justify a finding of unfitness" (p.486f).
"35. In Section IIIA the judge made a number of observations on the proper construction and application of the Act to which we refer, not because we disagree with the judge, but because we wish to emphasise the propositions to which he referred. First, the court must consider the question of 'unfitness' by reference to the conduct relied on by the Secretary of State and decide whether 'viewed cumulatively and taking into account any extenuating circumstances, [it] has fallen below the standards of … competence appropriate for persons fit to be directors of companies' (  1 BCLC 433 at p.483b). Thus it is no answer to the allegations of the Secretary of State that separately and individually none of them is sufficiently serious to demonstrate the requisite unfitness. Secondly, the matter referred to in Sch. 1, para. 6, namely, 'the director's responsibility for the causes of the company becoming insolvent', requires a broad approach and is not to be assessed by reference to nice legal concepts of causation (p.483f-g). Thus it matters not that others may also have been responsible for the causes of the insolvency whether more or less proximately. Thirdly, where the allegation is incompetence without dishonesty it is to be demonstrated to a high degree (pp.483j-484b). This follows from the nature of the penalty. Nevertheless the degree of incompetence should not be exaggerated given the ability of the court to grant leave, as envisaged by the disqualification order as defined in s. 1, notwithstanding the making of such an order. Fourthly, it is not necessary for the Secretary of State to show that the person in question is unfit to be concerned in the management of any company in any role. This test, described by the judge as the lowest common denominator approach, is not what the Act enjoins. As the judge observed, the court is concerned only with the respondent's conduct in respect of which complaint is made set in the context of his actual management role in that company. If his conduct in that role shows incompetence to the requisite degree then a finding of unfitness and a consequential disqualification order should be made (p.485d-h). Fifthly, a finding of breach of duty is neither necessary nor of itself sufficient for a finding of unfitness (p.486d-g). As the judge observed, a person may be unfit even though no breach of duty is proved against him or may remain fit notwithstanding the proof of various breaches of duty."
"…we would adopt the views of Mr Jules Sher QC in Re Hitco 2000 Ltd  BCC 161 at p.163D-H which were approved by this court in Re Grayan Building Services Ltd  BCC 554 at p.575;  Ch 241 at p.255 that:
'The ultimate determination for the trial judge is whether the proven "charges" render the director unfit to manage a company. That determination is not one of primary fact. It is a determination which involves the evaluation of the seriousness of the "charges" which have been proved and a judgment of the trial judge as to whether, taking all the circumstances into account, including all matters of mitigation and extenuation, the director is or is not unfit. The subjective evaluation of all this material by the trial judge is emphasised by the opening words of the section: "The court shall make a disqualification order against a person in any case where … it is satisfied … that his conduct … makes him unfit" (my emphasis). Nonetheless, the ultimate conclusion as to fitness or otherwise is itself a conclusion of fact….'"
"The purpose of the Act of 1986 is the protection of the public, by
means of prohibitory remedial action, by anticipated deterrent effect on further misconduct and by encouragement of higher standards of honesty and diligence in corporate management, from those who are unfit to be concerned in the management of a company."
"I should add that the court must also be alert to the dangers of hindsight. By the time an application comes before the court, the conduct of the directors has to be judged on the basis of statements given to the Official Receiver, no doubt frequently under stress, and a comparatively small collection of documents selected to support the Official Receiver's and the respondents' respective positions. On the basis of this the court has to pass judgment on the way in which the directors conducted the affairs of the company over a period of days, weeks or, as in this case, months. Those statements and documents are analysed in the clinical atmosphere of the courtroom. They are analysed, for example, with the benefit of knowing that the company went into liquidation. It is very easy therefore to look at the signals available to the directors at the time and to assume that they, or any other competent director, would have realised that the end was coming. The court must be careful not to fall into the trap of being too wise after the event."
De facto director
"It seems to me that for someone to be made liable to disqualification under s. 6 as a de facto director, the court would have to have clear evidence that he had been either the sole person directing the affairs of the company (or acting with others all equally lacking in a valid appointment, as in Morris v Kanssen) or, if there were others who were true directors, that he was acting on an equal footing with the others in directing the affairs of the company. It also seems to me that, if it is unclear whether the acts of the person in question are referable to an assumed directorship, or to some other capacity such as shareholder or, as here, consultant, the person in question must be entitled to the benefit of the doubt."
"… it may be difficult to postulate any one decisive test. I think what is involved is very much a question of degree. The court takes into account all the relevant factors. Those factors include at least whether or not there was a holding out by the company of the individual as a director, whether the individual used the title, whether the individual had proper information (e.g. management accounts) on which to base decisions, and whether the individual has to make major decisions and so on. Taking all these factors into account, one asks "was this individual part of the corporate governing structure?", answering it as a kind of jury question. In deciding this, one bears very much in mind why one is asking the question. That is why I think the passage I quoted from Millett J is important. There would be no justification for the law making a person liable to misfeasance or disqualification proceedings unless they were truly in a position to exercise the powers and discharge the functions of a director. Otherwise they would be made liable for events over which they had no real control, either in fact or law.'
"To establish that a person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director. It is not sufficient to show that he was concerned in the management of the company's affairs or undertook tasks in relation to its business which can properly be performed by a manager below board level."
"I do not understand Jacob J, in the first part of that passage, to be enumerating tests which must all be satisfied if de facto directorship is to be established. He is simply drawing attention to some (but not all) of the relevant factors, recognising that the crucial issue is whether the individual in question has assumed the status and functions of a company director so as to make himself responsible under the 1986 Act as if he were a de jure director."
"…someone who participates, or has the right to participate, in collective decision-making on corporate policy and strategy and its implementation, on the one hand, and others who may advise or act on behalf of, or otherwise for the benefit of, the company, but do not participate in decision-making as part of the governance of the company."
"But another issue that may arise is whether the acts relied on are actually the acts of a director at all. Holland's case did not address the question what actions make a person a director, save in so far as the majority clearly make it clear that the court should ask whether the defendant formed part of the corporate governance structure of the company. However, that is merely to restate the question. The real issue in some contexts will be whether the acts demonstrate the assumption of acts as a director."
"… the term is to be tested against the usual split of powers between shareholders and directors under Table A, ie on the basis that the powers of management of the company's business are delegated to the directors and the shareholders cannot intervene except by special resolution. On that basis it means a person who either alone or with others has ultimate control of the management of any part of the company's business."
"34. The concepts of shadow director and de facto are different but there is some overlap.
35. A person may be de facto director even if there was no invalid appointment. The question is whether he has assumed responsibility to act as a director.
36. To answer that question, the court may have to determine in what capacity the director was acting (as in Holland's case).
37. The court will in general also have to determine the corporate governance structure of the company so as to decide in relation to the company's business whether the defendant's acts were directorial in nature.
38. The court is required to look at what the director actually did and not any job title actually given to him.
39. A defendant does not avoid liability if he shows that he in good faith thought he was not acting as a director. The question whether or not he acted as a director is to be determined objectively and irrespective of the defendant's motivation or belief.
