12 February 2021 [2021] EWHC 175 (Ch) Official Receiver v Many ("Keeping Kids Company") Directors Disqualification Rejected (2of2)

12 February 2021 14:14 Page 140

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

• 1. The allegation was not pursued at trial against Ms Bolton in the light of responses to Part 18 requests made by her advisers. As referred to at [60] above, I had already ruled that the Official Receiver should not be permitted to allege that there were preferences voidable under s 239 Insolvency Act 1986 (which, very broadly, requires an element of intention to prefer in the event of an insolvency). This did not, however, prevent the Official Receiver maintaining that certain lenders were preferred as a factual matter.

  2. At the Board meeting on 31 March 2015 there was a discussion about repaying loans with the government’s grant money. It is clear from the Trustees’ evidence that they did not go through the whole list of lenders deciding whom should be repaid. Timing was also left to the executive team. I accept that Mr O’Brien’s loan was not discussed, and indeed accept his evidence that he did not request or expect repayment, and was surprised to receive it. It is also clear that Ms Atkinson’s loan was discussed, and the Trustees decided to repay her because the loan was well overdue for repayment, she was in difficult financial circumstances at the time and the Trustees did not want to discourage her or her network from lending or donating. (Mr Yentob did subsequently ask her to agree to a delayed repayment. She did not agree and was in fact repaid on 21 April.) As Mr Handover pointed out, it was important for Kids Company to keep well-connected donors, who would also help it to attract new donors, onside. It was also agreed that ICAP should be repaid because it was a condition of it making a donation that the loan was repaid. None of the relevant Trustees could recall discussing Ms Dellal’s loa n but acceptedthat they might have done. Ms Robinson made the point that it would have been important to keep Ms Dellal onside because, like Ms Atkinson, she was a well-connected lender. I accept this evidence and conclude that, given her significance, it is more likely than not that the position of Ms Dellal was discussed.

  3. There were good reasons for making the payments to Ms Atkinson, Ms Dellal and ICAP. I am satisfied that, when the Trustees discussed the matter, they did not consider that other creditors would go unpaid. If they had thought that was the case then it is highly unlikely that they would have felt able to agree to take the government grant. Rather, the decision to repay certain lenders because they or those associated with them could donate in the future indicates the Trustees’ view that the charity had a future, and that their decisions were being driven by a desire to secure that future, rather than by a concern that it would fail.

  4. The Trustees also gave evidence, which I accept, that there was no discussion at the Board meeting about paying trade creditors, and that apart from the lenders expressly discussed the decision as to which lenders and creditors to pay once the grant money was received was one for Ms Batmanghelidjh and the Finance team.

  5. At the time, £2.1m of loans were outstanding. The loans repaid constituted around one quarter of the total. In comparison, Mr Hannon’s report sets out that (leaving to one side HMRC, the bank and payroll) other non-corporate creditors were paid on average 95% of their total debt, and corporate creditors were paid about 56% of the balance outstanding. He does not provide information as to the extent to which these creditors were aged, and instead throughout his report presents all creditors as “aged creditors”, including those accrued in the month just ended. However, the management accounts for April 2015 indicate that creditors more

12 February 2021 14:14 Page 141

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

than three months old amounted to around £220,000 at 30 April, as compared to around £550,000 a month earlier.

601. Although the allegation relating to loan repayments was also made against Ms Batmanghelidjh, she was not asked about it in cross-examination. Her affidavit evidence stated that she did not recall making any decisions about whom to repay (see further [776] below about this).

Whether the restructuring would have succeeded

• 1. The Official Receiver disputes that the charity would have been able to survive if the proposed restructuring had not been prevented from proceeding by the unfounded sexual assault allegations. A particular focus of this challenge at the trial was the contents of a cash forecast sent to Ms Joseph and Ms Tabiner at the Cabinet Office on the evening of 28 July, before the £3m grant funding was released. In summary, this was said to understate creditors and overstate the funds that could be raised during the following month, August. The latter included £400,000 from an art sale and £350,000 from Ms Batmanghelidjh. The creditors were said to be understated by reference to claims lodged in the liquidation.

  2. I am not persuaded that the restructuring would have failed, and in fact conclude that absent the unfounded allegations it is more likely than not that it would have succeeded. The defendants certainly all believed that it would, and had reasonable grounds for doing so. My reasons for this are set out in the following paragraphs.

  3. In outline, the final version of the detailed restructuring plan agreed with the Cabinet Office and Mr Roden envisaged a restructuring grant of £3m from the government and £3m raised from philanthropists. This would fund an expected peak cash deficit during 2015 of £5.9m (at the point redundancy costs would be incurred), with the cash deficit for the full year projected to be £4.8m. The projected cash surplus of just over £1m would be used as a starting point for building cash reserves. Existing creditors, as well as restructuring and ongoing running costs, were addressed specifically. The plan referred to a schedule of payment being formalised with HMRC, addresse d outstanding loans (for example, indicating which loans would be converted to donations and which had been agreed with the lender could remain outstanding), and in relation to other creditors explained that the cash flow provided for them all to be repaid over the remainder of 2015.

  4. As I understand it, the final version of the restructuring plan was not reliant on any further fundraising during 2015, and the charity already had in place significant pledgesfor2016and2017.Nonetheless,theintention wastofundraise intensely during the second half of 2015.

  5. The cash forecast relied on by the Official Receiver was not simply, or even primarily, the work of the Trustees or Ms Batmanghelidjh. As I understand it, the document was produced by Ms Jenkins, an experienced accountant, but in addition Mr Whipp, an experienced restructuring professional, was very heavily involved and it was he who was corresponding with the Cabinet Office. Furthermore, Mr Roden was also heavily involved, had clearly looked at the numbers carefully and was also in direct contact with the Cabinet Office. He was

12 February 2021 14:14 Page 142

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

planning to become chair of the trustees. I note that one of the emails that Mr Roden sent earlier in the day, before the cash flow was sent to the Cabinet Office, specifically stated that Mr Whipp needed to be comfortable with the numbers before they were sent. Mr Whipp was to remain in his role as CRO for a period, with responsibility for operational, strategic and financial control, until a new CEO was appointed (with Ms Batmanghelidjh becoming “President”, focusing on clinical aspects and fundraising). In addition, the figures were obviously scrutinised closely by the Cabinet Office.

• 1. The email correspondence supports the defendants’ position that, if the Cabinet Office grant was secured, Mr Roden was confident that Kids Company’s future could be secured via private donations from himself and others. For example, an email he sent to Mr Yentob on 29 July asked that if Mr Letwin needed any more comfort on funds then Mr Roden should be given a chance to “respond/provide comfort”, and went on to say: “This is v conservative plan and assumes we raise no additional monies”. A slightly earlier email from him reports that he had lost his temper with Ms Tabiner because she had failed to include in her figures an additional £200,000 that he had secured that morning. Mr Yentob also provided clear oral evidence about Mr Roden’s level of confidence at this stage, and his determination to ensure that the charity survived. The latter point is supported by an email that Mr Roden sent to Mr Yentob on 26 May 2015 in which he said “I can’t let this charity go down – be a true disgrace”, and by a further email he sent on 8 June to a number of recipients, including Mr Yentob, reporting on a meeting with Mr Fisher and Ms Tabiner and stating that he had told them that he would make sure Kids Company “wasn’t insolvent by the time they put their money in”. The strength of his commitment is further underlined by the fact that (as an email he sent on 6 August 2015 makes plain) he did not withdraw the offer of £3m once the unfounded allegations were made, even though he knew that as a result of the allegations he would struggle to raise any of it from others and would be responsible for the whole amount himself.

  2. Ms Bolton confirmed that the £400,000 figure in the cash forecast referred to an art sale that was being planned of works that had been secured from a number of artists. She accepted in cross-examination that it would probably not have occurred during August but she thought it could be achieved during September, by putting the works into an auction house contemporary art sale. Mr Yentob’s evidence, based on his knowledge of Mr Roden’s position at the time, was that Mr Roden thought the £400,000 was on the low side and that he would have taken the art himself if necessary. However, he wanted to encourage other supporters and demonstrate that well-known artists had pledged works.

  3. The £350,000 related to Ms Batmanghelidjh’s home, which she had offered as surety if equivalent funds could not be found from elsewhere. It would have been relatively obvious to Mr Whipp and others that her property could not be sold, or probably even mortgaged, within a month. Instead, I conclude that the primary plan was to raise funds from elsewhere. This is supported by a query Mr Roden raised in an email on 28 July as to whether he was expected to step in and take Ms Batmanghelidjh’s flat “if Comic Relief doesn’t materialise”. It was also supported by Mr Yentob’s evidence, which was that there was a specific individual who had made it clear that they would not let Ms Batmanghelidjh

12 February 2021 14:14 Page 143

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

mortgage or lose her home and would provide the money instead. However, Ms Batmanghelidjh wanted the reference to her on the list to show the level of commitment that she was prepared to make. Ms Robinson also thought she recalled that a donor had said that he would step in to help Ms Batmanghelidjh out.

• 1. As regards creditors, caution is needed in comparing claims lodged in the liquidation with the creditors provided for in the forecast. For example, donors who had been expected to convert their loans to donations if the restructuring proceeded would obviously have remained as creditors in the liquidation. The information provided to the Cabinet Office included details of proposed loan conversions. It also appears that a number of individua ls who had been treated as self-employed by Kids Company (without there having been any challenge to that during the charity’s existence) established that they were employed by the charity following its liquidation, or at least lodged claims on that basis. Creditors in the liquidation would also have included redundancy costs for all staff. Ms Batmanghelidjh also evidently had a firm belief that there were a significant number of creditors on the Official Receiver’s list who should not have been there.

  2. The position is further complicated by a different document sent by Ms Jenkins to the Cabinet Office on 24 June, which a later email from Ms Laverty at KPMG confirmed was the forecast received the day before the £3m grant was signed off on 25 June. This clearly shows some adjustments made by the Trustees to figures produced by Ms Batmanghelidjh, including more modest projections than previously proposed in respectof the next gala dinner and certain other donations, and also showing the £400,000 artwork sale figure as split over the period from September to December. It was clear that these revised figures were produced following a meeting the Trustees held on 22 June 2015, which was convened after Mr Webster raised specific concerns about figures produced by Ms Batmanghelidjh.

  3. In any event the level of determination on the part of Mr Roden is such that the sorts of issues identified by the Official Receiver are in my view unlikely to have derailed the restructuring.

  4. I note that the Official Receiver adduced no expert accounting evidence to demonstrate that the restructuring would not have succeeded, or indeed evidence from anyone involved in the negotiations at the time.

  5. The Official Receiver relied on Mr de Winton’s decision in late July not to join the Board, and referred to emails he sent at that time. On 27 July Mr de Winton sent Ms Batmanghelidjh an email stating that it was not right for Mr Roden to become a “lender of last resort”, that there needed to be “fundamental and lasting changes” to how the charity was run, with an “absolute focus” on financial management, in particular building reserves, and that unless there was a real change of heart by her he would not join the Board and would seek to dissuade Mr Roden. He added that without Mr Roden’s “backstop” the charity was not a going concern, was insolvent and the Cabinet Office money should not be taken. On 28 July he sent an email to the Trustees following a meeting the previous evening stating that he would not join the Board because he would not be able to

12 February 2021 14:14 Page 144

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

work with Ms Batmanghelidjh and feared a “lengthy and possible unwinnable war of attrition”. He thought the change of heart he had referred to was not forthcoming, and that it was wrong to take Cabinet Office money with any doubts either about that or future solvency.

615. Mr de Winton’s observations and his decision not to join the Board do not affect my conclusion that, on the balance of probabilities, the restructuring would have succeeded in the absence of the unfounded allegations. He was obviously entitled to reach the view that he did in respect of Ms Batmanghelidjh, but she did ultimately agree to change her role (signing the papers later in the day on 28 July). If anything, his comments as to solvency are supportive of the defendants’position: the obverse of what he was saying is that with Mr Roden’s support the charity was solvent.

Non-implementation of a contingency plan before the July 2015 restructuring

• 1. At first sight it appears attractively easy to criticise, particularly with the benefit of hindsight, a failure to implement a radical contingency plan at an earlier stage. That criticism is at the core of the Official Receiver’s case, with particular reference to the position no later than 30 November 2014. However, as already discussed at that stage the Trustees were still genuinely, and not unreasonably, hopeful of substantial additional statutory funding being found. The government was still conveying a strong message that it did not want Kids Company to close any of its centres, which is what would be required to make radical cuts (see below). The Trustees also reasonably believed that there was strong support from philanthropists. For example, in cross-examination Ms Bolton stressed the strong support the charity had from key philanthropists and the relevance of that in determining whether a contingency plan should be implemented when it became clear that the government was not going to be forthcoming with the additional funding within the timeframe that Kids Company had hoped.

  2. In order to make a sensible plan about what to close, the Trustees would first want to have some understanding of the future funding position. Specifically, the Trustees would want to understand which parts of Kids Company’s operations could continue to be funded through other means (such as the free schools programme or mental health budget) and which could not. As Ms Robinson pointed out in cross-examination, no organisation entering a restructuring would wish to make strategic decisions about closure of operations until the full expected future plan was known. I would add that, in particular, it would want to understand the priorities of the proposed funder or funders. Making the wrong cuts could harm future funding prospects. Indications from senior government representatives that the government did not wish Kids Company to close centres are therefore relevant in determining whether the only reasonable course of action was to press ahead with significant cuts. It is also relevant that the charity was getting a similar message from supportive philanthropists: see [527] above in relation to a meeting with Mr Frieda in early March 2015.

