The Cabinet Office stands a good chance of recovering in full any remaining part of the grant it gave to Kids Company shortly before the charity was forced to close last week, according to a sector insolvency expert.
Peter Gotham, the head of not-for-profit at the accountancy firm MHA MacIntyre Hudson, told Third Sector that if the money was paid as a "restricted grant" – which must be used for a specific purpose – it could, under trust law, be used only for the purposes for which it was given and should not be used for repaying the charity’s other creditors.
"If there are funds in the bank account, and the funds were ‘restricted’ then, without knowledge of other transactions in the last few days, I consider that the government should get most of the money back," he said.
The £3m was paid to the charity just days before it closed last Wednesday, despite concerns from senior civil servants that the charity could not meet the conditions of the funding. Kids Company used £800,000 of the grant to pay staff salaries and the remaining £2.2m had not been repaid before the charity’s bank accounts were frozen last week.
Gotham said the £2.2m could be treated differently from the charity’s other assets, which will be divided among its creditors once the charity goes into administration, and paid directly back to the government. This is because any unspent part of a restricted grant does not form part of the charity’s own assets, he said.
He cited the Charity Commission’s insolvency guidance, CC12, which states that "restricted funds are generally considered to be, in effect, separate charities with their own trusts governing expenditure. Depending on the terms under which they were given, some unspent restricted income funding may need to be returned to the funders."
It adds: "It is a breach of trust to use endowment or restricted funds for purposes other than those for which they were given by the donor."
Subarna Banerjee, the head of charities and not for profit at the accountancy group UHY Hacker Young, agreed that it would be possible for the government to recoup most of its remaining grant by using this argument, but said there was no guarantee it would be successful. It would partly depend on whether the government had documentation to prove that the grant was for a specific purpose, he said.
A spokesman for the Cabinet Office confirmed that the £3m was a grant given for specific purposes, with the conditions including changes to the charity’s leadership, management and governance. In a letter to the civil servant who had called the funding decision into question, ministers also referred to "a set of clear conditions that will be placed on this funding, which we believe will help to protect the government’s additional investment."
The spokesman declined to say whether the government would be using this point of law in its argument for recovering the money. But the government could still have to write off most of the £3m in a number of circumstances: if the Cabinet Office is unsuccessful in arguing its case; if its grant is not deemed a restricted fund; or if the money is no longer in the bank account it was paid into.
Banerjee told Third Sector it could potentially receive as little as £150,000 because creditors typically get paid 5 or 10 per cent of what they are owed when an organisation goes into administration. He added that the amount they receive very rarely exceeds 50 per cent.
According to a statement on the Kids Company website, the charity is being placed into compulsory liquidation and an official receiver is being appointed to take over control of the organisation. "All Kids Company’s assets and property will become under the control of the official receiver once appointed by the court," said the statement.
Banerjee said that the official receiver – a civil servant in the government’s Insolvency Service – is likely to appoint an external firm to handle the charity’s liquidation in order to avoid a conflict of interest, because the government is one of the creditors and because the case has been so high-profile.
He said the firm is likely to earn about £50,000 to £100,000 for its work , which will probably take six to 12 months. Their fees will be taken first from the charity’s remaining funds. Once selected, he said, the receiver will work to recover as much funding as possible to repay the creditors through converting fixed assets into cash, securing debts and accessing any funds in the charity’s bank accounts.
Each creditor will then receive the same percentage of the amount they are owed. Previously the government would have taken precedent over the other creditors and been repaid first, but Banerjee said the law on this changed some years ago. He added: "Kids Company has very few assets that could be converted into cash."