40. The court must look at the cumulative effect of the activities relied on. The court should look at all the circumstances "in the round" (per Jonathan Parker J in Secretary of State for Trade and Industry v Jones  BCC 336).
41. It is also important to look at the acts in their context. A single act might lead to liability in an exceptional case.
42. Relevant factors include: (i) whether the company considered him to be a director and held him out as such; (ii) whether third parties considered that he was a director.
43. The fact that a person is consulted about directorial decisions or his approval does not in general make him a director because he is not making the decision.
44. Acts outside the period when he is said to have been a de facto director may throw light on whether he was a de facto director in the relevant period.
45. In my judgment, the question whether a director is a de facto or shadow director is a question of fact and degree…"
(a) Guidance should be obtained from looking at the purpose of the provision in question (Holland at ). The primary purpose of the disqualification legislation is the protection of the public. Those who assume the status and functions of a company director should be held to certain minimum standards in the public interest. The legislation has both a deterrent element and serves as an encouragement to improve standards of behaviour (see  above, referring to the judgment of Lord Woolf MR in Re Blackspur Group). I do not think that the purpose of the disqualification legislation is sufficiently different from the purpose of the legislation considered in Holland materially to affect the force of the observations in that case in a disqualification context.
(b) There is no single test, but an important starting point is the company's corporate governance structure. The court is seeking to identify functions that were the sole responsibility of a director or board of directors, that is, the highest level of management of the company. Those who assume and exercise powers and functions that can only properly be exercised or discharged at that highest level of management will, consistent with the purpose of the disqualification legislation, be within its scope as de facto directors. Those who are subordinate and accountable to that highest level of management will not be.
(c) The test has been described as whether the individual was participating, or had the ability to participate, in decision-making as part of the corporate governing structure (which I take to mean the highest level of management decision-making). Another way of putting it is to ask whether the individual was on an "equal footing" with others in directing the affairs of the company.
(d) There is a distinction between being consulted about, advising on or otherwise being involved in, decision-making in some other capacity (even in circumstances where real influence is exerted) and actually participating in making a decision as a director.
(e) The question is one of fact and degree. It must be determined objectively, by reference to what the relevant individual actually did (including, for example, whether they were held out as a director and whether they took major decisions), and looking at the cumulative effect of the activities relied on in their overall factual context.
FACTUAL FINDINGS: GENERAL
(a) Kids Company's business model;
(b) Kids Company's financial position from 2012 onwards;
(c) income projections and accruals;
(d) findings relating to the departure of senior managers;
(e) government funding;
(f) support from donors and risk of donor fatigue;
(h) client spend;
(i) the allegation of dominance by Ms Batmanghelidjh;
(j) alleged preferences in April 2015;
(k) whether the July 2015 restructuring would have succeeded;
(l) earlier non-implementation of a contingency plan; and
(m) timing of change to Ms Batmanghelidjh's role.
This is followed by a separate section which makes some findings specific to Ms Batmanghelidjh.
Kids Company's business model
Seasonality of income
Increasing scale: general
Increasing scale: Bristol
Financial position from 2012 onwards
Warning signs in 2012?
Financial position during 2013: general
Approval of the 2012 accounts (September 2013)
"We acknowledge the need to build reserves, and this has been the aim of the organisation for a number of years.
One area we have difficulty with [is] the nature of our funding streams: restricted funds do not allow retention to increase reserves, and contractual funding that is less than full cost recovery leaves no surplus to save for the future.
From a different perspective, Kids Company also promises never to turn away a child in need. This drives growth in charitable spend before growth in charitable income.
We acknowledge the risks in this situation, and regularly share these with the government, who are aware of the importance of our work."
January to September 2014
The 2014 Budget
"We will only increase expenditure by this amount once the additional £3.0m has been identified."
"…were very accurate with budgeting in 2013, which gives us confidence that the figures budgeted for 2014 are also reasonably accurate."
The document goes on to consider the 2014 Budget, noting the continuing rise in staff costs due to expansion of the Bristol operations and continued growth in London. It notes that the Trustees were "paying close attention" to this area of expenditure and working to make sure that it was effectively managed. It states that the increase in staff costs from 2013 reflected increased staffing during 2013, new pension contributions and staff contingency costs. There is reference to the contingency plan, to management of unpredictable income and the impact on creditors. The note states that Kingston Smith had looked at some of the old budgets and observed that "income budgets are generally reasonable and achievable" and that:
"Overall the income levels for 2014 look healthy and also achievable."
There is also a reference to Kids Company being able to pay off its liabilities to HMRC during 2013 whilst expanding its operations, suggesting that cash was being better managed than in prior years. It concludes that cost savings could be made if necessary in the event of income falling below expected levels, by closing centres. There is reference to having seen the:
"…detailed contingency plan to support this, which shows a workable action plan, timescales and cost savings."
March to September 2014
Approval of the 2013 accounts (September 2014): going concern issue
"I have not gone over all the financial data in detail again as you noted in your email, and when we spoke earlier, that this has not changed from the previous draft."
"… that you and the Finance Department at Kids Company, have (i) reviewed cash flow, income etc with a view to assessing whether the charity is a going concern; (ii) are of the opinion that the charity is a going concern; (iii) you have discussed this with the auditors and/or written to them to this effect; and (iv) received confirmation from the auditors that they are satisfied that the charity is a going concern."
"As the charity has no endowed funds, the level of activities in the financial year starting 1 January 2014 will depend almost entirely on its ability to secure continuing grant income. Whilst significant grants have been awarded, the organisation continues to grow very fast, and has low reserves relative to its size. The Charity's history of delivering the maximum possible charitable objectives with the resources available has often put a strain on the Charity's cash flow. The Trustees are confident sufficient funding will be secured and are monitoring the situation. The Trustees consider that debts will continue to be paid as they fall due."
October to December 2014
"DH discussed that our assets do not cover our liabilities and that we are not paying debts on time. This indicates insolvency. If we believe income is coming in as expected then trading is possible."
I accept Mr O'Brien's affidavit evidence that he did not demand urgent action at this point because he still had confidence that the charity would generate sufficient income for the year to meet its costs.
The outturn for 2014
"We are cautiously optimistic about being in the black this year after reviewing accruals."
January to March 2015
"Every year the demand grows and whilst the trustees have, in previous years, believed it was possible to raise the level of funding needed, they now consider it is a great deal more challenging to keep the sums required coming in. Therefore without a guarantee of additional funds, it will be necessary to cut back the support provided by Kids Company.
We have already made it clear that to continue operating at the current level of support for all these children and young people, in 2015, we would require an additional £6.5 to £7.0 million. This funding would need to be guaranteed, with further assurances about ongoing funding from 2016/17."
April to July 2015
"This company has had arrears with HMRC for many years and despite being offered numerous arrangements, they are still in arrears and do not seem to have made any provision going forward to account for their PAYE, but simply rely on donations coming in and HMRC support.