  3. Ms Robinson’s evidence was consistent with an email she sent on 25 February 2015 about a suggestion Mr Frieda had made about an individual who could take on a COO or CEO role. She said this:

12 February 2021 14:14 Page 145

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

“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.”

• 1. Mr O’Brien confirmed that the plan agreed in December 2014 was that Mr Yentob and Mr Handover would concentrate efforts on the government, a contingency plan would be worked on, and once the charity knew what money it was going to get from government it would know what plan needed to be put into action. I accept this. It obviously required a view to be reached that the charity could keep going in the interim.

  2. Mr Webster (with the benefit of his HR experience) also gave evidence in cross- examination that a clear business plan was needed before a contingency plan could be implemented, as well as a plan to allow consultation of staff where headcount would be impacted, as it would be. This was consistent with an email he sent on 9 June 2015, stating that appropriate consultation could not commence until there was clarity from the government.

  3. The difficulty of making significant cuts should not be underestimated. The high proportion that staff costs represented of overall expenditure meant that any material cost cutting programme would mean significant cuts to staff. However, steep cuts to the numbers of staff at individual centres would have raised safeguarding concerns in respect of clients as well as safety concerns in respect of staff. Any material cuts would require the closure of one or more centres, with the result that support to significant numbers of vulnerable clients – for whom the charity provided a safety net – would be cut off. Implementing steep cuts could itself have an impact on fundraising, because it could put donors off. The choices available were therefore limited, and difficult. The fact that choices are hard does not mean they do not need to be made, but it is a relevant part of the factual context in assessing the defendants’ conduct. Ms Robinson’s point about any business wanting to understand its funding position before making strategic decisions to close operations would be true for any business, but in this case the need to balance the harm to clients that would be involved in needless closures, and the consequent failure to fulfil Kids Company’s charitable objectives, was undoubtedly a legitimate factor for the Trustees to take into account.

  4. It is clear that the executive team were given clear instructions on 21 November and again in mid-December 2014 to revisit the existing contingency plan and ensure that it was fit for purpose (see [270] and [279] above). It is also clear from the evidence that, despite pressing from the Trustees, this was not done as promptly as would have been desirable. The reasons for this were not fully explored but I infer that they were at least in part attributable to the events leading up to, and the effect of, the departure of the senior managers, which removed a criticalmanagementlayer.MsBatmanghelidjh’s reluctancetoentertainsteepcuts would also have played a part, together with the personal difficulties touched on at [651] below. I accept Ms Robinson’s evidence that by February 2015 the Trustees were behind where they wanted to be in terms of contingency planning.

12 February 2021 14:14 Page 146

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

Nevertheless, a plan was ready for discussion with government during February (see [290] above), and on 12 March Ms Batmanghelidjh was instructed to prepare a plan achieving £6.6m of savings (see [297] above). However, as explained in that section of the judgment progress was not as fast as the Trustees wished.

623. The grant offer made in March 2015 included as a condition the production of a detailed contingency plan which included the removal of services from Bristol and closing the Urban Academy (see [496] above). The fact that the condition referred to production rather than implementation reflected the possibility of alternative funding for those services from the free school initiative (see [298] above). Nonetheless, the Trustees sought to push ahead with implementing material cuts: see for example [303] and [306] above.

Timing of change to Ms Batmanghelidjh’s role

• 1. One element of the Official Receiver’s case is a criticism of a failure by the TrusteestochangeMsBatmanghelidjh’s roleatanearlierstage.Thisisanaspect of the allegation that she had a dominant role.

  2. Mr Yentob’s evidence was that he recalled a recognition by the Trustees at the meeting on 10 December 2014 that there would need to be a change at the CEO level, but at the time it was right for Ms Batmanghelidjh to stay in the role and for the Trustees to exert more control in the way already described. Mr Handover gave similar evidence. Ms Robinson confirmed that all the Trustees agreed that Ms Batmanghelidjh could not stay as CEO permanently, but that she needed to stay in position for the time being given the charity’s reliance on her as a fundraiser. Ms Tyler gave similar evidence. Mr Webster’s evidence was that the Trustees had lost confidence in Ms Batmanghelidjh as a CEO beyond the immediate future, but that it was not possible to remove her or materially change her functions at the time. Mr O’Brien’s evidence was that there was a discussion about her role and how it could be changed but it would have been harmful to the charity to replace Ms Batmanghelidjh at the time. Ms Bolton’s recollection was a consensus by the Trustees that, while she was an excellent fundraiser, Ms Batmanghelidjh did not have the requisite management skills to run a charity the size of Kids Company without senior management support, but that it was not in the charity’s best interests, or that of the young people it served, to remove her at that stage: she would not at the time have accepted a reduced role, and losing her completely would have been extremely damaging for the charity, which was dependent on her connections and relationships with donors.

  3. I broadly accept this. Mr Yentob explained that, at the time, it would have been “reckless and counter-productive” to force her out of post, both from an external perspective (as an ambassador for the charity and brilliant fundraiser) and internally, given her popularity with clients and staff at the centres. She was important to and highly regarded by David Cameron. Ms Batmanghelidjh finally accepted that her role needed to change, but this took time and a lot of work on the part of a number of the Trustees. Mr Handover commented that a change of role was impractical until a specific plan for the future was developed, and that required the government funding position to be resolved. The evidence of Mr Webster, Ms Robinson, Ms Tyler and Ms Bolton was essentially consistent with

12 February 2021 14:14 Page 147

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

that of Mr Handover and Mr Yentob: what was “possible”, for example, was clearly, in context, a question of what was realistically possible at the time.

• 1. This does not indicate dominance by Ms Batmanghelidjh, but reality in dealing with an individual of strong views whom it was not in the charity’s interests to alienate. Mr Yentob clearly did have an effective, and what he described as honest, relationship as chair with Ms Batmanghelidjh as CEO. It was also clear that Mr Handover employed his own significant skills in dealing with Ms Batmanghelidjh, and invested a great deal of time in it. As Mr O’Brien said in the slightly different context of challenging Ms Batmanghelidjh in Board and committee discussions, when dealing with a CEO it is important to take care not to throw the baby out with the bathwater. He commented in his affidavit that he thought that both Mr Yentob and Mr Handover were comfortable addressing difficult issues with Ms Batmanghelidjh, and would do so by talking to her rather than in writing. I accept this. How Ms Batmanghelidjh was dealt with involved sensitive, and not straightforward, matters of judgment.

  2. There is also evidence that there was recognition at a much earlier stage that Ms Batmanghelidjh should not remain as CEO indefinitely. Her own evidence was that she had wanted to stand down since 2005 but it had not been possible to identify someone willing to take on the role given the lack of consistent funding. I treat this evidence with some caution since it is not supported by documentary evidence, but do not entirely discount it.

  3. More concrete are a reference in the December 2012 Board minutes to Ms Batmanghelidjh raising the possibility of recruiting someone who could take over from her in the long run (in the context of a discussion of an “ongoing concern” about her role as chief fundraiser) and, in particular, the notes from Mr Wheeler referred to at [525] above following a meeting in February 2014 with Mr Yentob, Mr Frieda and Mr Gold.

  4. Those notes referred to recruiting a COO who could stand up to Ms Batmanghelidjh when necessary but be broadly supportive of her and share her and the supporters’ passion to succeed. It is worth noting that Mr Wheeler commented that this was not an easy task, that they would be looking for someone equal in “rock-star status”, but also that Ms Batmanghelidjh was “by far the most valuable asset”, a point that is consistent with my findings at [627] above. Mr Yentob’s evidence that this was a great vision, but how easy it was to achieve (and whether details such as a “rock-star” COO would work) was another matter, is supported by an email he sent to Mr Handover about the discussions on 10 February 2014. That email referred to the meeting as “going over that old issue of who could partner Camila effectively”, help with running the organisation and represent Kids Company’s case to politicians to allow a move forwards to replication without too great a burden on Ms Batmanghelidjh to do everything, adding that this was “far easier said than done”. That strikes me as a realistic assessment.

  5. I note that the email Mr Handover sent on 30 January 2015 referred to at [431] above not only referred to the breakdown in the relationship between Ms Batmanghelidjh and Ms Caldwell but also said that Ms Batmanghelidjh had

12 February 2021 14:14 Page 148

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

agreed to the appointment of a COO. This suggests that some progress was being made.

632. At a later date, in Spring 2015, the Cabinet Office started raising the question of whether Ms Batmanghelidjh should remain as CEO, and ultimately required that she should not as a condition of the restructuring grant. Mr Yentob made clear in his evidence, and I accept, that the Trustees had in any event already concluded that change was required to ensure that Kids Company was on a stable financial footing. However, Mr Roden was very clear that he wanted Ms Batmanghelidjh to remain at the charity, albeit in a different role. So obtaining her agreement to the changes was essential. In fact, the correspondence indicates that Mr Roden’s preference was to keep her in the role of CEO for a transitional period, and shows him supporting her position against what was by then Cabinet Office insistence that she should not have an executive role.

FACTUAL FINDINGS SPECIFIC TO MS BATMANGHELIDJH

633. This section sets out some factual conclusions specific to Ms Batmanghelidjh and her role at the charity. It should be read as part of my findings of fact as a whole , others of which are also relevant to my overall assessment of the issues that relate to Ms Batmanghelidjh, and in particular the allegation that she was a de facto director. Further factual findings are also included in the following section discussing whether Ms Batmanghelidjh was a de facto director, on the basis that it is most convenient to deal with them as part of the discussion of the Official Receiver’s case on that issue. These include findings about the corporate governance structure but also other specific matters relied on, for example in respect of loans and taking on staff.

Role as CEO: financial aspects

• 1. Ms Batmanghelidjh’s own depiction of her role as CEO is worth noting. She accepted that she was shown as the most senior staff member on the organisational charts, with direct reports to her from all areas of the business, both administrative and managerial in nature (for example finance, HR etc) and also from the individual centres where services were provided, although in the latter case she said that centre managers also reported to the Clinical Director. However, in oral evidence she was not really prepared to accept that she was responsible for financial elements, with the exception of fundraising. Crudely, she accepted responsibility for income but not expenditure. Her position was that the Finance team, headed by the Director of Finance and Accountability, were responsible for financial aspects and that, due to her learning difficulties, they dealt directly with Trustees. Ms Batmanghelidjh modified this stance slightly near the end of her oral evidence, when she was being cross-examined on behalf of other defendants and was shown part of a statement she made to the Official Receiver about regularly reviewing expenditure as well as income, but it remained a theme.

  2. I accept that Ms Batmanghelidjh was not directly responsible for producing financial information for Trustees. However, the Finance team were heavily dependent on her input, at least indirectly, for projected income. Furthermore, I

12 February 2021 14:14 Page 149

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

do not accept that Ms Batmanghelidjh’s learning difficulties prevented her from taking proper responsibility for expenditure. I would add that it might be expected to be a core responsibility of a CEO, as the most senior executive, to ensure that he or she has a proper understanding of and control over key risks, which would include any question about the ability of an organisation to meet its debts as they fell due. Ms Batmanghelidjh’s evidence that the Finance team effectively reported to and dealt with Trustees directly was not supported by the Trustees’ evidence insofar as it referred to dealings outside Board and Board committee meetings (and related matters such as management account packs). Although she would not have routinely got involved in the details of which creditors were paid and when, I find that Ms Batmanghelidjh did have responsibility for expenditure as well as income, and that the Finance team followed her philosophy in that respect (as to which see [642] below).

• 1. There were a number of instances during cross-examination where Ms Batmanghelidjh indicated that the matter in question was or would have been left to the Finance team, or on occasion another member of staff, and that she was not aware of or did not recall the details. Given what Ms Batmanghelidjh described as her very good long term memory and her evidently vivid memories of other events, I doubt that the explanation is in all cases a simple failure to recollect. It more likely reflects the adoption of a selective approach, to some extent in recollection but probably more in choosing not to focus on the area in question, or adopting a perspective in relation to it that did not always accord with what others might regard as its significance.

  2. I have already referred to Ms Batmanghelidjh’s involvement in dealings with HMRC and to the position with Mr Spiers (as to which see my conclusions at [333] and [368] respectively). Another example is that Ms Batmanghelidjh claimed not to have been made aware of very real concerns being expressed by self-employed staff towards the end of 2014 about not being paid for some months, and the difficulties to which that was giving rise. That is inherently unlikely. It is also clear from the minutes of a Governance Committee meeting on 21 November 2014 that Ms Batmanghelidjh was involved in a process of determining which self-employed staff should be paid first (by reference to those she identified as “more dependent”). This appropriately led to challenge by the Trustees present, Mr Webster and Ms Robinson, as to the robustness of the system and the risk of favouritism. Similar comments appear to have been made at the Finance Committee meeting on the same day, with Mr O’Brien requesting a qualitative analysis of self-employed staff and criteria for payment, and Ms Robinson saying that more robust documentation was required to explain the rationale. I accept that Ms Batmanghelidjh did not attend either meeting, but the point is that the discussions related to a system that she was said to be involved in.

  3. Ms Batmanghelidjh insisted that it had been made clear to all self-employed staff when they were taken on that they should not rely on Kids Company for their main source of income, because of the fluctuations in income to which it was subject. This is reflected in a report by Ms Hamilton in the same Governance Committee meeting (at which Mr Kerman and Mr Stones were also present), so Ms Batmanghelidjh’s understanding was obviously shared by other key senior

12 February 2021 14:14 Page 150

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

staff. It is also supported to some extent by an email from one self-employed individua l on 27 November 2014 referring to her contractual terms as contemplating the possibility of not being paid monthly as agreed “owing to funding difficulties”. However, it was clearly not understood either by that individual or by others that what was envisaged was delays of the nature then occurring. It also appears to be the case that at least for some there was signific a nt dependence on income from Kids Company.

