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What next after the collapse of Kids Company?

Maxine Reid, leader of the Kreston Reeves restructuring and recovery team, unravels the aftermath of Kids Company’s insolvency.

Maxine Reid
Leader, Kreston Reeves restructuring and recovery team

One unusual aspect to the sudden collapse of Kids Company, shortly after receiving £3m from the government, has been calling in the official receiver.

It happens rarely with charities. But the decision signifies a case deemed to be of particular public interest, although sends no signal as to what is likely to be discovered.

What it certainly does mark out, in this case, is the complexity of unravelling an organisation where children are involved, taxpayers’ money has to be accounted for, and in the backdrop are press reports of a criminal investigation involving allegations of abuse.

Apart from the status of his office, at a practical level the official receiver has security clearances within government not given to commercial recovery companies.

It will still be a complex and politically delicate exercise for the person appointed, Matthew Stone, senior examiner and deputy official receiver. However, his basic task is clear.

He will try to realise assets, find out what went wrong, and decide if the trustees have fulfilled their duties.

At some point in the next few weeks he will also invite creditors to make a claim.

The role may involve attempting to transfer viable parts of Kids Company, which claimed to support 36,000 vulnerable young people, to others offering similar services.

As his investigation gets under way there will be a focus on what financial controls were in place, especially given claims in the media that regular audits failed to flag up its vulnerabilities.

So far, arguably, so familiar with a conventional liquidation. The law imposes duties on trustees similar to company directors, requiring the same fiduciary standards.

However, there are particular sensitivities when dealing with a failing charity.

Company directors, for example, are usually welded to a for-profit business. By contrast, charity trustees are generally part time, possibly from the ‘great and the good’, and often people with other roles elsewhere.

They may be in reality somewhat honorary, or there for the contacts they bring.

Anyone called in to restructure a charity must be aware of this distinction, although it does not absolve anyone from their responsibilities. They must also be particularly aware of the sector’s regulator, the Charity Commission.

The commission will want to know, for example, what plans are in place for any surplus after creditors can be paid. This generally must be for the balance to go to another charity.

There may also be issues around whether assets are ‘restricted’ or ‘unrestricted’ by covenant. If the former, it may be impossible to use them to repay creditors. The asset may have to be returned to the original donor. This can be a complex task, particularly if they were the result of a bequest.

It is not always easy to find fits with other organisations, either, however apparently similar. Charities often rely on good will to do their good work. Any restructuring that includes a merger must take into consideration whether it would damage reputation or diminish fund raising.

There are, therefore, particular challenges for recovery professionals in dealing with charities, and they can be onerous. Some commentators believe that the not-for-profit sector is heading for a big shake-up.

This gloomy view is based on clear indications from the Treasury of a reduction in government support upon which many of the UK’s 160,000 charities, including Kids Company, have come to rely. We have, perhaps, been warned.

Posted on 13th October 2015 by Marcel LeGouais



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