HMRC is no longer prepared to support the company in this way and now require payment in full."
"Before we can agree a TTP with any organisation or business we have to be sure it is viable. Our view is that 'Keeping Kids Company' is not viable with a business model in its present form. Both the level of your income and its profile clearly does not match the capacity you are operating on. The numerous TTP's HMRC has agreed with you over many years illustrates that clearly.
However, on the basis that you are seeking additional funding – in which connection you advised me you were meeting with a Cabinet Office Minister on 16 September – I agreed not to take enforcement action and to allow some more time for you to address the restructuring of your finances. Alongside this you will pay over to HMRC the first £50k as set out on your proposal."
Relationship with the bank
Dependence on loans
Mr Spiers' loan
"As you know I've felt this way for several years but now the position seems more acute than ever and I can no longer just accept it. Frankly, I am surprised that the Finance Committee has allowed such a situation to occur, it doesn't strike me as good governance and [I am] perfectly happy for you to report that back. In the event that a viable programme is put in place to build up reserves then I'd be happy to reconsider the issue of donating in 2013."
Income: projections and accruals
Findings relating to the departure of senior managers
"As anxieties rightly get raised, there is a risk that some splitting will ensue. It would be brilliant if you can make sure that discussions about the future of the organisation are had with me directly and that we don't upset the equilibrium that has been achieved so carefully. Once we know what the government plan and fundraising is, then I am happy to get together with you and think about the future.
You have been an amazing group of Trustees, with extraordinary vision and courage. It is thanks to your moral fibre and sticking by the kids that we have managed together to nurture a committed organisation. I don't want in conditions of stress for the cohesive fibre that has seen us through difficult times to be eroded. So I would appreciate it if you could redirect any concerns you have to me directly and put boundaries around dialogues which might not be constructive. I need all the staff to focus on carrying out their responsibilities, which right now relate to maintaining calm and delivering to our kids.
I have always been very transparent with you, and if at any time I sense that we are at risk I will let you know. If however, you feel I am not aware of something, please come to me. I have hugely appreciated the unique qualities each of you bring to the table, and I am clear that I could not have asked for a better board of Trustees. I value your counsel and like you as individuals very much. The last thing I would ever want is to put your reputations at risk. I have a deep sense of loyalty to you all."
"I appreciate your email but the trustees want every communication to be made openly rather than like this. I think this is the right thing to do, so would you be able to raise these points at the Finance Committee this week?"
History: NAO report
Interactions with Ministers and other senior figures
"I am keen to work with Kids Company to enable you to achieve a sustainable financial footing and I look forward to discussing this in the New Year."
"I have asked Nick Hurd to work with Kids Company to enable you to achieve a sustainable financial footing, and Nick and his team in the Cabinet Office are looking forward to working with you as we pursue our common goals.
I have asked to be kept informed about how this work progresses. Thank you, once again, for writing to me on this important issue.
"The inspirational work that Kids Company do with young people in our cities is a credit both to them and our country, and I'm sincerely pleased that the recent uncertainty has been laid to rest."
A copy of the letter was forwarded to Ms Batmanghelidjh, whose PA forwarded it to, I infer, the Trustees on 7 June.
"Keep the faith. The tone of what I am hearing is positive, but I am well aware that what matters to you is delivery, not mood music.
Work in progress, but I am on the case."
"We have all been working to make sure that these children get the support they require on a longer term basis. To this end, following cross departmental discussion, we have agreed to offer Kids Company a single fund of £4.265 million for 2015/16."
"However, we all agree that we need to put the services you provide on a more sustainable basis, without the need for ad hoc government assistance. I have asked officials to work collaboratively with you and the relevant Departments early in the New Year to develop these plans further."
"We had a very useful discussion with two of your trustees today, as I'm sure you will be aware. We look forward to working with them and you to establish a more sustainable way forward for 2016/17 and beyond."
"KC will move to a more sustainable financial footing during the first six months of the year, including the better matching of revenue to expense in cash flow and the up or down scaling of activities to match cash flow."
These conditions were reflected in the formal grant latter dated 31 March, which also refers to production of a detailed contingency plan, including removing 10% from costs, removing services in Bristol and closing the Urban Academy. These cuts would have added up to around £6.6m over a full year.
"Kids Company needs to be properly funded and the solution I am proposing is the Chancellor of the Exchequer writes a letter guaranteeing their funding."
Government commissioned reports: PKF Littlejohn and Methods
Policies and procedures: there were "comprehensive policies and procedures" (minor recommendations for improvement being identified);
Governance: "the governance system in place at the charity appears to be appropriate for its size and complexity" (with no recommendations for improvements to the governance systems and risk assessment process);
Management accounting: there was "regular reporting of performance to Trustees through the Board and Finance Committee" (with recommendations being made to "further improve the information provided");
Financial systems: given the "wide range" of income and expenditure there were "reasonable controls over the systems capturing and reporting income and expenditure" (with recommendations made to strengthen controls); and
Forecasting: "Both strategy and business planning are appropriately managed, however, this must be considered in light of the serious cash flow position that the Charity often finds itself in."
"It is clear from our work that the main financial risk to the organisation is cash flow. We understand that a significant amount of management and finance time is spent in assessing and managing the cash position. Without improving the cash position of the Charity it is not possible to build reserves and invest in new activities and locations."
A later section of the report under the heading "Business Planning" reads:
"Business planning decisions are proposed by the Senior Management Team and approved by the Trustees. Most decisions will form part of the annual strategy process, however, there may be other times when an opportunity arises outside of this. Such an example was the decision to replicate the Charity's delivery model in Bristol. Whilst replication of the model in other cities is part of the longer term aims of the Charity, the opportunity in Bristol only came about due to funding being made available which enabled the Charity to expand.
We understand that following Trustee approval to proceed with a proposal for funding, a formal budget and proposal document was submitted as part of a public tendering process. Having succeeded in winning the tender, the key for the Charity is to ensure that the costs of the Bristol operations remain within budget and do not result in a drain on the cash resources."
"…pleased to see that Kids Company's processes are better than most organisations I see. I will be using Kids Company as a case study in a presentation I am giving next week…on governance."
Support from donors: risk of donor fatigue?
"Whenever cash flow allows, 10% of unrestricted donations will be invested in the CAF Bank account."
The manual goes on to state that the Trustees' aim was to build up reserves equivalent to at least three months of annual expenditure.
Client spend (kids costs)
"As much as possible, our policy is not to distribute direct cash payments, but to meet individuals' needs through vouchers (i.e. food or shopping vouchers) and direct payments to third parties. Where direct cash payments are distributed, there need to be clear explanations as to why such steps have been taken. No one person makes the decision, i.e. a group of no less than three workers decide that a young person/family needs financial assistance. The reasons, as well as the amounts, must be clearly documented and decisions subject to regular review."
Relevance of external reports
"We were impressed with the holistic approach of Kids Company including the purposeful use of physical and financial resources within an overall plan of work for each young person."