639. A further example relates to payment for research commissioned by the charity. The evidence included correspondence with the LSE (in respect of the report referred to at [568] above) and the University of Cambridge in respect of unpa id invoices. Late payment for this research was not raised as an issue in the Official Receiver’s report, so it is not surprising that when it was raised in cross- examination Ms Batmanghelidjh could not recall the paperwork or that particula r concerns had been raised about the impact of non-payment on the position of the relevant academic research group at the University of Cambridge. Although Mr Butler did not challenge the questioning at the time, he did raise it as a fairness issue in closing, not without some justification. I deal with a different point about the commissioning of the research at [724] below, but as regards payment for the research the only finding I need to make is that, in the light of the evidence as a whole, I am not convinced by Ms Batmanghelidjh’s suggestion that the relevant member of staff (Mr Guinness) would have agreed the contractual terms with the two institutions in direct discussion with the Trustees without any involve me nt from her.

• 1. A similar point applies to some extent in relation to the charity’s operations in Bristol. Ms Batmanghelidjh’s evidence was that all the negotiation of the terms of the arrangements with the local authority was dealt with by Ms Chipperfield. Whilst that might well have been true in relation to detailed contractual terms, I do not accept that her involvement was as limited as she wished to portray. Ms Batmanghelidjh was clearly heavily involved in the development of the Bristol operations, including the staffing issues dealt with elsewhere in this judgment.

  2. Overall, I conclude that, consistently with her role as CEO, Ms Batmanghelidjh did take overall responsibility for expenditure as well as income. Furthermore, there was plenty of evidence that at times she got heavily involved in determining which creditors to pay and how much, for example in relation to HMRC, the self- employed and supporters who provided loans (see further below in relation to loans). Mr O’Brien commented in one of his interviews with the Official Receiver that Ms Batmanghelidjh “prided herself on being close to the finances”, including in dealings with the bank and HMRC. He added in that context that there was “no way Camila can claim not to have been CEO”.

Ms Batmanghelidjh’s approach to creditors and overoptimism

642. The minutes of a Finance Committee meeting on 17 July 2013 record Ms Batmanghelidjh setting out the Kids Company “philosophy” of payment that she expected Ms Jenkins to adopt in the Finance Director role, namely “human beings (children, staff and self-employed individua ls) come first, and organisations come second”. As a general statement this is a pretty accurate reflection of the way in which creditors were prioritised.

12 February 2021 14:14 Page 151

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

• 1. More generally, Ms Batmanghelidjh exhibited what I would describe as a somewhat elastic approach to the importance of time when it came to creditors (with the notable exception of payroll), combined with apparent overoptimism about the timing of income receipts and, to some extent, what liabilities those income receipts could be used to meet. Given the difficulties she describes with sequencing of time it occurs to me that Ms Batmanghelidjh’s approach may be affected to some extent by her learning difficulties. This was not directly suggested by Ms Batmanghelidjh or on her behalf, but it would be consistent with the view she put forward that her difficulties were such that she could not undertake all the aspects of corporate governance that would be required of a director.

  2. When challenged about late payments to creditors during the life of the charity, Ms Batmanghelidjh focused heavily on creditors being paid in the end, explaining that where creditors were not paid on a timely basis that was attributable to the nature of Kids Company’s income streams and its inability to force donors to complete the giving process by a particular date. That is no doubt factually accurate, but it does not by itself justify or explain how the situation arose.

  3. There were some particular concerns in this regard in respect of the management of creditors’ expectations. Self-employed staff and research institutions have already been mentioned, but a significant example is HMRC. The position with HMRC is discussed in more detail in an earlier section of this judgment. As far as Ms Batmanghelidjh is concerned, she had a significant role in managing the relationship, particularly after Ms Chipperfield left. Email correspondence in late 2014 shows the relevant HMRC officer, Mr Cross-Rudkin, commenting (with some justification) that he was getting increasingly concerned that “we are being strung along”. HMRC had previously been led to believe that the payment due in November 2014 would be covered by November cash flow, which was evidently not the case, and none of the income sources that Ms Batmanghelidjh then indicated (rather optimistically) would be available came through to meet the extended deadline that the officer had, exceptionally, been prepared to agree.

  4. Other examples of optimism as regards funding include funding from the government (dealt with in detail elsewhere) and also the lottery. In relation to the latter, Ms Batmanghelidjh sent an email to Trustees in September 2013 stating that the charity should receive £4 million of lottery money in January, to fund work in Bristol. The money evidently did not come through in January, and although Ms Batmanghelidjh asserted in oral evidence that lottery funding was received, the lottery awardof £2 million referredto in the 2012 and 2013 statutory accounts was for another project, and was awarded in November 2012.

  5. Although Ms Batmanghelidjh did not take steps to hide cash flow difficulties from Trustees when they occurred, her overoptimism about income and in particular the timing of its receipt did increase the tendency for cash flow problems to become the norm, as expenditure was allowed to be incurred and increase in anticipation of income that had not yet arrived, and creditors were given expectations about when they would be paid which could not always be met.

12 February 2021 14:14 Page 152

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

Failure to accept seriousness ofdeteriorating financial situation

• 1. Ms Bolton stated in her affidavit that, by the time of Ms Batmanghelidjh’s email on 8 December 2014 (see [406] above), the Trustees were very concerned about Ms Batmanghelidjh’s ability and willingness to recognise the gravity of the financial situation and the need for change. Mr O’Brien broadly agreed with this in cross-examination.

  2. I accept this. It is clear from the evidence that Ms Batmanghelidjh failed to accept the true seriousness of the charity’s financial situation from late 2014 onwards. Although she subsequently did work on contingency planning, my overall impression from the evidence is that she was extremely reluctant to go along with the level of cuts that the Trustees later concluded were essential. She continued to believe that if the Trustees were firm enough the government would provide significant additional funding, possibly through the free schools programme and/or mental health budget. That might have been true in the longer term, but Ms Batmanghelidjh was extremely reluctant to accept that radical action was required to secure the charity’s immediate future and enable it to meet its short- term running costs. This, combined with the departure of four senior managers and other events, including a period of illness suffered by Mr Mevada at a critic a l time, made the Trustees’ already difficult task markedly harder.

  3. However, I should emphasise that I have no doubt that Ms Batmanghelidjh’s reluctance was driven by concerns for the young people that Kids Company served. I accept that Ms Batmanghelidjh was genuinely motivated by strong views about the importance of the work the charity did and the impact of steep cuts on its clients, for whom Kids Company had provided a safety net. She was also concerned that some of the closures proposed could themselves jeopardise future funding applications, for example any free schools application. She would no doubt also have been concerned about the charity’s staff. Further, although she was very reluctant to accept the need for major cuts, it should not be forgotten that she had been making her view that the government needed to shoulder a significant element of the financial burden known for some time, and certainly from the autumn of 2013.

  4. It should also not be overlooked just how difficult this period must have been for Ms Batmanghelidjh personally. This was a charity that she had founded and built up, and devoted long hours to working for, over many years. She had a strong belief in the importance of its work (a belief shared by others). She was clearly particularly concerned about the effect that cuts could have on vulnerable young people, including the potential for violence. During this period she lost most of her senior management team, including Ms Caldwell with whom she had worked very closely. Having previously been fêted as a visionary, as the public “face” of Kids Company she became the focus of the negative press. She also had to deal with the loss of her mother in early March 2015, at a critical time in the life of the charity. As Ms Robinson said, the pressure at the time may have affected Ms Batmanghelidjh’s judgment. In any event it was clearly an extremely stressful period for her. I do not say this to excuse behaviour, but it is relevant context in understanding and assessing what occurred.

12 February 2021 14:14 Page 153

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

652. However, difficult decisions, and significant cuts, were required in the short term, and it is a fact that Ms Batmanghelidjh was not really prepared to accept that until a very late point. Ms Batmanghelidjh was also not prepared to accept that the fina l award of £3m was emergency funding, when it was clearly required urgently. She sent an email to all staff on 5 July 2015 which in part obviously reflected appropriate legal advice about what could and could not be said about potential redundancies in advance of a formal process, but it included additional wording to the effect that she was hoping not to have to make drastic cuts and was working “behind the scenes” to find potential solutions. I accept that Mr Roden had agreed that she could attempt to find ways to avoid the cuts, but he clearly thought, as did the Trustees, that it was an unrealistic exercise.

Minutes

• 1. One allegation made against Ms Batmanghelidjh relates to minutes of Board and Board committee meetings. The Official Receiver claimed that Ms Batmanghelidjh exercised editorial control over the minutes, insisting on amendments to reflect the message she wished to convey.

  2. Except for the emergency meetings in the last few months, minutes of Board and Finance Committee meetings were taken by a member of staff, who was generally one of Ms Batmanghelidjh’s PAs. Ms Batmanghelidjh’s evidence was that, with the exception of one instance where she asked for context to be added, she did not exercise editorial control over minutes and they were circulated by staff for approval by Trustees in the ordinary way, with Trustees having the opportunity to comment on them.

  3. I do not fully accept either the Official Receiver’s allegation or Ms Batmanghelidjh’s evidence on this point. Minutes were subject to approval by the Trustees and changes were made when they required them (see for example [271] above). Ms Batmanghelidjh certainly did not have the last word. However, draft minutes of Board and Finance Committee meetings were generally circulated only with the papers for the next meeting, rather than shortly after the meeting in question, so that whilst major points, and in particular key action points, were likely to be picked up, the level of scrutiny of the language used was likely to be somewhat less (as Ms Robinson accepted in cross-examination), and inevitably detail would be lost.

  4. Where minutes were prepared by a PA I also think it more likely than not that they tended to be reviewed by Ms Batmanghelidjh in advance of circulation. In any event, it is clear that minutes did tend to reflect Ms Batmanghelidjh’s influence. In circumstances where the writer was someone who worked closely with Ms Batmanghelidjh as CEO, it would not be surprising if the minutes tended to reflect some of her phraseology and indeed her overall approach, which clearly included a strongly positive outlook and a reluctance to focus on negative aspects.

  5. Having said that, the main criticism that can be made of most of the minutes is that they are too brief, and do not reflect the level of discussion, which Ms Robinson described as “spiky [and] sometimes heated”, on financial matters. It is certainly not the case that negative aspects were routinely omitted, and I do not consider that there was any intention to mislead. It is also clear that senior staff

12 February 2021 14:14 Page 154

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

as well as Trustees were able to comment on minutes of meetings at which they were present. For example, there was evidence of Ms Hamilton ensuring that reference to a discussion at the Finance Committee meeting on 10 November 2014 about insolvency (see [392] above) was included in the final version of the minutes. It is also worth noting that the email correspondence relating to this matter indicates that Mr O’Brien was sent a copy of the draft minutes in question at a relatively early stage following the meeting.

• 1. Ms Batmanghelidjh did not attend Governance Committee meetings and the member of staff who generally took those minutes was closely guided by Ms Tyler as chair. There was one instance of an email where Ms Batmanghelidjh, having read the draft minutes of a Governance Committee meeting (which were circulated to members of the committee at the same time as being sent to Ms Batmanghelidjh), expressed concern to Ms Jenkins that the “tone” of the minutes was somewhat flippant and factually inaccurate, stating that she wanted the minutes modified because they were formal minutes, and that if that was the tone of the meeting it was inappropriate. Ms Jenkins apologised and asked to discuss the changes that Ms Batmanghelidjh would like made. I accept MsBatmanghelidjh’s explanation of this, which broadly accords with the email, namely that formal documents of this nature should not exhibit a disrespectful tone, out of line with the charity’s style. It is an example of influence beingexercised, but the Trustee members would have seen and had a chance to objec t to any changes.

  2. There was also one instance where minutes of a later meeting record that Ms Batmanghelidjh asked for additional context to be added to a set of Finance Committee minutes. There are two points to make about this. First, the minutes in question had clearly been sent to Trustees in draft before Ms Batmanghelidjh had reviewed them, showing that she did not always review minutes in advance. Secondly, I do not accept the allegation made to the Charity Commission that her actions went beyond this and amounted to editorial control. That allegation does not accord with the documentary evidence, and Ms Lloyd, who was present at the relevant meeting, could not provide support for the allegation in oral evidence, accepting that what was said to the Charity Commission was indicative of the sort of thing that would happen, and was reflective of conversations that had occurred between her and the other senior managers.

Contacts betweenstaffand Trustees:general

• 1. Throughout her oral evidence Ms Batmanghelidjh insisted that there was regular contact between other members of the management team and Trustees, outside formal Board and Board committee meetings. This point was emphasised most in relation to Finance team members and Trustees on the Finance Committee, for reasons attributed to Ms Batmanghelidjh’s learning difficulties (see in particular [634] and [635] above).

  2. In relation to discussion and approval of financial matters, and with the particular exception of the Trustee involvement required in signing large cheques, I am not convinced that these contacts occurred to the extent that Ms Batmanghelidjh suggested. She was in no real position to know what level of contact there was. The evidence I saw and heard leads me to conclude that the principal contacts

12 February 2021 14:14 Page 155

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

between other staff and most of the Trustees were through formal Board or Board committee meetings, together with paperwork sent in advance, in particular the detailed monthly management accounts packs. Specifically in relation to payments to HMRC, for most of her oral evidence Ms Batmanghelidjh was under the misapprehension that Trustee approval would have been required for any payment to HMRC because of its size, and therefore that details of each payment must have been discussed. That was not in fact the case under the terms of the Financial Procedures Manual (see [696] below) and I do not accept that Ms Batmanghelidjh was correct in thinking that Trustees were heavily involved.

662. However, it was the case that Mr Handover was very regularly present at Kids Company’s head office and would have had significant dealings with staff while he was there, in particular the Finance team (see [30] above). More generally, other Trustees would also have had dealings with staff outside meetings, for example in connection with fundraising and Development Committee work.

