There was an interesting aside to the story this week that the Insolvency Service was seeking to disqualify as directors the trustees and former chief executive of Kids Company.
The trustees were all, of course, directors of the organisation, but former chief executive Camila Batmanghelidjh was not. So how could she be disqualified as a director when she held no such role and, in theory, was nothing more than a member of staff?
The answer is that the Insolvency Service can make the case that someone was a "de-facto" director and seek their disqualification on the basis that they acted as a director rather than as a manager.
The matters the Insolvency Service must take into consideration when deciding whether someone is a de-facto director sound quite similar to a lot of the duties performed by senior managers in charities. These include whether they make independent decisions, decide the business strategy, participate in formal meetings and participate in informal management decisions. Other considerations include being regarded as the boss by the employees, hiring new staff and negotiating prices with large creditors. They even include whether the person attends the organisation’s premises each day, something you’d expect the chief executive of a charity to do more often than its trustees.
The Insolvency Service guidance, however, says that de-facto director cases need to be decided on an individual basis, with each case looked at in the round.
It is also interesting to note that when the legal firm Bates Wells Braithwaite released a statement earlier this week saying the seven former trustees of Kids Company would defend themselves vigorously against any attempts to disqualify them as directors, there was no mention of Batmanghelidjh. Despite the Insolvency Service trying to make the argument that she was effectively a trustee and a director, Batmanghelidjh is not being represented by BWB and is yet to make a statement about the attempt to disqualify her as a director.
So where does this leave Batmanghelidjh? Potentially facing a hefty legal bill. The legal costs of trustees would usually be covered partly by trustee indemnity insurance, but given that Batmanghelidjh was not a trustee at the time of Kids Company’s collapse it is likely she will have to fund her own defence.
Hannah Kubie, a partner at the legal practice Stone King, tells me that if charities want to avoid their senior managers being considered de-facto or shadow directors there should be a clear delineation between the role of the board and the executive team. "The charities that have more dynamic chief executives who tend to sway the board should particularly be aware of this," she says.
Kubie adds that chief executives should also be conscious of the new powers granted to the Charity Commission under the Charities (Protection and Social Investment) Act 2016, which gives the regulator powers to pursue senior staff members involved in mismanagement. "It will be interesting to see how the Insolvency Service and Charity Commission join up on this," she says.
Given the moves to make senior managers in charities more accountable when things go wrong, it will be intriguing to see how this plays out in the longer term, and whether they too will need to think about protecting themselves more in the future.
After all, you never know where the next charity scandal might be lurking.
Andy Hillier is the editor of Third Sector