The Official Receiver v Atkinson & Ors

Disqualification under section 6 of the Company Directors Disqualification Act 1986 requires proof that the director’s conduct, viewed cumulatively and in context, demonstrates unfitness. Where the case is based on incompetence, the conduct must show incompetence of a high degree. Directors may trade while insolvent, or at a loss, where they honestly and reasonably consider that the company can avoid insolvent liquidation. A charity’s nature, objects, funding model and the unpaid, non-executive character of its trustees are relevant context. Delegation to a chief executive does not make the chief executive a de facto director where the board retains ultimate supervision and control. The claim failed because the alleged business model was not shown to be bound to fail and the defendants’ decisions fell within a reasonable range.

Kids Company, a charitable company limited by guarantee, entered insolvent liquidation in August 2015. The Official Receiver sought disqualification orders against its trustees under section 6 of the Company Directors Disqualification Act 1986, alleging that they had caused or allowed an unsustainable business model. A de facto director issue arose in relation to the chief executive, Camila Batmanghelidjh, who had not been formally appointed as a director.

The allegations concerned demand-led services, reliance on donations, loans and government funding, inadequate reserves and controls, financial difficulties, and delayed implementation of contingency plans. The central questions were whether Ms Batmanghelidjh was a de facto director, whether the trustees’ conduct demonstrated unfitness, and whether the alleged model was unsustainable.

1. De facto director. The claim that Ms Batmanghelidjh was a de facto director failed. The statutory and constitutional structure placed ultimate responsibility for management in the trustee board. Her employment contract and the Financial Procedures Manual showed that she was a chief executive accountable to, and supervised by, the board. She exercised substantial delegated authority and influence, but did not participate on an equal footing in the highest level of corporate decision-making. The relevant question was what she actually did, viewed objectively and cumulatively in context.
2. Meaning of unsustainable. In the context of the allegation, “unsustainable” meant bound to fail. The Official Receiver had not shown that the model was bound to fail by 27 September 2013 or that failure was inevitable without immediate material change by 30 November 2014. The charity had operated the essential model for many years, had historically raised sufficient income, and had reasonable grounds for expecting government and philanthropic support.
3. Unfitness. The test under section 6 required an evaluation of each director’s conduct in context. The case was principally one of alleged incompetence, requiring incompetence of a high degree. The trustees’ cash-flow difficulties, reliance on loans, absence of liquid reserves and delayed cost reductions were legitimate criticisms, but did not establish conduct outside the range of reasonable decision-making. Their reliance on qualified staff, auditors, government indications and philanthropic support was not unreasonable. Their charitable context and the consequences of unnecessary service closures were relevant.
4. Insolvency and creditors. Paragraph 6 of Schedule 1 required particular regard to the director’s responsibility for the causes of insolvency. “Becoming insolvent” under section 6(2) encompassed both entering liquidation and doing so with insufficient assets. The later criminal allegations, which precipitated the collapse, were relevant to assessing responsibility. Trading at the risk of creditors could support unfitness, but there was no general duty to ensure solvency and honest continuation of trading was not automatically improper.
5. Outcome. The claim failed on the merits. No disqualification order was warranted against any trustee. Ms Batmanghelidjh was not a de facto director and, alternatively, would not have been disqualified on the allegation advanced.