Mr Kendrick

• 1. One of the issues raised by the senior managers was Ms Batmanghelidjh’s dealings with a potential donor, David Kendrick, in November 2014.

  2. Mr Kendrick was someone whom Mr Stones had got to know through his previous employment. It appears that Ms Batmanghelidjh had been attempting to meet Mr Kendrick for around a year, but meetings had been cancelled or rescheduled. However, he did attend the gala dinner on 9 October 2014. Following this a meeting was arranged and, after some further rescheduling around Mr Kendrick’s commitments, took place on 19 November. MsBatmanghelidjh was present, along with Ms Lloyd and an assistant to Mr Kendrick, Paul Khullar.

  3. At the meeting Ms Batmanghelidjh asked Mr Kendrick for an immediate donation of £1m. It appears that she also included a donation of that size from him on an income projection discussed with the Finance Committee on 21 November (see [273] above) and had raised the possibility of a donation from him (and Comic Relief) at the Board meeting on 30 October.

  4. Mr Kendrick asked for a day or so to think about it. Ms Batmanghelidjh chased by email on 21 November and on 22 November Mr Khullar responded to say that Mr Kendrick was not in a position to donate the immediate £1m required, which Ms Batmanghelidjh had requested to fund payroll, but made a number of longer term proposals. These proposals involved a form of partnership which included assistance with the website and marketing, developing a strategy for replication globally and exploiting the “commercial potential”, including expandingmerchandising. These other ideas were rebuffed by Ms Batmanghelidjh in an email which clearly reflected her honest views but which, at least in retrospect, can be criticised as ill-judged in tone. I would not however go so far as to adopt Ms Lloyd’s description of the email as “vile”. In both that and a further email to Mr Khullar Ms Batmanghelidjh indicated that she had made it clear at the meeting that being able to work together on other projects was dependent on addressing the charity’s immediate requirements: “It’s important that we are able to survive”.

12 February 2021 14:14 Page 156

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

The effect on Mr Kendrick was a negative one and all suggestions of support for the charity disappeared.

• 1. It is regrettable that the existence of email evidence of Mr Kendrick’s decision not to donate the funds requested was not disclosed with the Official Receiver’s report, and that the Official Receiver instead relied on Ms Lloyd’s evidence that Ms Batmanghelidjh had refused his assistance. Ms Lloyd was not aware of the relevant email until she was shown it in cross-examination. I do not suggest that the omission was intentional, but the effect was that the Official Receiver did not present his case in a balanced way on this point.

  2. It is however the case that, when Mr Kendrick refused immediate help, Ms Batmanghelidjh neither alerted the Trustees at the Board meeting on 26 November nor Mr Cross-Rudkin at HMRC, to whom some reference had been made to the prospect of a £1m donation.

WAS MS BATMANGHELIDJH A DE FACTO DIRECTOR? The Official Receiver’s case

The case as put in Mr Hannon’s first report

669. The relevant section of Mr Hannon’s first report made the initial comment that Ms Batmanghelidjh was precluded from being formally appointed as a director because she received remuneration, but that his case was that she was nevertheless a de facto director throughout Kids Company’s period of operation. The report went on to give Mr Hannon’s reasons for this in 21 numbered sub- paragraphs. Mr Butler’s written opening submissions categorised these as amounting to six classes of activity, which he listed as allegations relating to 1) the CEO “label”; 2) CEO functions; 3) holding out; 4) attendance at Trustee meetings; 5) entitlement to approve spending; and 6) instigation of committee membership (which Mr Butler referred to as the “promotion” allegation). It is convenient to summarise the allegations using this categorisation.

The CEO “label”

670. Mr Hannon relied on Ms Batmanghelidjh’s job title, the fact that she was the most senior staff member, with all department heads reporting to her, the fact that she styled herself as Chief Executive (including in the company’s annual reports), the Trustees’ description of her as having overall responsibility for day-to-day running, her understanding that she was responsible for managing the organisation, and the fact that there was no one else fulfilling the role of chief executive.

CEO functions

671. Mr Hannon relied on a number of Ms Batmanghelidjh’s functions or alleged functions asCEO,namely:

(a) the responsibilities that the Chief Executive was stated to have under the Financial Procedures Manual (see further below);

12 February 2021 14:14 Page 158

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

• • (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 clinic a l 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.

677. Counsel also noted that Ms Gregory of Hogan Lovells had commented that Ms Batmanghelidjh would “probably be treated in a similar way” to the directors in terms of exposure if liabilities were incurred with no prospect of meeting them.

Closing submissions

• 1. Inclosing submissions, thecasewasdeveloped further.MsAndersonemphasised that Holland in particular was not a disqualification case. With reference to the Trustees’ claim to have delegated to a very material extent to Ms Batmanghelid jh , Ms Anderson relied on the following comment in the judgment of Hildyard J in Re UKLI Ltd, Secretary of State for Business, Innovation and Skills v Chohan [2015] BCC 755 (“Chohan”) at [24]:

     1. “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...”

  2. Ms Anderson also relied on the judgment of Lewison J in Re Mea Corp Ltd, Secretary of State for Trade and Industry v Aviss [2007] BCC 288 (“Re Mea Corp”) (a case not cited in opening), which considered the concept of de facto director in a disqualification context. (I note that this case was decided at around the same time as Etherton J’s decision in Hollier.) What Ms Anderson mainly relied on it for was two passages Lewison J cited from the judgment in Tjolle, set out at [83] and [84] of Lewison J’s judgment, which she said were approved in Holland. The second of these passages is set out at [157] above. The first, at [83] of Re Mea Corp, was a citation from a slightly earlier passage at pp.289-290 of Tjolle which itself sets out a passage from the judgment of Judge Cooke inSecretary of State for Trade and Industry v Elms (16 January1997, unreported):

12 February 2021 14:14 Page 159

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

“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’3, and Mr Lloyd QC meant by ‘on an equal footing’4. 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?”

• 1. Ms Anderson relied in particular on the references to committing the company to major obligations and equality of participation in the board room. In relation to the former in particular, I remind myself of the comment of Robert Walker LJ in Re Kaytech, referred to at [159] above, that the factors listed by Jacob J in Tjolle, which included making major decisions, are relevant factors, but the crucial issue is whether the individual had assumed the status and functions of a director. That is a similar approach to the one expressed by Lord Collins in Holland,albeit there outside a disqualification context (see [163] above), namely that the crucial question is whether the person “assumed the duties of a director”. As to whether paragraphs [83] and [84] of Re Mea Corp were approved in Holland, paragraph [83] was referred to by Lord Hope at [32] and by Lord Walker in his dissenting judgment at [108] (who also referred to paragraph [84]), but in the context of a comment by Lewison J about the importance of focusing on what the person did . Paragraph [83] was briefly referred to again by Lord Walker at [111] in relation to the requirement that the relevant person undertook functions that could properly be discharged only by a director. There was no specific discussion of the reference to “major decisions”.

  2. Ms Anderson submitted that the most decisive points on the facts of this case were as follows:

     1. • (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

3 Re Hydrodan (Corby) Ltd [1994] BCC 161 at 163.

4 Re Richborough Furniture Ltd [1996] BCC 155 at 170.

12 February 2021 14:14 Page 168

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

HMRC

• 1. As regards negotiating time to pay arrangements with HMRC, this is obviously an executive function which would ordinarily be undertaken by the executive team. The evidence indicates that before she left discussions were principally undertaken by Ms Chipperfield. Thereafter Ms Jenkins was involved as well as Ms Batmanghelidjh, although as discussed at [333] above Ms Batmanghelidjh took the leading role. There is nothing remarkable in this. Dealing with HMRC is an executive function that was properly carried out by staff members. The level of involvement by Trustees once they became aware of material issues was appropriate. For example, Mr O’Brien confirmed that he would have been told about HMRC’s letter dated 8 March 2013 (referred to at [318] above). Ms Tyler said that there were regular questions in meetings about the position with HMRC and whether the charity was keeping to time with its payments. I accept this. The position with HMRC, and in particular whether it was up-to-date with payments, was covered in management account information (in particular, in the “Management Accounts Summary Report” referred to below in relation to loans ) and minutes indicate discussion in Trustee meetings. To take one example of this, at the Finance Committee meeting on 18 July 2013, Ms Tyler is reported as asking whether the charity was keeping to its deal with HMRC.

  2. IdonotagreethatallthattheFinancialProceduresManualdelegatedwasroutine payments to HMRC. The specific provision relied on by Ms Anderson simply statedthat PAYEcould be processedby the Headof Finance in amounts in excess of the authorisation limits. Elsewhere the Manual made it clear that it was the task of the Head of Finance to submit assessments to HMRC and make monthly payments, and more generally that it was the overall responsibility of the Finance team to ensure accurate and timely payment of creditors, including PAYE. My overall assessment is that the Finance team had and sought to discharge this responsibility, that Ms Batmanghelidjh got involved when major issues arose after Ms Chipperfield left, and that the Board was alerted both to major issues and more generally as to the extent to which payments were either up-to-date or overdue. In my view the Board was appropriately exercising a supervisory role.

Loans

• 1. Loans from supporters are not explicitly addressed in the Financial Procedures Manual. Taking out a loan of course involves taking on a commitment, and on that basis it could be said that loans in excess of £20,000 should have been authorised by the Trustees (see [696] above). It is also an exercise of the power to borrow that was expressly conferred on the Management Committee by the Articles (see [684] above). However, Ms Batmanghelidjh did not understand that the limits imposed by the Financial Procedures Manual applied to loans, and neither did the Trustees. It was also clear from the evidence that it was understood that Ms Batmanghelidjh was taking out loans from supporters, and was permitted to do so. (I also note that the loan from Mr Spiers was negotiated by Ms Chipperfield rather than by Ms Batmanghelidjh (see [361] above), albeit that Ms Batmanghelidjh had responsibility for it.)

  2. For example, a minute of a Finance Committee meeting on 19 March 2014 records that Ms Batmanghelidjh “manages loans directly”. As Ms Robinson

12 February 2021 14:14 Page 169

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

commented in her evidence, it made sense for Ms Batmanghelidjh to manage loans because they invariably came from close supporters who were already donors. Effectively, it was seen as an aspect of fundraising.

• 1. Asrecordedat[235]above,the2014Budgetrecognisedthatloanswouldneedto be secured for at least the latter part of 2014. It also stated that the Trustees would need to work with Ms Batmanghelidjh to identify appropriate sources and negotiate sufficient facilities. I read this, as did Mr Yentob and Mr O’Brien when asked about it in cross-examination, as a recognition that the Trustees’ assistance in identifying philanthropists willing to help with short term loans was of value. The document neither stated that the Trustees had to be involved via an approval process, nor did it confer an authority to take out loans that did not previously exist. It simply recognised that Trustees could assist with their contacts. That interpretation is also consistent with an action point in the “next steps” section of the document which reads “Trustees to identify loan options with Camila”. A number of the lenders were known to Trustees, and in some cases were Trustees themselves. As regards the former, Mr Yentob for example spoke to Mr Roden about loans he made, and did in fact approve a £650,000 loan from Mr Roden in April 2014. He also confirmed in cross-examination that he was asked about loans made by Harvey McGrath and by Mr Frieda.

  2. The monthly management accounts, many of which were circulated to the whole Board as well as to the Finance Committee, always included the amount of loans outstanding in the balance sheet. Further details, namely the identity of lenders and the amount each had lent, were included in a “Management Accounts Summary Report” produced for Trustees, of which I saw a number of examples . I also accept Ms Batmanghelidjh’s evidence that she discussed loans informa lly with some Trustees, particularly if the lender was known to the Trustee in question, although I do not accept that this would have happened as frequently as she indicated.

  3. Loans were also discussed at Board and committee meetings. For example, in the case of the one loan where interest was charged, it was made clear at a Finance Committee meeting (on 1 July 2013) that the loan in question should be paid back as soon as possible.

  4. If not spelt out expressly, the fact that authority to take out loans was delegated was certainly implicit until the Finance Committee meetings in November 2014. The minutes of the meeting on 10 November 2014 record that outstanding loans were discussed at great length and that the committee discussed an authorisation process and borrowing limits, with Mr O’Brien asking for a list of loans and the terms to be provided. The minutes of the meeting on 21 November again record that the terms of existing loans should be shared with Trustees and that the committee discussed introducing some level of advance control, and also that Mr O’Brien asked for a draft policy note to be written with authority levels to be further discussed. The topic was also raised in the Finance Committee meeting on 18 December 2014, the minutes of which record Mr O’Brien as requesting that Trustees be made aware in advance of any future loan commitments, with an approval process to be prepared involving two Trustees giving approval by email. This followed the Board meeting on 15 December where the “key actions

12 February 2021 14:14 Page 170

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

agreed”, as recorded in an addition to the minutes of the 26 November meeting (see [279] above), included:

“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.)

• 1. It is the case that Ms Batmanghelidjh obtained a loan of £100,000 from one of the charity’s supporters on 26 November, shortly after the two November meetings at which controls had first been proposed. However, she was at neither meeting. I also do not read those minutes as putting in place immediate controls, as oppose d to proposing an approval process for further discussion. Further, I do not read the minutes of either the November or December meetings as requiring Trustee approval to the order in which loans were actually repaid, or the dates on which they were repaid. Ms Robinson’s oral evidence was that this was her understanding of the position as well, and that as a general matter decisions as to which creditor to pay and when (including lenders) remained with staff, and in particular the Finance team.

  2. I deal further below with the Official Receivers’ case in relation to loans as developed in submissions (see from [749] below).

