A recent judicial review judgment concerning Kids Company has important implications for charities, especially those navigating regulatory scrutiny or complex governance issues. The claim was initially brought against the Charity Commission by the former CEO of Kids Company, and later continued by its former Clinical Director.
At the heart of the case was a challenge to the Charity Commission’s 2022 report, setting out the findings of a statutory inquiry into Kids Company, following its controversial closure in 2015.
The claims under consideration by the court focused on whether the Commission’s report was unlawfully irrational in making criticisms of the charity’s governance and financial management, and that the Commission had pre-determined to produce a critical report.
Rationality
As a public decision-maker, the Charity Commission is required by common law to reach rational decisions where there is no infringement of any legal right, no misdirection of law and no procedural unfairness. There are two aspects to rationality:
1. Process rationality: Looking at whether the Commission’s reasoning was free of logical errors or gaps in evidence.
2. Outcome rationality: Looking at whether the conclusions were so unreasonable that no reasonable authority could have reached them.
Judgment and Key Findings
The High Court upheld the judicial review on two fronts:
1. Mischaracterisation of Trustee Oversight on Expenditure:
The Charity Commission’s report (at paragraph 45) gave the “extremely unfair” impression that financial support given to a group of service users known as the “Top 25” may have lacked proper justification. The court found this portrayal failed to reflect the conclusion that the trustees had, in fact, scrutinised this expenditure adequately, and was therefore irrational.
2. Criticism of Financial Reserves:
The report (at paragraph 51) suggested that the trustees’ decision to operate with low reserves was the reason Kids Company became insolvent. The court held that this was also irrational, having failed, for example, to acknowledge that even a (commonly adopted) three-month reserve fund would not have prevented the collapse. The Commission had not provided a satisfactory explanation for diverging from this finding.
All remaining grounds were dismissed. This included dismissal of the claim that the Commission’s sole finding of mismanagement against the trustees (in relation to the late payment of debts) was irrational. The court held that the finding of mismanagement was clearly one that was open to the Commission to make in its report. The Commission has now amended the relevant paragraphs in its report (an updated version of which can be found here).
Key Takeaways for Charities
1. Ensure Governance Is Both Effective and Evident
In an earlier High Court decision, Kids Company’s trustees were ultimately found by the High Court to have acted responsibly (in the context of a claim brought by the Official Receiver, seeking their disqualification as company directors). The controversies relating to the charity’s closure arose in part because of the appearance of blurred lines between formal governance structures and informal influence, the rapid growth of the charity, and a focus on delivery of aid to beneficiaries over longer term planning.
- Charities must ensure their governance arrangements are robust, clearly defined, and capable of withstanding regulatory scrutiny in both substance and in how they are perceived.
2. Maintain and Justify Financial Resilience
While the judicial review decision recognised that low reserves were not necessarily the cause of Kids Company’s insolvency, it highlights how financial decisions can become focal points in regulatory reviews. It is notable too that a significant number of recent new inquiries have been initiated having first come to the Charity Commission’s attention due to the late filing of accounts, as an early indicator of financial problems.
- Charities should document risk management strategies, justify their reserve policies, and consider stress-testing their financial models for resilience in adverse conditions. Regular financial audits and risk assessments can help identify potential vulnerabilities and allow for timely interventions.
3. Engage Proactively with Regulators and Record Evidence
One of the key issues in this case was the Commission’s failure to grapple fully with the evidential findings of the judgment in the earlier High Court case (see point 1, above).
- Charities engaging with the Charity Commission should ensure that all communications and decisions are clearly documented, especially where they deviate from standard practice. A proactive and collaborative relationship with regulators can mitigate the risk of future disputes and serve to protect reputations. Charities should also choose to seek legal advice when necessary to protect their interests.
The Kids Company judgment is a nuanced reminder of the challenges that can arise when a charity faces public and regulatory scrutiny. While the court identified significant flaws in parts of the Charity Commission’s report, it also reinforced that trustees must act with both care and accountability. For charities across the sector, this is a moment to reflect on governance, financial oversight, and the importance of fair regulatory processes.
If you would like to explore the implications of this case for your organisation, or need guidance on engaging with the Charity Commission, our team is here to help.
