Alastair Keatinge, Partner and Head of Charities at Lindsays, discusses a recent case which provides useful legal lessons for those managing third sector organisations.
If there’s a lesson that all charity trustees can learn from the Kids Company furore, it’s this: Never be afraid to act in good faith and fight your corner.
Acting in good faith is a principle that really should underpin the work of trustees in any organisation. From a practical point of view, if they begin to doubt the legal ground surrounding their ability to carry out their role, that can cause problems for important decision-making.
That’s not to say that anyone should act recklessly, of course. Any trustee or director has a legal responsibility to apply due diligence to their actions in the running of a charity. And good governance demands that all decisions be properly recorded.
The London-based Kids Company collapsed in 2015 amid financial pressures and negative media headlines arising from allegations later found to be baseless. Although the recent case in which former trustees successfully challenged an assertion that they were unfit to be directors was heard in an English court, the principles from it are likely to apply as equally in Scots law.
It reminds us that trustees should not be punished for personal wrongdoing for issues which are genuinely outwith their hands.
And what stands out for me is the fact that those who step forward to oversee the work of charities should not forget that - in cases where they are sure they have carried out their duties properly - it’s their own reputation that may be hit.
Challenging a court decision that you see as unfair may be important from a personal and professional perspective. That’s heavily tempered, of course, by the fact you must have the financial means to do so.
With Kids Company, the Official Receiver had argued that the CEO and all directors were “unfit” to hold directorships because of their handling of the charity’s affairs, alleging that the eight defendants in the case ought to have acted earlier to stop its financial collapse.
But the judge, Mrs Justice Falk, sitting in the High Court in London, found that the Official Receiver’s allegations were not proven, saying there was no evidence of “dishonesty, bad faith, or personal gain”.
She even went as far as to describe the people running the charity as a "group of highly impressive and dedicated individuals who selflessly gave enormous amounts of their time to what was clearly a highly challenging trusteeship".
And it’s this which was a key point for me.
Had the trustees not chosen to fight their corner, they would have been barred from being directors and suffered a stain on their reputation that was not deserved.
So much about being a trustee - and I am one myself as well as advising organisations across the third sector - is doing the right thing. This ruling is an important reminder that, if you are faced with an allegation that you believe to be wrong, you should try to do the right thing by yourself and contest it. Not doing so can be damaging.
This case should give charity trustees faith that they should not be punished if found to have done what they should have.
It has also been a powerful reminder of the need for charities to ensure they have crisis management measures in place to deal with claims on the scale that the Kids Company did in a BBC Newsnight report - allegations which essentially sealed the charity’s fate.
Of course, this story is not yet over, with the Charity Commission’s statutory inquiry still to follow. That will be watched with great interest.
Charities are always in need of good trustees. And good trustees need not be afraid of scrutiny. Nor should they be put off from doing their bit.Indeed, the Covid-induced challenges that many charities currently face demand strong leadership and the best people, more than ever.
The Kids Company ruling is one which indicates that the courts will support charity trustees when they have acted properly. Do not let the earlier noise from this case deter you from stepping forward.
Alastair Keatinge is a Partner and Head of Charities at Lindsays
alastairkeatinge@lindsays.co.uk
0131 656 5746