Negotiating with donors

723. Negotiating with donors as to the use and timing of payments is clearly an executive function associated with Ms Batmanghelidjh’s fundraising role. It involved no breach of procedures. Ms Batmanghelidjh clearly had delegated authority to generate funds from fundraising.

Commissioning research

724. Commissioning research was consistent with the charity’s objects and was contemplated by the Financial Procedures Manual. Ms Anderson cross-examined Ms Batmanghelidjh about the commissioning of two pieces of research, from the LSE and the University of Cambridge (discussed at [639] above), as examples of instances where it was said that research was commissioned without evidence of Trustee approval, in breach of the requirement in the Financial Procedures Manual for approval to be obtained for researchcommitments exceeding £20,000 (see paragraph [696] above, and assuming for these purposes that the same authority limits applied before the December 2013 version of that Manual was adopted). In both cases Ms Batmanghelidjh believed that the research had been discussed with the Trustees, even though this is not evident from the available minutes of meetings. However, the Cambridge contract was originally entered into in 2010, most of the Board minutes for which were not in evidence. The LSE contract was entered into in February 2013 with an initial value of around £43,000 (which was invoiced in July 2013), so it would appear to have required approval.

12 February 2021 14:14 Page 171

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

• 1. GiventhatminutesofBoardmeetingsinparticulartendedtobebrief,itispossible that a proposal to commission research was discussed and not minuted. Moreover , I did not read the Financial Procedures Manual as necessarily requiring a collective decision by Trustees, rather than approval from a Trustee. This reading is consistent with the way in which substantial cheques and invoices were dealt with. Cheque requests and invoices in excess of £20,000 were subject to Trustee approval, but this was not taken to mean collective approval in a meeting, at least where the expenditure had been budgeted for. If collective approval was required there would no doubt have been numerous references to such approvals in Board minutes. Rather, my understanding of the evidence is that the approval of an individual Trustee would typically have been sought, and that this was the way in which the controls were understood and operated. This conclusion is consistent with the way in which additional controls were imposed in December 2014: see [279] above. Furthermore, the detail included in monthly management accounts and budgets was such that it is unlikely that the commitments would not have become apparent. There is no evidence of any concern or objection being raised to the commissioning of any research.

  2. The 2013 Budget, approved by the Board in May 2013, stated that in 2012 Kids Company spent £333,000 on external research, and that the charity expected the 2013 figure to be in line with that. My overall reading of the Financial Procedures Manual is that expenditure within budget, or which did not vary materially from the budgeted level, did not need the approval of the Finance Committee (or therefore, by extension, the Board): see in particular the passages set out at [694] above. Rather, commitments in excess of the specified limits but within budget required the authorisation of a Trustee.

Holding out

• 1. I did not find any of the documents shown to me in support of this allegation to carry material weight.

  2. The only meaningful example of Ms Batmanghelidjh signing herself solely as director that was at all close in time to the period in dispute was the lease of Arches II, entered into in 2010. This was a document intended to be executed as a deed, and as such it should have been signed by two directors or by a director and secretary (s 44 Companies Act 2006). It was evidently a document drafted by the landlord’s solicitors. Ms Batmanghelidjh signed next to the pre-printed word “Director”, whereas Mr Mevada (who was in fact the secretary at the time) signe d as “Director/Secretary” without deleting the word “Director”. Ms Batmanghelidjh should not have signed as she did, but it is an isolated example of something which might have been expected to be picked up by the solicitors, andindeedMrMevada(aqualified accountant),asanerror.Thereisnoindication that anyone was actually misled.

  3. In most of the other documents relied on Ms Batmanghelidjh signed herself as Chief Executive, which was simply an accurate statement of her role. Importantly, it is clear that this was how she described herself in her own letters and emails during the period in dispute. Using that description does not amount to the company holding out Ms Batmanghelidjh as a director.

12 February 2021 14:14 Page 172

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

• 1. There were a couple of much older letters relating to individual clients where Ms Batmanghelidjh signed herself “Director – Kids Company”. However, they date from September 2001 and September 2004. There were also two letters dating from October 2000 and January 2004 in which other staff members referred to Ms Batmanghelidjh as “Director” of Kids Company. These isolated examples, drawn from a very extensive review of client files, are simply too far removed from the period in question, and too limited, to carryweight. At most they indicate that at one stage Ms Batmanghelidjh did describe herself as a director, but by the period in question it is clear that this had been corrected and she was using the job title in her employment contract. I also accept Ms Batmanghelidjh’s evidence that when she used the term director she did not understand the legal significance of the word. She thought she was saying that she was an executive officer working under the Trustees.

  2. There was one example of acceptance of a government grant offer made in February 2014 where Ms Batmanghelidjh signed next to the pre-printed words “Director/Chief Executive” without deleting the former word. There was a simila r unsigned version relating to the grant offered on 31 March 2015. (It is worth noting that Ms Tyler also signed next to the word “Chair”, without clarifying that she was not Chair of the Trustees.) In my view the non-deletion of the word “Director” is not material.

The case as developed: Discussion

• 1. As already indicated, the Official Receiver’s case that Ms Batmanghelidjh was a de facto director was developed in written and oral submissions. Mr Butler’s primary submission was that the Official Receiver’s case should be confined to the case put in his report (to which Mr Butler had addressed his written opening) and not the case as developed.

  2. There is validity in Mr Butler’s criticisms. A disqualification order involves penal consequences, and the defendant must know and have proper notice of the case they have to meet (Re Lo-Line Electric Motors Ltd [1988] (Ch) 477 at pp.486- 487 per Sir Nicholas Browne-Wilkinson VC, discussed further by Dillon LJ in Re Sevenoaks Stationers (Retail) Ltd [1991] (Ch) 164 at pp.176-177). As Lewison J said in Secretary of State for Trade and Industry v Goldberg [2003] EWHC 2843 at [51], the substance of the case that the defendant is required to meet must be set out. The defendant should be able to ascertain with clarity exactly what the allegations are and on what evidence the applicant intends to rely (Re Finelist [2004] BCC 877 at [16] to [21]). In principle, I do not see why these comments should not apply to the question of whether an individual is a director for the purposes of the disqualification rules, as they apply to the question of unfitness. Both are essential requirements for a disqualification order.

  3. However, as I explained in the ruling referred to at [60] above, the court has a discretion to allow additional allegations or a change in the nature of allegations provided that it can be done without injustice. I have concluded that, given the length of the trial and the opportunity that Ms Batmanghelidjh’s legal team have now had to respond, it is not unjust to Ms Batmanghelidjh to take account of the case as developed. This is subject to the caveats discussed below in respect of one particular issue relating to taking on staff, which was raised only in closing.

12 February 2021 14:14 Page 173

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

735. Although in my view it makes no difference to the final result, given Mr Butler’s criticisms I have dealt with additional points raised in submissions separately, in the following paragraphs. However, I should note that I accept that the points about negotiating loans and deciding on the priority for their repayment, and the centrality of Ms Batmanghelidjh’s role, were raised to some extent in Mr Hannon’s first report.

Centrality of role

• 1. The case as developed relied on the centrality of Ms Batmanghelidjh’s role at the charity, with her being the public face and, it was said, the charity existing to carry out her “vision”. She was the founder and genesis of the business model.

  2. I do not see that the fact that Ms Batmanghelidjh was the public face of the charity is itself either determinative or of significant weight, unless it involved her role being one that was directorial in nature. In order to determine that, it is necessary to investigate what actually happened, rather than what public perceptions might have been.

  3. Ms Batmanghelidjh was obviously heavily involved in founding the charity, although I accept her evidence that the “model” adopted, meaning in this context the nature of the services provided and the self-referral element, was the result of a team effort with staff members, and that it evolved with significant input from the young people to whom services were provided. But for similar reasons that does not itself make Ms Batmanghelidjh a de facto director.

  4. Akeyquestioniswhether,astheOfficialReceiveralleges,theseelementsinfact led to the Board allowing Ms Batmanghelidjh to take the lead, deferring key decisions to her and relegating themselves to the role of attempting to persuade her rather than exercising control, with her “telling us all the answers”. I have already discussed the corporate governance structure in some detail and there is a separate section on the more general allegation of dominance from [579] above (also discussed further below). Having regard to my conclusions on those aspects, and on the basis of my findings of fact overall, I am not satisfied that this allegation is made out.

  5. In my assessment Ms Batmanghelidjh accepted throughout that the Trustees were the ultimate decision makers (as to the relevance of this, see [789] below). That did not prevent Ms Batmanghelidjh seeking to persuade them to make, or not to make, particular decisions, or at times (particularly in the final few months) chafing against the exercise of the Board’s authority, but she recognised and accepted that, ultimately, she needed to abide by instructions from the Trustees.

  6. The Trustees were also clear that it was they, not Ms Batmanghelidjh, who were the ultimate decision makers, and carried responsibility accordingly. This is evident from their actions at the time of the events in question. This is important because Ms Batmanghelidjh could not have unilaterally assumed the role of director: the Trustees would need to have allowed her to do so.

  7. The identity and qualities of the individual Trustees are highly relevant. Each of the Trustee defendants has an impressive CV and has held responsible positions,

12 February 2021 14:14 Page 174

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

including some who have held very significant leadership roles in large organisations. It is inherently unlikely that such a group of individuals would place themselves in a position where they were in such thrall to Ms Batmanghelidjh that they did not exercise appropriate supervision and control. That inherent unlikelihood was reinforced by their oral evidence.

743. Trustees had regular meetings at which searching questions were properly asked of the executive team, including in particular Ms Batmanghelidjh. I am satisfied that there was a fuller discussion of matters than most of the minutes indicated. Budgets, which were the main means by which the Trustees exercised control over expenditure, were discussed and approved. The level of written information provided to Trustees, in particular the monthly management accounts packs and also the detailed risk register information (which was considered by the Governance Committee on a regular basis), is notable. There is and can be no suggestion that meetings were too infrequent. Decisions were taken, action points were noted, and there was appropriate follow up. Ms Batmanghelidj h undoubtedly exercised significant influence and was heavily consulted, and for most of the period in question the Trustees were sufficiently content with what she was doing not to require a change of direction, but it does not follow that she was either the ultimate decision maker or that she had parity with the Trustees in that respect.

• 1. As to Ms Batmanghelidjh having been “central” to the charity’s operations, centrality would be typical of an effective and committed CEO. Among other things it ignores the fact that the Trustees were non-executives and that it was Ms Batmanghelidjh who, as the title suggests, was in charge of the charity’s executive operations. I do not agree with the suggestion in closing that any CEO of a charity doing a role that can be compared to that of a CEO of a commercial company is likely to be a de facto director. Whilst it is no doubt the case that the CEO of a commercial company would pretty much invariably be on the Board, the roles of CEO and director are distinct. At Board level, directors have the collective role of supervision and control described by Jonathan Parker J in Re Barings (No. 5). When carrying out executive functions as a CEO the individual in question is carrying out functions delegated by the Board, and is subject to supervision and control by the Board as a whole. This is the case even if the extent of delegated authority is significant.

  2. It is relevant that Ms Batmanghelidjh did not attend meetings of the Governance Committee and it seems only reluctantly attended meetings of the Finance Committee when requested. At meetings at which she was not present, the executive team was represented by other senior staff, who received instructions directly from Trustees. It was not the case that everything was filtered through Ms Batmanghelidjh.

Clinical judgment

746. The Official Receiver also relied on the Board not being in a position to challenge Ms Batmanghelidjh’s clinical judgment. I do not consider this point to carry significant weight. The Board, in particular via the Finance Committee, exercised budgetary control and regularly scrutinised expenditure. Expenditure on clients, in particular the “Top 25”, was regularly discussed (see from [546] above). As

12 February 2021 14:14 Page 188

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

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 [566] 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 [253] 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.

The model

• 1. The Official Receiver described the model as:

     1. “... 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.”

  2. By 27 September 2013, the first of the dates relied on by the Official Receiver, Kids Company had been running its “model” for around 17 years, without a material change in its nature. That does not suggest inherent unsustainability.

  3. I discuss the Kids Company model from [172] above. In summary, neither the fact that it was demand-led nor that clients self-referred should be criticised. The “never turning a child in need away” mantra was an aspiration that Kids Company could not always meet. Furthermore, support provided was based on need, there was no open-ended commitment, and costs were scrutinised.

  4. It is true that clients’ needs drove a growth in charitable spend in circumstances where income had not yet been secured. Mr O’Brien’s description of the model

12 February 2021 14:14 Page 189

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

as “look after children and raise money to cover the costs” was apt. But the defendants were well aware of the risks and the need to ensure that funds were raised. As discussed earlier in this judgment, until late November 2014 the Trustees were satisfied that sufficient funds could be raised. It is worth recalling that this was not based on groundless optimism: see [243] above for the auditors’ comments in May 2014 that “income levels for 2014 look healthy and also achievable”. The Trustees’ views were also based on the experience of prior years, where the charity had consistently raised additional funds to meet increased need.

• 1. The issue of reserves is discussed from [528] above. In summary, reserves in the form of liquid resources would have been desirable, and there is some validity in a criticism of their absence, but creating them was much easier said than done. It is also important to note that there is no legal requirement for reserves, and their absence did not prevent unqualified audit opinions being provided. Creating reserves would have involved diverting resources from meeting the increasing level of need that the charity existed to serve. The decision to prioritise spending on charitable objects is one that, in my view, the Trustees could reasonably reach. Further, whilst not having reserves might increase the risk of failure (albeit that reserves would not necessarily ensure survival where income fell away: see [822] below), their absence during the charity’s life self evidently did not make its model “unsustainable”.

