The Disqualification Of Directors Of Incorporated Charities

Like the directors of commercial companies, the directors of incorporated charities can be disqualified under the Company Director Disqualification Act 1986. However, as the Court has found in a case brought by the Official Receiver against the trustee directors of the Keeping Kids Company (Kids Company), charitable status is important in determining how these rules are applied.

Re KEEPING KIDS COMPANY [2021] EWHC 175 (Ch)

The case

In 2015, amid intense media interest, the Kids Company was forced to close and enter insolvent liquidation, as a result of a steep fall in donations following serious, if ultimately unfounded, criminal allegations.

The Official Receiver decided to use their powers under the insolvency and director disqualification rules to seek to disqualify the Kids Company’s seven directors and their high profile CEO, for conduct which ‘made them unfit to be concerned in the management of a company.’ Namely, their alleged incompetence.

The issue of incompetence

Of particular interest to the directors of many charities, considering the perilous financial position that many have been placed in as a result of the pandemic, the allegations of incompetence centred on the unsustainability of their business model.

In essence, the Kids Company, like many charitable organisations, was demand-led, and the Official Receiver argued that they had been placed in an unsustainable position of dependency on ad hoc grants with little in the way of financial reserves in order to enable them to function. The charity’s trustees were alleged to have failed to have appreciated the risks of this funding model and to have taken inadequate control of the charity’s governance.

The decision

The Judge did not find the Official Receivers’ arguments convincing. They felt that the allegations in relation to the Kids Company’s business model failed to take into account the fact that many charities have to adopt a demand-led model and have done so successfully. As, indeed, the Kids Company for almost two decades prior to its collapse.

The Court noted that the incompetence would have to be of a ‘high degree’. They did not agree that dependency on charitable donations was in itself an unsustainable model, and found that without the allegations of criminal conduct, the Kids Company would more likely than not have been successfully restructured in 2015. Furthermore, whilst financial reserves would have been beneficial, the Judge determined that, in practice, these could be difficult to achieve.

Crucially, the Court rejected the Official Receiver’s argument that the disqualification regime should apply in exactly the same way to charities as it does to other companies. The Judge stated that the fitness test would differ, particularly in this case where the trustees were non-executive directors. As such, what may result in a ruling of unfitness for a director, and particularly an executive director, of a commercial company, would not be determinative of the fitness of the actions taken by a trustee of an incorporated charity.

Finally, the Court was concerned about the impact that a finding against the trustees would have on the charitable sector. The Judge stated that: