What might charity trustees learn from the closure of Kids Company?

A version of this article first appeared on Guardian Voluntary Sector Network

The sad news that Kids Company is closing down is a crushing blow to everyone involved. Regardless of the inevitable debate regarding the effectiveness of its work and accusations of a lack of management control, its clients today don’t have the services that they had, and its staff and volunteers are left without an idea of what the future holds. Those volunteers include the trustees, a position I found myself in last year, when as one of the trustees of the BeatBullying charity we made the difficult decision to enter our charity into a creditors’ voluntary liquidation, with the result that the charity closed down.

Be wary of speculation: nobody knows the full story

From my experience, I think it’s important to highlight that the only thing outsiders should really know is that they don’t know what is really going on. Large charities like Kids Company are often incorporated as companies and as such subject to company law. Faced by an inquisitive media, we were strongly advised to say nothing by our lawyers, specifically because any comments might affect our chances of getting someone to take over the charity as a going concern. This is important, because once a company becomes insolvent, the primary stakeholders become the creditors. Whereas before our primary duty as trustees was to the beneficiaries of the charity, after a declaration of insolvency, you must not prejudice the interests of creditors. And company law trumps charity law. Nevertheless, be prepared for criticism for your silence. And for the inevitable filling of the media vacuum by those outside the organisation (which is why my comments here aren’t about Kids Company specifically).

Just because the doors are closed…

If saying nothing to the outside world was difficult, what was even more difficult was the knowledge that our primary responsibility was now to creditors. In other words, not the staff or the children and young people who were our users, the people for whom we got into this. But that doesn’t mean that you can’t talk to other charities or statutory agencies about who can help the service users, and then signpost to them. We did an awful lot of phoning in those long, difficult days – and for a sector that is often accused of being ultra-competitive, we got many offers of support from other charities.

Although the doors were metaphorically closed, our experience of the voluntary liquidation route was that there is still an awful lot of work required if you want to try and preserve the service for users. The single most important lesson here is that the staff (many of whom stuck around, despite not being paid or getting much in the way of communication from us) and the trustees have to stick together. I can’t underline enough how important this is: a number of people subsequently told me that in their experience the trustees had run for the hills. The Administrator arguably should do this work, but the challenge might be that there isn’t enough money left for an administrator to spend time trying to transfer the charity as a going concern. So if you care about the service and the beneficiaries, you’ll probably have to put the hours in.

Get proper legal and financial advice.

We had some fantastic professional advice, including pro bono advice. I would strongly recommend that you get this, and the earlier the better. That’s particularly the case if you are in financial difficulties: nobody wants to be accused of wrongful trading. If you’re at the point where you have concerns about whether or not the charity is a going concern, its more important than ever that you get accurate, timely financial information. It’s likely that the board will be meeting at least once a week to discuss this.

Much tends to get written about whether funders were right to make further payments to a charity that subsequently fails. Yet there is a similar onus on the trustees to be sure that in continuing to ‘trade’ at that point that they had a reasonable certainty of continuing as a going concern. Get professional advice (ideally from an insolvency practitioner), it’s out there. Also make sure that you tell the Charity Commission what is happening, as they need to know. It wont help in the long term if they are the last to know.

But we still need to address the starvation cycle

Every year thousands of charities close. Thousands are established. The news of a large charity closing triggers introspection (there but for the grace of God…) but even more thousands successfully deliver brilliant campaigns or services. Newspaper website articles nevertheless are deluged with inaccurate comments criticising charities for their poor governance and financial incompetence, but they also highlight some hard truths and paradoxes about how our sector works.

The brave not so new world of contracting with the state for the delivery of services has singularly failed to enable charities to build their resilience. While many charities now have a reserves policy, implementing that policy and building 3 months’ worth of expenditure is a goal many find unattainable. Charities with reserves can find it hard to convince donors and funders that they should give their support (the so called non-profit starvation cycle). And donors dislike of funding core costs or ‘administration’ mean that it remains difficult to put in place the sort of financial and outcomes reporting infrastructure that build resilience in many charities. We need to shift the questions from low overheads to high impact.

Many trustees will no doubt be more carefully reading the financial report in advance of their next board meeting as a result of recent events. That is a good thing. I’d particularly recommend that you read the Charity Commission’s 15 questions to ask at your next board meeting. And just as boards sticking together at times of crisis is a good thing, I hope we as a charity sector stick together now, and support those who are currently trying to save the services provided by Kids Company, in the anticipation that we will learn from their experience later in the future.