  2. Kids Company’s dependence on donations is discussed in some detail from [509] above. Charities are, of course, commonly dependent on donations. Donations are, by their nature, difficult to predict with confidence, both as to amount and timing of receipt. Kids Company cannot be criticised for that. The combination of this, the lack of reserves and the nature of Kids Company’s charitable activities, with the bulk of its costs being staff costs that were not straightforward to cut, made for a potentially high risk enterprise. But, without more, that does not mean that the model was “unsustainable”.

  3. It is also the case that the charity expanded significantly over the period in question, whilst the level of central government support remained largely static. This was in response to cuts following the financial crisis and also reflected the replication of Kids Company’s activities, particularly in Bristol. But expansion would not make the charity’s “model” unsustainable if adequate funds could be raised to meet expenditure. It would become unsustainable if and when that was no longer the case, either because circumstances changed such that it was no longer possible to fundraise as before, or the charity was allowed to expand beyond its capacity to fundraise.

  4. A key point to recognise is that the defendants were well aware that there were limits on Kids Company’s continued ability to fundraise from private sources to meet increasing need. In that sense, there is no dispute about unsustainability. This was precisely why Kids Company was lobbying government for a material increase in statutory funding from the autumn of 2013 onwards, as discussed in detail above. It is also important to note that the increased costs reflected in the 2014 Budget did not reflect further material expansion of the charity but rather, for example, the full year effect of increases the previous year (see [233] above).

12 February 2021 14:14 Page 190

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

• 1. The Official Receiver specifically criticised dependence on Ms Batmanghelidjh’s fund-raising abilities. That is rather unreal. This was someone who, even on Ms Lloyd’s evidence, was a phenomenal fundraiser. It was fully recognised both by Ms Batmanghelidjh and by the Trustees that she could not carry on fundraising as she had indefinite ly , but the charity can hardly be criticised for making full use of her fundraising skills while they were available, at least provided appropriate consideration was given to plans for the future (as I conclude that the Trustees were attempting to do). She was also not alone: the fundraising team numbered around 18 staff on a full time basis ([513] above). Trustees also played an active role in fundraising.

  2. I have also concluded that it was not until late 2014 that the Trustees had serious reason to think that fundraising targets would not be met (see [515] above). It is not the case that fundraising became increasingly difficult by 2013, as the Officia l Receiver alleged. The charity was also not simply dependent on a “small pool” of donors and “ad hoc” donations as he suggested. As explained at [521] above, there was recognition that the burden of increasing need could not continue to be met entirely from non-statutory sources, but it does not follow that it was unreasonable to continue operating without immediate severe cuts, bearing in mind not only the indications from government but also the support the Trustees believed that the charity had from philanthropists.

  3. Fundamentally, the Official Receiver’s case is, or is more appropriately expressed, as being rather less about the “model” itself (a model which had not changed in its essentials), and more about the way in which it was operated by September 2013, and in particular whether the Trustees did “too little too late” to address the risks associated with the model, particularly in terms of controlling expenditure and cutting costs.

“Unsustainable” and paragraph 6 Schedule 1 CDDA

• 1. The Official Receiver alleged that the model was “unsustainable” and that the defendants knew or ought to have known this. Sensibly construed, unsustainable means bound to fail. This was recognised in the Official Receiver’s formulation of failure being “inevitable” without immediate material change after 30 November 2014 (albeit less obviously consistent with the alternative references to “highly likely” that appear elsewhere in the report). Clearly, the charity did not fail until nearly two years after the first date relied on, 27 September 2013, and some eight months after the second date, 30 November 2014, despite there not being what the Official Receiver would accept as “material change”, let alone “immediate material change”, after either date.

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

  3. TheOfficialReceiver’scaseasarticulatedinMrHannon’ssecondreportwasthat Kids Company would have failed even without the unfounded sexual assault allegations. In closing Ms Anderson submitted that it was not necessary to prove that point, because causation of insolvency is not a jurisdictional threshold. The court is simply required to consider, as one of the factors that informs the question

12 February 2021 14:14 Page 191

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

of unfitness as a whole, the “extent of the director’s responsibility for the causes of the company becoming insolvent” (paragraph 6 of Schedule 1 to the CDDA). The reference to “becoming insolvent” is to the balance sheet test of assets being insufficient to pay the company’s debts (s 6(2) CDDA). Ms Anderson submitted that what therefore needs to be considered is the director’s responsibility for the company being in a position where its liabilities exceeded its assets, rather than for the causes of its being wound up.

• 1. As discussed from [602] above, I am not persuaded that the restructuring would have failed, and have in fact concluded that absent the unfounded allegations it is more likely than not that it would have succeeded.

  2. I do not agree with Ms Anderson that this makes no difference. First, it does not take proper account of the nature of the allegation. The allegation made was that the business model was “unsustainable”, that is bound to fail. It was no doubt for this reason that it was part of the Official Receiver’s case that the restructuring would not have succeeded, and why there was much effort at trial to discredit the cash forecast produced on 28 July, which I have addressed in some detail. The restructured charity would have retained the essence of Kids Company’s model,albeit on a scaled back basis. It would have involved material change, but this was not the “immediate” material change after 30 November 2014 referred to in the allegation.

  3. Secondly, I do not fully agree with Ms Anderson’s legal submission as to the effect of s 6(2) and paragraph 6 of Schedule 1 CDDA. To recap, under s 6(2) a company:

     1. “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”.

     2. 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, whic h relevantly included at paragraph 6:

     3. “The extent of the director’s responsibility for the causes of the company becoming insolvent.”

  4. I agree with Ms Anderson that causation of insolvency is not a jurisdictional threshold. I also agree that the extent of the director’s responsibility for the causes of the company becoming insolvent is only one factor for the court to consider, albeit, I would add, one to which it should have “particular” regard. Where I depart from her analysis is the submission that all that needs to be considered is the director’s responsibility for liabilities exceeding assets, rather than the causes of the company being wound up. A natural reading of the words provides a strong indication that the concept of “becomes insolvent” or “becoming insolvent” encompasses not only the existence of balance sheet insolvency (assets being less than liabilities) but also the fact of going into liquidation. That interpretation would also seem to me to accord best with the aims of the legislation. What is encapsulated by the definition in s 6(2) has two limbs, namely (a) going into liquidation, and (b) doing so at a time when liabilities (and expenses of winding

12 February 2021 14:14 Page 192

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

up) exceed assets. I note that this interpretation is also supported by the other limbs in s 6(2), which at the time provided that a company alternatively “becomes insolvent” if an administration order was made or an administrative receiver was appointed. The focus there was (and indeed remains under the current version of the legislation) entirely on the relevant insolvency process.

• 1. Having said that, however, I remind myself that the application of paragraph 6 does not depend on legal concepts of causation, and in particular does not depend on whether persons other than the defendants may also have been responsible for the causes of insolvency (Barings CA at [35], see [145] above). Paragraph 6 is not irrelevant because the company was brought down by the unfounded allegations, but I am entitled to take the effect of those allegations into account in determining the extent of the defendants’ responsibility for the causes of insolvency. Put another way, those causes include the effect of the unfounded allegations.

  2. Thirdly, Ms Anderson placed significant reliance on debts said to exist at the point of liquidation which were pre-existing debts that arose from the company’s “structural problems”, including hiring too many staff and failing to build reserves, and pointed to debts said to be still outstanding from March 2015.

  3. There were significant difficulties with this submission. A schedule was produced comparing creditors as at 9 March 2015 (as provided to the bank on that date) and what was said to be a list of creditors at the date of liquidation. That list dated from 2017, is clearly an estimate of individual amounts owed, and did not include a total figure. Although an updated list was produced during the trial the comparison provided to the court was not done by reference to the updated list, and moreover it appears that there is a significant discrepancy between the Official Receiver’s updated estimate of total liabilities (£10.38m) and the actual claims received (£7.6m).

  4. The comparison provided to the court highlighted creditors in respect of which the amount owed was the same or higher than on 9 March 2015. I was not provided with an aggregate figure, but by my rough calculations these amounts total around £175,000. In the context of this charity and the allegations made, this is relatively modest. It also of course takes no account of the fact that, for a number of these creditors, debts may have been repaid and replaced by others. I note that, as stated at [600] above, the management accounts for April 2015 indicate that creditors more than three months old amounted to around £220,000 at 30 April, as compared to around £550,000 a month earlier. The management accounts for June 2015, the last set produced, show creditors more than three months old amounting to around £212,000. This strongly indicates that the great majority of the company’s debts at the point of liquidation were relatively recently accrued. This does not support a case that the scale of the insolvency should properly be attributed to long term failures to pay creditors.

  5. Finally on this issue, I should record that I do not agree with the suggestion that, if it had had appropriate reserves, Kids Company would have been able to survive notwithstanding the unfounded allegations. That is not demonstrated by the evidence. It is worth recalling that the allegations came in the aftermath of the Jimmy Savile abuse scandal (see [315] above). The police felt obliged to

12 February 2021 14:14 Page 193

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

investigate them in detail. Their investigation completed only in January 2016 (when they not only dropped the investigation but reported that they had not identified any failings by the charity in its safeguarding duties). If the charity had built up reserves equivalent to three months of operating expenditure (see [528] above – what I understood to be an uncontroversial aspiration) that would have been well short of what was required. Mr Roden’s view, as reported by Mr Handover during a telephone conference on 31 July 2015, was that “his ability to raise funds while [the allegations were] unresolved was almost impossible”. Ms Batmanghelidjh’s affidavit evidence also pointed out that she thought it would have taken at least six months to regain donor confidence after the police investigation completed. There is no reason to doubt this.

The real issue in this case

• 1. As already indicated, what this case is, or should properly be, about is whether the Trustees did “too little too late” to address the financial risks associated with the model, particularly in terms of controlling expenditure and cutting costs. This features in various forms in the Official Receiver’s case, in particular allegations of failure by the Trustees to take adequate action to control expenditure in the context of rapid growth and increasing financial difficulties, inadequate control of the CEO (who always prioritised clients’ needs), inadequate financial controls, trading at an increasing deficiency of income to expenditure (with increasing reliance on short-term loans, bringing funding forwards, circulation of credit, delaying payments to creditors and year-end accruals), relying on overoptimistic statutory funding projections and failing adequately to consider the risk of donor fatigue (see [55] above).

  2. By the stage of closing submissions, the focus was on the charity’s financial, and in particular on its cash flow, position. The Official Receiver relied on Kids Company’s monthly management accounts to assert that Kids Company was “cash flow insolvent at all material times and balance sheet insolvent the vast majority of the time”. Ms Anderson pointed to the extent of aged creditors shown in the management accounts as demonstrating that creditors could not be paid on time (details of creditors more than three months old were included from January 2014 onwards: see [265] above). She referred to the problems that arose in 2012, with an increase in staff and a cash deficit remaining at the end of the year. She referred to a significant increase in spending during 2013 and material cash flow difficulties, as shown by the problems with HMRC in that year, which involved what Ms Anderson submitted was an unacceptable use of statutory debt monies as working capital. By the year end accruals had materially increased and the surplus was, she said, on a balance sheet basis only. Ms Anderson submitted that the pattern continued in 2014, with a substantial value of aged creditors every month (averaging in the region of £500,000 of creditors over three months old), an increase in the budget despite structural problems not being resolved, the 2013 accounts being signed off despite a negative cash flow statement for the following 12 months, and no real progress with the government. She argued that the only real change at the end of 2014 was a recruitment freeze. In 2015, she said that there were further unsuccessful attempts to secure funding from government, and the grant for 2015/16 was spent in a month, showing that the model was unsustainable.

12 February 2021 14:14 Page 194

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

825. There is validity in the criticism that expenditure was allowed to be incurred, and increase, without income having been secured to allow prompt payment of creditors, particularly in circumstances where the charity did not have available reserves to tide it over. However, I would make the following points:

• • (a)  The Official Receiver’s focus was on Kids Company’s mont hly 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 [211] and [218] 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 [379] 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 [219] above, I do not accept the Official Receiver’s criticisms aboutthose 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 [246] 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

12 February 2021 14:14 Page 195

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

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 [272] 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 [185] 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 [282] 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 [335] above.)

  • (i)  Reliance on loans is discussed from [347] 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

12 February 2021 14:14 Page 196

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

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 [809] above, and more generally the section on donors from [509]).

  • (k)  The position of HMRC is discussed from [316] 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 [819] to [821] 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 insolve nc y 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 [123] above).

826. Mr Margolin fairly made the point that some of the Official Receiver’s criticisms were put in closing in terms redolent of a want of probity, notwithstanding that any such allegation had been disavowed. In particular, the position with HMRC was described as completely or wholly unacceptable. The position in respect of HMRC was not presented in that way in the Official Receiver’s reports, and it does not fit well with an allegation framed as one of incompetence. I would also point out that the charitable context is relevant (see further below on this). This was not a company squeezing creditors to maximise returns for shareholders or for the personal gain of the directors. In addition, I note that there has at no stage been an allegation of wrongful trading. The Official Receiver has not said that what the directors should have done is put the company into liquidation at any earlier stage.

12 February 2021 14:14 Page 197

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

The significance of discussions with government (and donors)

• 1. Kids Company’s interactions with the government, discussed in detail from [445] above, are highly significant and key to understanding the full factual context. As explained at [807] above, it was well recognised that the charity could not continue as it had done, which is why it lobbied the government for a material increase in statutory funding. At the heart of the case is whether the Trustees waited too long for the government to make a decision about the extent to which it was prepared to fund Kids Company, and whether they should have scaled back expenditure at an earlier stage.