He also confirmed that for the sample seen the assessments were in line with Kids Company's charitable aims, especially with an emphasis on supportive relationships provided by key workers.
Lack of records identified: conclusions to be drawn
Allegation of dominance: general
(a) in response to the proposition that the Board set clear objectives, Mr O'Brien wrote: "devoted Board but real influence over decision-taking within Kidsco is limited";
(b) under the heading "Relationship with CEO and Executive team", whilst Mr O'Brien thought that the Board's selection, support and evaluation of the CEO and its assistance to the CEO in the appointment of senior members of the team was done well, the Board needed to work on seeking to build strong working relationships with the team and on having an open dialogue with the CEO on future development and direction of the organisation, commenting that: "1. The Board is not exposed enough to the team, CEO is too dominant? 2. We talk a lot but don't seem to impose our views";
(c) under the heading "Financial oversight", whilst doing well on compliance with financial reporting and maintaining accurate financial records and controls, Mr O'Brien thought that work was needed on demonstrating financial sustainability and adopting a financial strategy to meet Kids Company's needs and minimise risk, commenting: "Too tight in cash flow terms and therefore risky. We try but every year it gets tighter";
(d) under the heading "Strategic planning", Mr O'Brien also responded that work was needed on strategy development by the Board and having a business plan that is implemented and reviewed, commenting: "I strongly support a 3 yr plan with full trustee input";
(e) in relation to Board selection, Mr O'Brien commented: "lacking hard-nosed financial and clinical input (independent)";
(f) whilst Mr O'Brien thought the Board was doing well on all aspects of Board/staff relations (including having experienced and qualified staff and offering effective support at committee level) he queried whether the Board was big enough and said: "I don't feel we are briefed enough in advance of meetings";
(g) in relation to Board operations he suggested that the Board could be "more effective if more of Kidsco senior people were involved"; and
(h) under "Any other comments" he added: "Boards tend to be Camila telling us all the answers. I feel there could be a lot more questioning around strategy, clinical and research to establish we are getting most for our money. Seems to be hardly any pre-approval of major decisions i.e. contract commitments etc".
(a) relationships with the CEO were very good, but wider relationships with the executive team needed work;
(b) whilst there were discussions with Board members on future development, "the majority of decisions are made by the CEO and are often predetermined"; more earlier discussions could be beneficial;
(c) the nature of the activity was such that "it will always be a financial white knuckle ride, but history demonstrates that the challenge is always met and therefore the Board supports the view that it is sustainable";
(d) there was unanimous agreement that "we have a financial strategy that meets the needs and seeks to minimise risks. However the nature of the business makes this a real challenge for all involved";
(e) in the area of strategic planning, there was a need for "much deeper involvement in the early discussion on future development and Board involvement in final setting of strategy and objectives", with more time being devoted to this and the Chairman taking the leading role; there should also be a three year plan with a rolling review;
(f) action should be taken to strengthen and increase the number of Trustees, specifically to a greater depth in financial and clinical areas; and
(g) in relation to Board operations, there is a reference to greater involvement of the senior management team, including Ms Jenkins, Mr Stones, Mr Hill, Mr Kerman and Ms Caldwell; to a "more rigorous process of challenge at the Board… on major issues of policy and operations"; a desire for stronger direction from the Chair; and a comment that "Board meetings tend to be reporting sessions, rather than a balance between reporting and future facing discussions".
"I'm not against accountability but I'm not prepared to work under conditions where clinical decisions are being micromanaged long distance. There is protocol internally involving senior managers who make clinical decisions. Either these people and their decision-making process needs to be respected or whoever wants to manage things should come and be here daily and take full responsibility for finding the resources and deploying them."
"…selective choice of what risk to pay attention to and what to leave. Managing daily housing and clinical expenditure choices, in the context of an organisation which has an 85% staff liability in relation to salaries, is hardly an effective way forward.
I do not want to be the subject of somebody else's need to manage their personal authority or anxiety. If you do want to run the organisation like that, I won't be the person doing it. I'm really sorry that I am being very clear about this. I have limited resources and I can't be spending it on, what is to me, disproportionately petty management. I want to be clear that I'm not avoiding accountability but I'm not going to be a puppet Chief Executive whose strings are pulled elsewhere and dependent on other people's emotional states."
Alleged preferences in April 2015
Whether the restructuring would have succeeded
Non-implementation of a contingency plan before the July 2015 restructuring
"Before we embark upon any recruitment whether for the executive team or the board, we need greater clarity on our financial viability. I think it is now inevitable that we will be forced to scale back the organisation in some way although the extent and nature of any reduction has yet to be agreed. Once we have a clear idea of the size and structure of the charity going forwards we will be able to address recruitment requirements."
Timing of change to Ms Batmanghelidjh's role
FACTUAL FINDINGS SPECIFIC TO MS BATMANGHELIDJH
Role as CEO: financial aspects
Ms Batmanghelidjh's approach to creditors and overoptimism
Failure to accept seriousness of deteriorating financial situation
Contacts between staff and Trustees: general
WAS MS BATMANGHELIDJH A DE FACTO DIRECTOR?
The Official Receiver's case
The case as put in Mr Hannon's first report
The CEO "label"
(a) the responsibilities that the Chief Executive was stated to have under the Financial Procedures Manual (see further below);
(b) allegations that Ms Batmanghelidjh was responsible for i) negotiating time to pay arrangements with HMRC (alone from 15 August 2013); ii) negotiating short-term loans and deciding on the priority for their repayment; iii) negotiating with donors as to the use and timing of donations; iv) commissioning academic research at significant expense; and v) responding to concerns expressed by the Charity Commission in April 2015; and
(c) the fact that Ms Batmanghelidjh stated that her responsibilities included safeguarding, clinical matters (alongside the Clinical Director), managing the department responsible for generating data relating to key performance indicators and outcomes (alongside the Financial Director), liaising with the finance and operations team to maintain administrative infrastructure, and going through expenditure and creditors regularly with the Finance team.
Attendance at meetings
Approval of spending
The case as developed by Counsel
(a) the fact that Ms Batmanghelidjh had founded the charity and it existed to carry out her "vision", with (so the submission went) the Board taking her lead, deferring key decisions to her and relegating themselves to reading reports, imparting advice and attempting to persuade her to allow the business to change tack;
(b) Ms Batmanghelidjh being the public face of the charity, and it being very visibly associated with her;
(c) Ms Batmanghelidjh being "central to every aspect" of its operation;
(d) the Board being in no position to challenge Ms Batmanghelidjh's clinical judgment;
(e) the Board regarding Ms Batmanghelidjh as indispensable, particularly when it came to restructuring;
(f) Ms Batmanghelidjh committing the company to transactions, particularly loans, for which she had no express authority (any implied authority making the point that she was responsible for overall, and not just day-to-day, running); and
(g) operating policies being "regularly disregarded" by Ms Batmanghelidjh without censure or consequence.