  2. It is notable that the Official Receiver’s reports include limited detail about Kids Company’s discussions with the government, and what is included mainly addresses the 2015 restructuring. Limited information is provided about the grants made for 2014 and 2015 as part of sections dealing with Kids Company’s sources of income. This is in stark contrast to the parts of the reports, and accompanying documentation, devoted to allegations relating to kids costs, whic h have at most very peripheral relevance (see below). The documentation that was exhibited to the reports evidencing dealings with the government was also incomplete, and was expanded during the trial as further relevant documentation was produced. This included the correspondence with Mr Grayling in June 2014 referred to at [468] above and the financial projection sent by Mr Yentob on 11 March referred to at [493]. Both would have been available in Ms Batmanghelidjh’s Kids Company email records held by the Official Receiver. Limited enquiries also appear to have been made of the government. Importantly, no factual evidence was adduced to challenge the defendants’ accounts of their dealings with the government, or the reasonableness or otherwise of their understanding of the oral and written communications.

  3. ItshouldinmyviewhavebeenapparenttotheOfficialReceiverthattheposition with the government was an important issue. Not only did the topic come up in interviews, but the NAO report referred to at [437] above clearly flags how Kids Company had successfully lobbied Ministers for funds over a number of years.

  4. I am not going to repeat in any detail the findings I have already made about the discussions with the government (from [445] above) or the section of the judgment dealing with the non-implementation of a contingency plan before the July restructuring (from [616] above). However, I would emphasise the relevance of the timing of discussions with the government in relation to the dates selected by the Official Receiver as dates by which the defendants should have appreciated that the business model was unsustainable, 27 September 2013 and 30 November 2014. If funding had come through as the Trustees reasonably believed was in prospect at those dates, then it is unlikely that material change (assuming that to mean significant cuts) would have been needed.

  5. In very brief summary, there was a significant amount of contact between Kids Company and senior members of the government. It is worth noting that the first date selected by the Official Receiver, 27 September 2013, falls shortly after the charity had elicited an additional £500,000 on top of the grant that had been agreed only a short time earlier. Further and importantly, there were discussions from September 2013 onwards about the provision by the government of

12 February 2021 14:14 Page 198

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

“sustainable” funding (meaning funding at a materially higher level than previously), as evidenced in writing by Mr Hurd on 9 December ([449] above). In addition, there was a very supportive letter from the Prime Minister on 8 January 2014 ([452] above).

• 1. Kids Company’s pressure on the government increased during the second half of 2014. There were further positive indications about substantial additional funding, and indications that the government did not want Kids Company to close centres, but no actual promise of additional funds. A meeting with and letter from Mr Letwin on 22 December 2014 appeared to leave a promising prospect of additional funding for 2016/17, with the position for 2015/16 less promising, albeit that in my view it was not unreasonable to conclude that there was a real prospect of further support being found during that period if it was necessary. Discussions continued, and even in late February 2015 Mr Yentob (who thought the events of 22 December disappointing) still believed that some additional funding could be obtained for 2015/16. Thereafter, the position became more difficult, although Kids Company managed to secure an immediate payment of its 2015/16 grant in one lump sum in early April, together with a promise of immediate further talks, and ultimately secureda restructuring grant in July 2015.

  2. I have also explained at [617] above that, in order to know how expenditure should be scaled back (which would require the closure of one or more centres to achieve material savings), it would be necessary to understand what could be funded in the future. That would in turn require an understanding of the priorities of the proposed funders, whether in the government or private sector. The grant offer for 2015/16, finalised during March 2015, contemplated the closure of the Urban Academy and Kids Company’s operations in Bristol if alternative funding could not be secured. Prior to March 2015 the options were unclear: see for example the summary of the contingency plan intended for discussion at the meeting on 18 February discussed at [291] and [292] above, which referred to a possible closure of Arches II. When, during March 2015, the position became clearer the Trustees pushed for the plan to be implemented (see in particular [297] to [306] above). However, even after March there was some uncertainty, given the upcoming general election and Harriet Harman’s statement ([499] above), together with the possibility of alternative funding, in particular under the free school programme (see also [623] above). After the election in early May, the combination of significant cash flow problems due to expected donations not arriving and the continued lack of committed additional funding from the government – together with the indication from Ms Casey that funding from the Troubled Families programme was unlikely – led to the Trustees’ focus turning to the restructuring plan developed with Mr Roden (see [312] above) and procuring government support for that.

  3. It is also relevant that the Trustees were aware of the availability of support from philanthropists, and in particular from Mr Roden, significantly earlier than May 2015: see in particular [526] above. The Trustees were entitled to take account of that, as well as a reasonable expectation of support from the government. This is of particular relevance to the second of the Official Receiver’s dates, 30 November 2014.

12 February 2021 14:14 Page 199

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

835. In summary, I have concluded that in all the circumstances the Trustees did not act unreasonably in taking account of an expectation of support from the government. In particular, as at 30 November 2014 the Trustees were still genuinely, and not unreasonably, hopeful of substantial additional statutory funding being found. Nonetheless a detailed contingency plan was prepared, albeit that it took longer than the Trustees wished: see [622] above. Once it became clearer what cuts were likely to be required the Trustees pushed for them to be implemented during March 2015. A combination of a worsened financial position and a continued lack of additional committed statutory funding then led to the focus turning to a more radical restructuring plan.

Allegations ofinadequate control, dominance and resistance to change

• 1. I have discussed these allegations in some detail earlier in this judgment, in particular in the general section addressing the question of dominance (from [579] above), and the section considering whether Ms Batmanghelidjh was a de facto director (see in particular from [736], dealing with the centrality of her role). In summary, Ms Batmanghelidjh did have a central role, including in developing strategy, but she was subject to supervision and control by the Trustees. They were the ultimate decision makers: see [588], [741] and [744] above in particular . It is true that Ms Batmanghelidjh was resistant to change, which contributed to the difficulties of implementing cuts (see for example [622] above), but for the reasons given in the section discussing the timing of change to her role (see from [624] above), the Trustees had good reason to tread carefully.

  2. The link between the significance of Ms Batmanghelidjh’s role and the “single” allegation of an unsustainable business model is by no means clear. For some 18 years her skills, including her fundraising ability, made a very material – and by most standards pretty extraordinary – contribution to the charity, enabling it not only to survive but to grow very significantly. That is an indication of a successful model, not an unsustainable one. In financial terms it could remain so for so long as Kids Company could raise the funds required to meet its expenditure.

  3. The Trustees recognised the significance of the role that Ms Batmanghelidjh played, but obviously knew that it could not remain unaltered indefinitely. See the discussion from [624] above, including the reference at [630] to an email from Mr Yentob to Mr Handover on 10 February 2014, where he talked about “going over that old issue of who could partner Camila effectively”.

  4. By early December 2014 the Trustees had (reasonably) reached the conclusion that Ms Batmanghelidjh’s role needed to change. However, her value to the charity was still very significant, as evidenced by Mr Roden’s insistence on her continued involvement, and indeed his desire for her to retain the CEO role for a transitional period ([632] above).

  5. Ms Anderson submitted that if Ms Batmanghelidjh had been subjected to appropriate governance and control earlier on it was unlikely that she would have refused to co-operate in 2015, and that a restructuring in, say, early 2014 could have been approached in a more reasonable and rational way than the rushed events of May to July 2015. I would make two comments. First, I think it extremely unlikely that Ms Batmanghelidjh’s resistance to change would have

12 February 2021 14:14 Page 200

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

been less at an earlier stage, and in fact consider that she would have had reason to, and would, have resisted it even more strongly, given her own confidence about fundraising at least during 2014, and given the Prime Minister’s support among others (see [452] above). Secondly, as discussed further below, the question is not whether it would have been a reasonable course of action to restructure earlier, but whether the Trustees’ conduct amounts to incompetence of a high degree. Self-evidently, the two are not the same. For the reasons discussed in the next section, the latter would involve concluding that the only reasonable course of action that a competent director would have considered open to them at that earlier time was to embark on a restructuring.

Kids costs

• 1. The Official Receiver’s allegation in respect of kids costs (namely a failure 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) is discussed in detail from [541] above. As summarised at [577], the Trustees were not aware, nor ought they to have been aware, of any major issue in respect of policy compliance. They exercised real scrutiny over expenditure and were entitled to gain comfort from external reports. They were entitled to expect staff to draw any major concerns to their attention.

  2. Although the Official Receiver strongly disputed that this was the case, it is frankly very hard to resist the conclusion that the conduct of this part of the case was oppressive. The Official Receiver confirmed in witness evidence for the pre- trial review that he was not challenging the appropriateness of any particular spending on any individual client. Even if he was it would be pretty hard to see how the allegation properly fits with the so-called single allegation. Whether a model is sustainable or not does not straightforwardly turn on whether spending that was on any basis in accordance with Kids Company’s charitable objectives was (by some unspecified standard) excessive or inappropriate, or indeed on whether particular policies were adhered to. But in any event it does not really fit with the case as presented in closing, which appeared to recognise the reality that the costs the focus of Mr Tatham’s report, which the defendants were said not properly to oversee and scrutinise, were pretty immaterial in the context of the financial challenges facing the charity: see [553] above. I reject the suggestion that it is possible to extrapolate from the alleged failures in respect of kids costs to a lack of control of staff and other costs. There is no real basis for that, and any weight that might be put on it is weakened by Mr Tatham’s focus on the Top 25 rather than the position of the vast majority of clients dealt with at the centres (see for example [556] above).

  3. Over 100 pages of Mr Tatham’s report, accompanied by some 5,400 pages of exhibits, related to the position of individual clients. This was not required to support the case actually put against the Trustees in respect of kids costs. That case goes to what the Trustees did or did not do in terms of scrutiny, testing adherence to policies and considering whether to adjust them. It was always unrealistic to put a case that asserted that volunteer Trustees were expected to have discovered alleged issues with individual client records that Mr Tatham and two other staff seem to have spent most of a year working on.

12 February 2021 14:14 Page 201

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

844. The reality is that the bulk of the work on Mr Tatham’s report was done, utilising significant resource, to seek to support a case alleging inappropriate expenditure , a case that was initially raised in correspondence but which was not ultimately put (see [80] above). Whilst the work might have been used for a different allegation against Ms Batmanghelidjh, the allegation made against her was the same as against the Trustees, and she was not cross-examined on the topic. But the net effect of including Mr Tatham’s work was to make the task of managing the defence of an already diffuse case, with significant documentation, even harder, and to increase costs significantly (including, for example, costs incurre d in redacting confidential client information). It also led to understandable concerns on the part of certain of the charity’s former clients, which the court was required to address both at the pre-trial review and at the trial.

Allegations in respect of senior management

845. My detailed findings in respect of the events surrounding the departure of the senior managers are set out from [389] above. As I said there, the evidence is relevant to the financial position of the charity at the time, what the Trustees knew about it and whether they reacted appropriately. My conclusion is that the Trustees did take the financial problems facing the charity seriously and that they sought to address concerns raised by those senior managers who raised them. I also do not accept that the Trustees took inappropriate steps to prevent or dissuade the departing directors from raising their concerns with them, although I would comment that the link between that allegation and the allegation or allegations asframed in the Official Receiver’s report is not clear.

WHETHER THE DEFENDANTS WERE UNFIT

846. This section of the judgment considers whether, on the basis of my findings of fact and my conclusions in respect of the allegations made about the defendants’ conduct, they must be disqualified under s 6 CDDA. I deal first with some points that are relevant to the court’s approach to the question of unfitness in this case.

The relevance ofKids Company being a charity

• 1. The Official Receiver’s case was that Kids Company’s status as a charity was ultimately irrelevant. It operated as a company and was therefore required to comply with company law. There is no express dilution of the usual duties of directors or the manner in which the directors’ disqualification legislation applies to directors of charitable companies. A charity is not obliged to operate as a company, but if it does (with the attendant benefit of limited liability) then those dealing with it are entitled to expect its operators to be held to the same standard as those operating non-charitable companies.

  2. As Mr Westwood pointed out, the courts have long taken a benevolent approach towards charity trustees in circumstances where (as here) no dishonesty or wilful misconduct is alleged. There are good reasons of public policy for this approach. It reflects the real risk that any other approach would deter individua ls who would otherwise be well suited to becoming charity trustees from doing so. It also reflects the court’s recognition of the public service that charity trustees provide.

12 February 2021 14:14 Page 202

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

• 1. The classic statement of the court’s approach to charity trustees was provided by Lord Eldon LC in A-G v Exeter Corpn. (1826) 2 Russ 45 at 54, 38 E.R. 252, as follows:

     1. “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.”

  2. InStanwayvAttorneyGeneral(unreported)5April2000,SirRichardScottV-C said the following at p.8 (in the context of whether or not proceedings should be brought against charity trustees under s 32 Charities Act 1993):

• • 1. “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.”

• 3. The court’s approach has recently been reaffirmed by the Supreme Court in Lehtimäki v Cooper (also known as Children’s Investment Fund Foundation (UK) v Attorney General) [2020] UKSC 33, [2020] 3 WLR 461, which concerned a charitable company limited by guarantee, like Kids Company. In a section dealing with companies as charities (starting at [52]), Lady Arden described the “liberal interpretation taken to charities by the courts”, noting how charitable companies were recognised by Parliament and how provisions of the Companies Act 2006 apply to charitable companies, subject to further or different provision made by the Charities Act 2011, such that charitable companies may be subject to two levels of regulation (paragraph [58]). At [188] Lady Arden set out the passage just cited from Lord Eldon’s judgment in A-G v Exeter Corpn. and said:

• • 1. “...the law looks benevolently on charity trustees even where there is evidence of actual or potential breach of duty.”