"24. The paramount purpose of disqualification being the protection of the public from unscrupulous corporate management, it would frustrate a primary objective of the CDDA if a person who actually was responsible, or jointly responsible with others, for such management could escape disqualification by the simple expedient of never formally being appointed as a director…"
"At the forefront of the test I think I have to go on to consider by way of further analysis both what Millett J meant by 'functions properly discharged only by a director', and Mr Lloyd QC meant by 'on an equal footing'. As to one it seems to me clear that this cannot be limited simply to statutory functions and to my mind it would mean and include any one or more of the following: directing others, putting it very compendiously, committing the company to major obligations, and thirdly (really I think what we are concerned with here) taking part in an equally based collective decision process at board level, i.e. at the level of a director in effect with a foot in the board room. As to Mr Lloyd's test, I think it is very much on the lines of that third test to which I have just referred. It is not, I think, in any way a question of equality of power but equality of ability to participate in the notional board room. Is he somebody who is simply advising and, as it were, withdrawing having advised, or somebody who joins the other directors, de facto or de jure, in decisions which affect the future of the company?"
(a) Ms Batmanghelidjh founded Kids Company, was the genesis of its business model and a member of it; she was historically regarded as a director and was "in charge".
(b) When the other defendants were appointed as trustees they, as Mr Handover said, "inherited" the business model, with Ms Batmanghelidjh remaining in her existing role and with Board meetings tending to be "Camila telling us all the answers" (see [580(h)] above).
(c) In a commercial context a wholly non-executive Board was unheard of, and if the CEO of a charity was in substance doing what could be characterised as the same job as a CEO of a commercial company then they were likely to be a director (noting that Mr Handover and Mr O'Brien had drawn some analogies between Ms Batmanghelidjh's role and that of a CEO of WH Smith or a bank).
(d) A prime example was the taking of loans, which was simply left to Ms Batmanghelidjh. The Trustees' acquiescence in this put her on an equal footing with them. It was not a day-to-day matter because the loans were high-value, could affect Kids Company's solvency and potentially put it in breach of its Cabinet Office grant. The fact that Mr Yentob said that he did approve loans from Mr Roden and Harvey McGrath simply showed Ms Batmanghelidjh operating alongside him. There was no collective decision-making or delegation and the 2014 Budget should not be construed as conferring authority on Ms Batmanghelidjh to take loans.
(e) A similar point applied in relation to negotiations with HMRC, where all that was delegated was routine payments.
(f) The main manifestation of the business model was the annual budgets. The Financial Procedures Manual (discussed below) contemplated a staged process of approval of an annual plan and then a budget submitted to fulfil it. Mr O'Brien's suggestion of a zero-based budget for 2015 ( and  above) and Ms Robinson's later suggestion of a reduced 65% budget ( above) are examples of how a "top-down" approach could have happened, but instead the 2014 Budget was prepared by Ms Jenkins, under Ms Batmanghelidjh's responsibility and with her involvement, and then approved by the Board with no changes of substance.
(g) Additional staff were taken on in 2013 over budget and, Ms Anderson submitted, only reported to the Finance Committee and the Board after that happened. She said that Mr Yentob accepted that Ms Batmanghelidjh decided to increase headcount in Bristol without advance Board approval. Headcount in 2013 was budgeted at 430 but by the end of the year it was 496, albeit not all attributable to Bristol.
(h) Although the Financial Procedures Manual contained procedures for the payment of debts and financial controls generally, they presupposed Kids Company's solvency and did not deal with the situation where it was insolvent or of doubtful solvency, and decisions needed to be made about priority. Leaving such matters to Ms Batmanghelidjh, as the Trustees said they did in respect of the Board meeting on 31 March 2015 (see from  above), was the "clearest example" that she was elevated into the governing structure, and was a reason why she should be held responsible.
(i) Ms Batmanghelidjh had editorial control over the minutes. If she wanted the minutes to say something she could and did make sure that happened, elevating her input to that of the Trustees rather than the minutes being a true reflection of what the Trustees alone considered, thought and decided.
(j) The Board and committees did not routinely vote on matters. This was relevant to the distinction drawn in Re Mea Corp between someone who is simply advising, or someone who joins the other directors in decisions: Ms Batmanghelidjh was just as much a participant as the Trustees. Ms Anderson also put the question the other way, asking what decisions in the period starting September 2013 were not initiated by Ms Batmanghelidjh.
(k) The fact that Board was "hamstrung" in effecting change in 2015 suggested a concentration of power at the highest level in Ms Batmanghelidjh.
The corporate governance structure
The Articles of Association
"The business of the Company is managed by the Management Committee… They may use all powers of the Company which are not, by the Act or by these Articles, required to be used by a general meeting of the Company…"
It was not in dispute that for the purpose of the Articles the Board was the Management Committee.
Ms Batmanghelidjh's employment contract
"Your duties are to provide leadership to the Charity and to take responsibility for its management and administration within the strategic and accountability frameworks established by the Board of Trustees/Directors. Working with the Board you will ensure that Kids Company fulfils its duties and responsibilities for the proper governance of the Charity and to ensure that the Board receives advice and information in a timely, thorough and appropriate manner. To work closely with the Board in ensuring the furtherance of the charitable purposes of the Charity. To ensure that all activities are carried out in accordance with the values of the Charity.
These are the normal duties required of you. However, the nature of the organisation is such that all staff need to be flexible and all employees may be required from time to time to perform other duties to ensure the efficient running of the Kids Company.
This post is directly accountable to the Board of Trustees/Directors."
The Financial Procedures Manual
"The CEO is able to reallocate up to 10% of the total annual budget between Teams.
Beyond 10%, or wherever there are policy implications or very significant changes to programmes, changes can only be authorised by the Finance Committee."
The Manual also noted that:
"Changes to staff complement were agreed by the Finance Committee, normally as a result of the planning and budgeting process."
It is also clear from the Manual that pay rises and bonuses would be approved by the Finance Committee.
The CEO role and the role of the Board
"(i) Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company's business to enable them properly to discharge their duties as directors.
(ii) Whilst directors are entitled (subject to the articles of association of the company) to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions.
(iii) No rule of universal application can be formulated as to the duty referred to in (ii) above. The extent of the duty, and the question whether it has been discharged, must depend on the facts of each particular case, including the director's role in the management of the company."
The functions relied on by the Official Receiver
"2. All new leases, financial agreements, loans or contracts will be signed off by a Trustee.
3. A schedule of loans will be produced, to include date received date for repayment."
(A note was added to the effect that this schedule had since been produced by Mr Mevada.)
Negotiating with donors
The case as developed: Discussion
Centrality of role
Ms Batmanghelidjh being "indispensable"
Implied authority, in particular for loans, indicating overall responsibility
Taking on additional staff
"A. It's true at that stage. Well, if I may just, again, provide some context here. Bristol were in need of our coming. What we discovered, or what Camila discovered, as she was there, that one of the reasons for their problems was the skill set of the staff and that they were understaffed. That safeguarding issue for Kids Company has been absolutely crucial, so having got there and found that out, she was concerned. And there was, during this year, a case of sexual abuse of children, which Kids Company was very much involved in disclosing, and this wouldn't have been done if we didn't have enough staff to talk to the children privately, to go into their family homes. So the Bristol work was very crucial, but I do accept that it did mean more staffing and that the question of what timing it was in which we had this conversation with Camila and whether she had committed in advance is an issue which is fairly made.
Q. All right. I think you accept therefore that --
Q. -- what happened, and I think you accept that this wasn't necessarily something that the board approved in advance, was that Ms Batmanghelidjh assessed the need to be greater than what you had -- the 600 --
A. Correct, that's it.
Q. And decided to take on more people to fulfil that need?
Deciding priority of payment
Operating policies being disregarded
Did Ms Batmanghelidjh join in decisions?
Conclusions on the de facto director allegation
THE "SINGLE" ALLEGATION: DISCUSSION
(a) Mr Tatham's report set out some highly prejudicial allegations that were the subject of investigation by Ruth Lesirge, without making it clear that they were found to have no substance. Further, Mr Tatham's report did not refer to the confirmation Ms Lesirge gave in response to questions from the Official Receiver that the Policy for Distributing Financial Assistance – which is what was said to be the focus of Mr Tatham's report – was largely adhered to. (See  above.)
(b) The second example relates to the audit of the 2013 accounts, and in particular the criticism levied of the Trustees in respect of the more positive cash flow sent to the auditors as compared to the cash flow accompanying the August 2014 management accounts (see from  above). I would add to this the related point discussed in the same section about the letter of representation to the auditors which Ms Hamilton signed, and which had not been included in the trial bundle. The difference between the cash flows was not raised as an issue in Mr Hannon's report, so it had clearly not been picked up during the course of a long and intensive investigation. It was raised for the first time in the Official Receiver's skeleton argument, not leaving a proper opportunity for the defendants to investigate the matter and respond, and in particular not affording them a proper opportunity to make enquiries of Mr Mevada or the auditors. The point was obviously not put to Mr Mevada in interview or in follow-up questions. This example is noteworthy not only from a procedural perspective, but because it was thought appropriate to criticise Trustees for not picking up something at extremely short notice that the Official Receiver's team had failed to pick up during their lengthy investigation. The letter of representation is also important because the Official Receiver sought to allege that staff had not said that they thought the charity was a going concern, despite having possession of what is on any basis a significant letter in which Ms Hamilton did provide such a confirmation.
"… a demand-led model of 'self-referral' by clients and a policy of 'never turning a child in need away' … dependent on large ad hoc grants, donations and loans to meet the expenditure occasioned by the same, without any or any sufficient reserves being maintained or other provision made for the eventuality that grants, donations or loans sufficient to meet [Kids Company's] expenditure would not be made."
"Unsustainable" and paragraph 6 Schedule 1 CDDA
"becomes insolvent if … it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up".
Under the version of the legislation in force at the relevant time s 9 required the court to "have regard in particular" to the matters mentioned in Schedule 1, which relevantly included at paragraph 6:
"The extent of the director's responsibility for the causes of the company becoming insolvent."
The real issue in this case
(a) The Official Receiver's focus was on Kids Company's monthly management accounts. Its statutory accounts were ignored or sought to be discounted. There are significant differences between the two sets of accounts. The statutory accounts were produced under accounting principles the overriding requirement of which is that the accounts show a true and fair view. Unqualified audit opinions were provided in respect of them. In the absence of a successful challenge to those audited accounts, they must in my view be treated as a more accurate reflection of the overall financial position of the charity. For example, the 2012 and 2013 statutory accounts both show positive net current assets (see  and  above). These facts cannot be dismissed simply because audited accounts reflect accruals that were not included in the management accounts. I have discussed the Official Receiver's criticisms in relation to accruals in the audited accounts from  above. In summary, the charity accounted for accruals as it was required to do under accounting principles. The Trustees had no cause to doubt the correctness of the accruals, and they are in any event not by themselves a reliable indicator of cash flow difficulties. The scale of accruals did increase, but the evidence in relation to the position in 2014 indicates that the increase was not unrelenting.
(b) The Official Receiver's first choice of date, 27 September 2013, is the date on which the Board approved the 2012 statutory accounts. As discussed from  above, I do not accept the Official Receiver's criticisms about those accounts being signed off on a going concern basis. Accounts signed off on that basis, with the benefit of an unqualified audit opinion which confirmed that there were no significant matters arising from the audit, are not consistent with the company's business model being "unsustainable". This is highly relevant to the Official Receiver's allegation that the defendants knew or should have known by (or indeed in the period after) 27 September 2013 that Kids Company had an unsustainable business model.
(c) I have discussed the sign off of the 2013 accounts on 30 September 2014 on a going concern basis, and the negative cash flow included in the August 2014 management accounts, in detail from  above. In summary, I am not persuaded that the Trustees could not properly have formed the view at the time that the charity could continue as a going concern. The fact that the 2013 accounts were signed off on a going concern basis in the circumstances described is highly relevant to the allegation that the defendants knew or ought to have known that "failure was inevitable without immediate material change" at a date shortly afterwards. If it was, and the Trustees were aware or ought to have been aware of that, then it is very hard to see how the accounts could have been approved on a going concern basis. Not only were the auditors prepared to give an unqualified opinion, which again confirmed that there were no significant matters arising from the audit, but Ms Hamilton, who had clearly seen both versions of the cash flow, was content to confirm that it was appropriate to prepare the accounts on the basis that Kids Company was a going concern. This is not indicative of an unsustainable model at that time.
(d) Specifically in relation to Ms Hamilton and the Official Receiver's second chosen date of 30 November 2014 I would also add that, even when she was raising the alarm in late November, her own notes state "all believe we can make cuts and still provide a good service", see  above. Once again, this is not obviously consistent with an unsustainable model.
(e) I also reject without hesitation the Official Receiver's attempt to suggest that it was inappropriate to place any weight on Ms Hamilton's views because she had only been at the charity a few months. She was a full time, well qualified, senior executive with overall responsibility for the charity's finances. She would not have signed the letter of representation had she not felt sufficiently informed to do so. The attempts to downplay her understanding of the position contrasted sharply, and unattractively, with the criticisms of Mr Webster, who was accused of failing to "call out" the financial problems by the time of his second Board meeting.
(f) The increasing deficits relied on by the Official Receiver are by reference to cumulative monthly income deficits in the management accounts. These reflect the seasonal nature of the charity's income, with a significant proportion of its income arising in the latter part of the year whilst expenditure was incurred relatively evenly across the year (see  above). The figures for 2013 and 2014 show, as might be expected, deficits increasing over the first part of the year and then reducing later in the year. Clearly, for months in which the deficit reduces there is no "increasing deficiency". Both 2012 and 2013 finished with surpluses (in the latter case I note by reference to the management as well as audited accounts), and in relation to 2014 I have concluded that, at the least, it was not expected that there would be a material deficit, and that the Trustees were expecting the charity to break even (see from  above).