• 4. I agree with Ms Anderson 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 CDDA, described earlier in this judgment, is the same. But I also agree with Mr Westwood and with Mr Margolin, who made similar submissions on this point, that this does not mean that the fact that Kids Company was a charity should be ignored. This is because, in determining whether someone is unfit to be concerned in the management of a company, the test of unfitness must be applied to the facts of the case. What must be assessed is the individua l’s conduct, and that must be evaluated in its context. That context, or setting, must include the nature of the company and its activities,

12 February 2021 14:14 Page 203

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

as well as (for example) the role played by the individual director. The factthat the company was a charitable company is a relevant part of the context. It could mean, for example, 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. In principle the same would apply as between different commercial companies, because in each case conduct must be assessed in its factual setting. It is one of all the circumstances to take into account. Its materiality or otherwise will depend on the facts of the case.

• 1. In my view this approach is consistent with the approach of the Supreme Court in Lehtimäki v Cooper. The effect of the decision was not to disregard or override provisions of the Companies Act or the company’s constitution, but to ensure that the regime worked so far as possible in a cohesive manner that did not result in inappropriate distinctions between charities that happened to be incorporated under the Companies Act and those that are not (see, for example, Lady Arden’s judgment at [72]).

  2. The policy reasons for the court’s benevolent approach to charity trustees apply with the same force whether the charity is incorporated or not. Contrary to the Official Receiver’s suggestion, they are also not restricted to cases where the court is concerned with potential personal liability of a charity trustee to account for losses of the charity. Lehtimäk i v Cooper was not such a case and A-G v Exeter Corpn. (albeit dealing with possible misapplication of assets) appears not to have been either. Exposure to disqualification proceedings could, at least for some individua ls, be as significant or even more significant than a risk of financ ia l exposure for a charity’s losses. The same policy considerations apply.

  3. Mr Westwood identified a further example of a case which clearly involved no financial claim against a trustee but where the same benevolent approach can be seen. This was Scargill v Charity Commissioners, unreported, 4 September 1998, where Neuberger J said at pp.98-99 (in the context of an appeal under s 18 Charities Act 1993 against an order removing the appellants as trustees):

     1. “...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.”

     2. The comments are obiter but clearly carry some weight.

The role of the Board, delegation and non-executive directors

856. Ihavealreadyreferredtotheproperroleofdirectors,withreferencetoapassage from Jonathan Parker J’s judgment in Re Barings (No. 5) (see in particular [704]

12 February 2021 14:14 Page 204

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

to [707] above). Directors must, on a continuing basis, ensure that they have a sufficient knowledge and understanding of the company’s affairs to enable them to discharge their duties.

• 1. As Jonathan Parker J recognised, directors are entitled to delegate, and to trust the competence and integrity of staff to a reasonable extent. Directors without an executive role will in addition generally be reliant, and properly so, on the executive team to gain the knowledge and understanding they require, and to ensure that decisions they make are implemented. As Lord Davey said in Dovey v Cory [1901] AC 477 at 492:

     1. “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.”

     2. This passage was adopted by Romer J in Re City Equitable Fire Insurance Co. Ltd [1925] Ch 407 at 430 and by Norris J in Sharp v Blank [2019] EWHC 3096 (Ch) at [628].

  2. However, the directors’ ability to delegate, and more generally to rely on staff members, is subject to qualification. Norris J referred to this in Sharp v Blank at [628] by adding the following two glosses to what Lord Davey said:

• • 1. “...(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...”

• 3. Proper delegation does not involve abdication. There is always an overall duty to supervise. An important aspect of the role is to ensure that material risks are identified and managed, including financial risks. In addition, the extent of delegation that can properly be made to, and reliance that can be placed on, staff members will depend on the circumstances. In particular it will depend on whether the directors have reason to be concerned about the competence or integrity of the relevant staff member or members, the quality of information being provided, or their willingness to carry out the Board’s instructions. Where issues of that nature arise and cannot be dealt with by a director with executive responsibility, non-executive directors would need to consider what should be done to address the issues that have arisen, for example by replacing staff or recruiting additional staff.

  4. Directors’ obligations to ensure that they have a sufficient knowledge and understanding on an ongoing basis would include, where appropriate, following up on matters previously discussed. When that would be required would depend on the subject matter and the degree of trust that could reasonably be placed in the staff member or members concerned. It is obviously good practice to follow up on important “action points” agreed at a previous meeting. Beyond that, the

12 February 2021 14:14 Page 205

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

extent of follow-up would depend on the significance of the issue and whether there was any cause for concern, for example a doubt arising as to whether an agreed action has been implemented. Material risks, including in relation to thecompany’s financial position, should be assessed on an ongoing basis.

• 1. Ms Anderson submitted that the Trustees were inappropriately trying to excuse themselves on the basis that they were volunteer non-executives, pointing out that “non-executive” is not a legal concept, but rather a conclusion based on whether functions that directors would otherwise have had have been properly delegated. To the extent that aspects of management are not delegated, the directors remain responsible, and to the extent they are delegated there is a duty of supervision. She maintained that whilst day-to-day management had been delegated to Ms Batmanghelidjh, together with authority to carry out certain transactions under the terms of the Financial Procedures Manual, strategic decisions, substantial borrowings, entry into agreements with HMRC and large research projects had not been.

  2. I have already dealt in detail with the position in respect of loans, arrangements with HMRC and researchprojects in the context of the de facto director allegation (see from [713] above in respect of HMRC, [715] in respect of loans and [724] in respect of research, and also see [749] more generally about the extent of delegation). I have not accepted the Official Receiver’s case in respect of these matters. There was a general delegation of management and administration to Ms Batmanghelidjh under her employment contract (see [688] above). The Financial Procedures Manual made clear that the Board retained overall responsibility (see [692] above). The duty of supervision was clearly recognised.

  3. The fact that the Trustees were non-executive directors is a relevant part of the factual context. The relevance of the role assigned to or assumed by the individua l in question, and his duties and responsibilities in that role, was specifically recognised by Jonathan Parker J in Re Barings (No.5) at p.484c-d, and see Hoffmann LJ comment’s in Bishopsgate Investment Management v Maxwell [1993] BCC 120 at 139 set out at [152] above. Similarly, in determining the nature andattendantresponsibilities ofthatrolethefactthattheTrusteeswerevolunteers should not be ignored: see Re Barings (No.5) at p.488d, where the level of reward to which a director was entitled was regarded as a potentially relevant factor in determining the extent of a director’s duties and responsibilities. In principle, the fact that a director is an unpaid volunteer, in circumstances where there is a paid executive team with responsibility for day to day management, must affect the part that the director could reasonably be expected to play.

Section 174 Companies Act 2006

864. One of the effects of the earlier ruling referred to at [60] above is that the question whether there was a breach of the duty to exercise reasonable care, skill and diligence under s 174 Companies Act 2006 is not in issue. However, given that the allegation or allegations are based on incompetence it seems to me that s 174, and the case law relating to it, cannot be entirely irrelevant. Whether a director was incompetent or not cannot be decided in a vacuum, but at least to some extent in the context of standards expected of directors more generally. This is so even though it is not a necessary ingredient of a finding of unfitness that there has been

12 February 2021 14:14 Page 215

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

single allegation, and as already discussed was in reality not required to support the case that was put.

• 1. The reports also included a significant number of quotations, which contributed to length. Two difficulties with these were, first, that they showed a tendency to be selective, such that a reader who did not consult the underlying document could well be left with the wrong impression, and secondly that it was often not possible for the reader (including in particular the defendants) to determine without further enquiry whether the Official Receiver was asserting the truth of the content of all or part of the quotation. Both aspects are unsatisfactory. On the whole I think it would have been better to direct the reader to consider specified documents in full, rather than set out lengthy quotations, and make clear what it is said that the particular document demonstrates. Simply appending full versions of documents does not, without more, address concerns about unbalanced statements or quotations, because unless asked to do so it is unlikely that most readers, including I suspect those charged with deciding whether to authorise the proceedings to be brought, will read much of the exhibits to a report where the total exhibits are extremely lengthy, as they were in this case.

  2. More broadly, the overall context needs to be borne in mind. This was not a case alleging dishonesty or want of probity, but an allegation of incompetence against the directors and a manager of a charitable company, who had made no personal gain from any of the alleged conduct, and who with one exception were all unpaid. The periods of disqualification being sought against the Trustees were in the lowest of the three brackets referred to by Dillon LJ in Re Sevenoaks Stationers (Retail) Ltd [1991] (Ch) 164 at 174 (being “relatively, not very serious”). The resources involved in bringing the proceedings (not only those of the Insolvency Service, but court resources as well), and the scale and nature of the case that the defendants had to defend, need to be carefully considered agains t this backdrop.

Individual defendants/length of disqualification sought

• 1. As already indicated, it is the responsibility of the Official Receiver to adduce evidence on which the court may rely in determining both whether each individual director is unfit and the length of disqualification that is appropriate tothat individual. More should have been done to reflect the requirement for the court to consider the position of each director individua lly and determine whether the conduct of that person makes him or her unfit, and the length of any disqualification order that is appropriate for that individual. (See in particular [75], [883] and [884] above.)

  2. For example, the case against Mr Webster effectively assumed that he was unfit from the date of his appointment, simply by being on the Board, and that despite his short period in office he was as blameworthy as most of the other Trustees, and indeed more so than two of them. Conversely, the Official Receiver’s approach appeared to imply that more criticism should be levelled against Ms Tyler than Mr O’Brien because she remained in post in the last few months of the charity’s life out of a sense of duty, even though she had wanted to stand down.

12 February 2021 14:14 Page 216

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

908. Moregenerally,itwasunsatisfactorythatMrHannonwasunabletogiveaproper explanation in oral evidence of the basis on which different periods of disqualification were being sought for the Trustee defendants (2.5 years for Ms Bolton, 3 years for Mr O’Brien and 4 years for the others). On the face of it, the different periods sought sat uneasily with the insistence that the allegation was one of collective failure, and that more did not need to be done to specify the acts or omissions of each individua l which were alleged to amount to unfitness. Apart from the periods in office, which has already been touched on, other possibilit ie s that I speculate might have been used as distinguishing factors included the individual skills and experience of the directors (in relation to which there was really no information in the reports), or the extent of their roles on Board committees. The fact that Ms Bolton was on neither the Finance Committee or the Governance Committee might have been the reason for the lower period sought in relation to her. But the overall impression given by Mr Hannon’s first report is that it may have been a lower level of engagement and attendance at meetings (rather than non-membership of committees) that was the relevant mitigating factor. Whilst differences in duties and responsibilities are relevant, to treat or to appear to treat non-engagement or non-attendance at meetings more leniently risks sending a dangerous signal.

Charitie s

• 1. I was struck by the lack of experience that the Official Receiver had had in relation to charities, in particular the failure to give full recognition to the fact that it is common for charities to be heavily dependent on donations, and the apparent difficulties that both Mr Hannon and Mr Tatham had with the concept of wholly non-executive boards of directors. I think this affected their approach and, for example, contributed to some inappropriate assumptions being made as to what should have been done by the Trustees. Although Mr Hannon had obviously attempted to gain some familiarity by speaking to the Charity Commission and going on a training course, this was not able to make up for the lack of experience.

  2. Whilst it is obviously the case that directors of incorporated charities are subject to the Companies Act and related legislation, including the CDDA, it might be thought that the primary means of regulating trustees’ behaviour, at least in practice, is and should be via the standards set by, and the enforcement powers of, the Charity Commission, being the regulator that has the most appropriate expertise. At the least, this might in practice reduce the risk of charity trustees being held to inappropriately different standards depending on whether the charity in question happens to be incorporated.

CONCLUSIONS

911. The charity sector depends on there being capable individuals with a range of different skills who are prepared to take on trusteeship roles. Most charities would, I would think, be delighted to have available to them individuals with the abilities and experience that the Trustees in this case possess. It is vital that the actions of public bodies do not have the effect of dissuading able and experience d individua ls from becoming or remaining charity trustees. Disqualifica t io n proceedings, or the perceived risk of them, based on wide ranging but unclear

12 February 2021 14:14 Page 217

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

allegations of incompetence rather than any want of probity, carry a high risk of having just that effect, and great caution is therefore required. This is particularly so for individuals otherwise involved in the management of businesses, and professionals for whom additional regulatory issues may arise: in fact, the sorts of individuals whose experience is often most needed. The result of proceedings being brought in other than the clearest of cases is likely to be to deter many talented individuals who take the trouble to understand and appreciate the risks either from charitable trusteeship at all, or at least from all but the most wealthy, well endowed, charities which are likely to have least need of their skills.

• 1. I am wholly satisfied that a disqualification order is not warranted against any of the Trustees. As I said at [877] above, the public need no protection from them. On the contrary, I have a great deal of respect for the care and commitment they showed in highly challenging circumstances.

  2. I have concluded that Ms Batmanghelidjh was not a de facto director. If I am wrong about that then I would still not have made a disqualification order against her, taking all the circumstances into account and on the basis of the allegation or allegations made against her. Although there are differences between Ms Batmanghelidjh’s position and that of the Trustees they are not clearly relevant to the case as put. I would also point out the enormous dedication she showed to vulnerable young people over many years and what she managed to achieve in building a charity which, until 2014, was widely regarded as a highly successful one doing what senior members of the government rightly described as incredible work. It would be unfortunate if the events the focus of this decision were allow e d to eclipse those achievements.

  3. Finally, I would like to record my thanks to Counsel and the parties’ wider legal teams for their assistance throughout a long trial, and to court staff (in particular, my clerk and the ushers) for their help in ensuring that the trial was able to run smoothly in difficult circumstances. I would also like to thank the technical team, whose assistance in particular with electronic document support allowed the trial to proceed as it did.

12 February 2021 14:14 Page 218

MRS JUSTICE FALK Re Keeping Kids Company Approved Judgment

APPENDIX: DRAMATIS PERSONAE

OFFICIAL RECEIVER’S OFFICE