(g) This point is key: whilst cash flow was difficult, until late November 2014 the Trustees were expecting (as in previous years) that income for the year would exceed expenditure, such that creditors could be paid out of the income received.
(h) As far as cash is concerned, Mr Westwood pointed out that the management account figures relied on by the Official Receiver show that Kids Company was within its overdraft limit for all but one month in 2013 and for most months in 2014 (9 out of 12). (This was obviously the month end position in each case: see also  above.)
(i) Reliance on loans is discussed from  above. In summary, whilst there is force in the Official Receiver's criticism of increased reliance on loans, particularly where sought on an emergency basis, it is important to take account of the wider context of what was happening at the time, the charity's overall income position, the identity of the lenders and the total size of the loans as compared to turnover, as discussed there. In particular, the significant increase in loans during 2014 needs to be considered in the context of the ongoing dialogue with government during that period. And I would again note the additional controls on loans insisted upon by the Trustees after November 2014.
(j) Donors, including the government, were on a number of occasions asked to bring donations forward, and loans were sought to repay other loans and make payments to other creditors (including payroll). Where the Trustees reasonably expected that income would arise to repay loans, or to replace the income brought forward, this is not necessarily problematic. As already discussed, it was only in late 2014 that the Trustees had serious reason to think that fundraising targets would not be met (see  above, and more generally the section on donors from ).
(k) The position of HMRC is discussed from  above. 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.
(l) More generally in relation to aged creditors, I discuss at  to  above the likely make up of creditors at the point of liquidation, concluding that the great majority of the company's debts at the point of liquidation were relatively recently accrued, rather than the scale of the insolvency being properly attributable to long term failures to pay creditors. Rather, the evidence indicates that during its life the vast majority of creditors were paid, albeit that for many creditors significant advantage was taken of their goodwill, or at least their failure to take legal action.
(m) As for the Official Receiver's criticism that difficulties with creditors became "normalised" as far as the Trustees were concerned, it is clearly the case that the charity had regular cash flow problems, and in that sense the Trustees became used to experiencing them. However, I accept Mr Webster's evidence that there was no complacency (see  above).
The significance of discussions with government (and donors)
Allegations of inadequate control, dominance and resistance to change
Allegations in respect of senior management
WHETHER THE DEFENDANTS WERE UNFIT
The relevance of Kids Company being a charity
"With respect to the general principle on which the Court deals with the trustees of a charity, though it holds a strict hand on them when there is wilful misapplication, it will not press severely upon them when it sees nothing but mistake. It often happens, from the nature of the instruments creating the trust, that there is great difficulty in determining how the funds of the charity ought to be administered. If the administration of the funds, though mistaken, has been honest, and unconnected with any corrupt purpose, the Court, while it directs for the future refuses to visit with punishment what has been done in the past. To act on any other principle would be to deter all prudent persons from becoming trustees of charities."
"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 law looks benevolently on charity trustees even where there is evidence of actual or potential breach of duty."
"…I think it is legitimate for the court should bear in mind that making or upholding an order removing a person as charitable trustee could, at least in some circumstances, discourage people who might otherwise be prepared to do that which is self-evident in the public interest, namely to act as charity trustees. It would be wrong to require unrealistically high standards of legal skill, financial analysis, or detailed factual knowledge, from charitable trustees. The court should, in principle, not be anxious to find fault with charitable trustees who, while doing their best, make honest, even stupid mistakes."
The comments are obiter but clearly carry some weight.
The role of the Board, delegation and non-executive directors
"I think the respondent was bound to give his attention to and exercise his judgment as a man of business on the matters which were brought before the board at the meetings which he attended … But I think he was entitled to rely upon the judgment, information and advice, of the chairman and general manager as to whose integrity, skill and competence he had no reason for suspicion."
This passage was adopted by Romer J in Re City Equitable Fire Insurance Co. Ltd  Ch 407 at 430 and by Norris J in Sharp v Blank  EWHC 3096 (Ch) at .
"...(i) that today there is a recognised duty to monitor employees upon whom significant reliance is placed and to ensure that there are in place appropriate supervisory and review systems; and (ii) that the reliance must in the particular circumstances be consistent with the discharge of the duty of reasonable skill and care by the director..."
Section 174 Companies Act 2006
"…in testing whether a director has been negligent the question is not simply what the Court thinks it would be reasonable for the director to have done; rather it is what the evidence before the Court establishes were the courses open to reasonably competent directors (the burden lying on a complainant to establish that the course of which complaint is made is not amongst them)."
"When embarking upon a transaction a director does not guarantee or warrant the success of the venture. Risk is an inherent part of any venture (whether it is called 'entrepreneurial' or not). A director is called upon (in the light of the material and the time available) to assess and make a judgment upon that risk in determining the future course of the company. Where a director honestly holds the belief that a particular course is in the best interests of the company then a complainant must show that the director's belief is one which no reasonable director in the same circumstances could have entertained."
Trading at risk of creditors and unfitness
"The companies legislation does not impose on directors a statutory duty to ensure that their company does not trade while insolvent; nor does that legislation impose an obligation to ensure that the company does not trade at a loss. Those propositions need only to be stated to be recognised as self-evident. Directors may properly well take the view that it is in the interests of the company and of its creditors that, although insolvent, the company should continue to trade out of its difficulties. They may properly take the view that it is in the interests of the company and its creditors that some loss-making trade should be accepted in anticipation of future profitability. They are not to be criticised if they give effect to such views, properly held."
Chadwick J went on to explain that, in contrast, if a director knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation, then they might well be held to be unfit.
"Chadwick J.'s observations… mean that, ordinarily, a director will not be at risk of a finding of unfitness, such as to lead automatically to disqualification, merely because he knowingly allows the company to trade while insolvent, i.e. he allows the company to incur credit … even though, at the time and as he knows, the company is insolvent and later goes into liquidation... If the director is to be found unfit there must ordinarily be an additional ingredient. Normally that ingredient is that, at the time that the credit is taken…, the director knows or should know that there is no reasonable prospect of his company avoiding insolvency. The point was put with succinctness in Secretary of State for Trade and Industry v Creegan  EWCA Civ 1742;  BCC 835 where the relevant ground of unfitness alleged was that the defendants caused the company to trade while it was insolvent without a reasonable prospect of meeting creditors' claims. In the course of his judgment, Sir Martin Nourse (with whom the two other members of the court agreed) stated (at p.101; 837):
'It is well established on the authorities that causing a company to trade, first, while it is insolvent and, secondly, without a reasonable prospect of meeting creditors' claims is likely to constitute incompetence of sufficient seriousness to ground a disqualification order. But it is important to emphasise that it will usually be necessary for both elements of that test to be satisfied. In general, it is not enough for the company to have been insolvent and for the director to have known it. It must also be shown that he knew or ought to have known that there was no reasonable prospect of meeting creditors' claims.'"
Application of the legal test
The individual Trustees
The allegation or allegations put
Length and content of reports
Individual defendants/length of disqualification sought
APPENDIX: DRAMATIS PERSONAE
|OFFICIAL RECEIVER'S OFFICE||OFFICIAL RECEIVER'S OFFICE|
|Anthony Hannon||Official Receiver|
|William (Stuart) Tatham||Senior Examiner and Deputy Official Receiver|
|WITNESSES FOR THE CLAIMANT||WITNESSES FOR THE CLAIMANT|
|Diane Hamilton||Finance Director / Director of Finance and Accountability, Kids Company, 7 July 2014 to 30 January 2015 (but undertook some tasks during February 2015)|
|Adrian Stones||Director of Human Resources, Kids Company from 8 April 2013, resigned 28 January 2015 and left shortly thereafter|
|Mandy Lloyd||Director of Development, Kids Company from 3 June 2013, resigned 2 February 2015 and left then or shortly thereafter; fundraising role|
|Sunetra Atkinson (now known as Sunetra Sastry)||Trustee, appointed 31 October 2006|
|Camila Batmanghelidjh||Chief Executive of Kids Company|
|Erica Bolton||Trustee, appointed 19 April 2005|
|Richard Handover||Trustee, appointed 19 April 2005. Deputy Chair of Board of Trustees, Interim Chair of Finance Committee from April 2015, Governance Committee member|
|Vincent O'Brien||Trustee, appointed 20 March 2007, resigned 31 March 2015. Chair of Finance Committee|
|Francesca Robinson||Trustee, appointed 25 July 2006. Finance Committee member until September 2012; Finance Committee and Governance Committee member from Autumn 2014|
|Jane Tyler||Trustee, appointed 20 March 2007. Chair of Governance Committee, Finance Committee member|
|Andrew Webster||Trustee, appointed 10 December 2013. Governance Committee member from October 2014|
|Alan Yentob||Trustee, appointed 28 May 2003. Chair of Board of Trustees|
|Professor Stephen Briggs||University of East London, worked with Tavistock Clinic. Author of several reports into Kids Company|
|Alan Bufton||Director, Corporate & Commercial Customer & Transaction Management, Commercial and Private Banking, NatWest|
|Jane Caldwell||Head of Arts, Kids Company. Training and Work Experience Manager from 15 September 2008, also described as Director of Public Engagement. Latterly had a fundraising role, treated as claiming constructive dismissal on 28 January 2015|
|David Cameron||Prime Minister (2010-2016)|
|Louise Casey||Director General of the Troubled Families Team, Department for Communities and Local Government|
|Mozhy Chipperfield||Director of Finance and Development, Kids Company, 2008 to July 2013|
|Nigel (Lord) Crisp||Former NHS Chief Executive and then former Permanent Secretary to the Department of Health|
|Phil Cross-Rudkin||Deputy Head, Debt Management & Banking, HMRC|
|Gaby Dellal||Donor. Actor and film director|
|Alastair Duke||Partner, PKF Littlejohn|
|Mark Fisher||Director of Government Innovation Group and Office for Civil Society (Cabinet Office)|
|John Frieda||Celebrity hairdresser. Funded Kids Company's 'School of Confidence'. Planned member of new 2015 Kids Company Board of Trustees|
|Mike Gee||Lead Safeguarding Manager at the 'Arches II' centre, Kids Company|
|Chris Grayling||Secretary of State for Justice (2012-2015)|
|Deborah Gregory||Partner, Hogan Lovells, provided pro bono insolvency related advice|
|Laurence Guinness||Head of Campaigns and Research, Kids Company|
|Harriet Harman||Deputy Leader of the Labour Party (2007-2015)|
|Alan Hill||Operations and Resource Director, Kids Company|
|Nick Hurd||Minister for Civil Society (2010-2014)|
|Ruth Jenkins||Finance Director, Kids Company, from June 2013. On maternity leave from 7 July 2014 to 26 May 2015|
|Sian Joseph||Senior Policy Adviser, Cabinet Office|
|Professor Sandra Jovchelovitch||Professor at LSE|
|David Kendrick||Potential donor|
|Michael Kerman||Clinical Director, Kids Company|
|Chris Laverty||Insolvency Practitioner, KPMG, provided pro bono advice|
|Nick Lawson||A managing director at Deutsche Bank at the relevant time|
|Oliver Letwin||Minister of State for Government Policy and Chancellor of the Duchy of Lancaster (2014-2016)|
|James Lupton||The then Chairman of Greenhill Europe. Donor. Conservative Party Co-Treasurer|
|Sir Harvey McGrath||Business and philanthropy executive, Chairman of Big Society Capital, former Chairman of Prudential|
|Sachin Mevada||Head of Finance and Company Secretary, Kids Company, from 3 August 2009|
|Craig Oliver||Director of Communications, 10 Downing Street|
|Stuart Roden||Hedge fund manager, Lansdowne Partners (UK) LLP. Donor and planned Chair of new 2015 Kids Company Board of Trustees|
|Richard Stacey||Senior Relationship Manager, Not for Profit & Education Sector – Commercial Banking, NatWest|
|Philippa Stroud||Special Adviser to Iain Duncan Smith at the Department for Work and Pensions|
|John Spiers||Donor. Director of the Spiers Family Foundation|
|Helen Tabiner||Deputy Director of Youth Policy, Cabinet Office|
|Laura Trott||Political Adviser at No 10, Education and Family Policy|
|Peter Wheeler||Former managing director at Goldman Sachs and former trustee|
|Colin Whipp||Interim CRO/COO, Kids Company, appointed 7 July 2015|
|William de Winton||Hedge fund manager, Landsdowne Partners (UK) LLP. Planned member of new 2015 Kids Company Board of Trustees|
Note 1 The effect of The Small Business, Enterprise and Employment Act 2015 (Commencement No. 2 and Transitional Provisions) Regulations 2015 (SI 2015/1689) is that the amendments made by s 106 of the 2015 Act to s 6 and Schedule 1 CDDA do not apply in respect of conduct before 1 October 2015. [Back] Note 2  AC 459 [Back] Note 3 Re Hydrodan (Corby) Ltd  BCC 161 at 163. [Back] Note 4 Re Richborough Furniture Ltd  BCC 155 at 170. [Back] Note 5 The contract also stated that Ms Batmanghelidjh’s period of continuous employment commenced on 1 December 1998. [Back]
Note 1 The effect of The Small Business, Enterprise and Employment Act 2015 (Commencement No. 2 and Transitional Provisions) Regulations 2015 (SI 2015/1689) is that the amendments made by s 106 of the 2015 Act to s 6 and Schedule 1 CDDA do not apply in respect of conduct before 1 October 2015. [Back]
Note 2  AC 459 [Back]
Note 3 Re Hydrodan (Corby) Ltd  BCC 161 at 163. [Back]
Note 4 Re Richborough Furniture Ltd  BCC 155 at 170. [Back]
Note 5 The contract also stated that Ms Batmanghelidjh’s period of continuous employment commenced on 1 December 1998. [Back]