Risky (Not for Profit) Business

With over 500 pieces of legislation in Australia which impose personal liability on directors and officers of public companies limited by guarantee, and committee members of incorporated associations, Mills Oakley Lawyer, Clementine Baker looks at the risks associated with being a Director of a Not for Profit organisation.

Directors of Not for Profits should be aware of their legal obligations. While not summarising all of the legislation that imposes obligations on Directors here, a good starting point is the directors’ duties which all Directors must comply with.

As a Director of a company or association, a Not for Profit must:

(1) Comply with the governing document

Directors must comply with the company’s governing document – its constitution. The constitution is a legal contract that every Director enters into with the company/association when that Director agrees to sit on the board.

(2) Comply with the ‘Directors’ Duties’

Directors must comply with the ‘Director’s duties’ (these duties are prescribed by legislation and case law and are largely the same whether you are a Director of a company or an association) which are:

(a) be honest and careful in your dealings both with the

company/association and on behalf of the company/

association;

(b) know what the company/association is doing, including how the company/association is faring financially;

(c) make sure that the company/association can pay all of its debts on time;

(d) ensure that the company/association keeps proper financial records;

(e) always act in the best interests of the company/ association, even if this may not be in: a. your own interests; or b. the interests of any member organisation that has appointed or elected you onto the Board or employs you; and

(f) do not improperly use your position to gain an advantage or cause detriment to the company/ association.

(g) use any information you receive through your position properly and in the best interests of the company/association. Using that information to: a. gain, directly or indirectly, an advantage for: i. yourself; ii. the member organisation which elected/ appointed you or employs you; or iii. any other person; or b. harm the company/association, may be a crime or may expose you to other claims.

(h) always disclose any material personal interest to other Directors as soon as practicable after any conflict arises.

(3) Comply with other relevant legislation

Directors should be aware of their possible personal liability for breaches of other State or Federal legislation. For example, environmental and work health and safety legislation now often provides that both a corporation and the Directors or persons concerned in its management will be guilty of offences committed by the corporation regardless of any active involvement, for example, section 10 of the Environmental Offences and Penalties Act 1989 (NSW).

Another area in which there may be hidden dangers for Directors is revenue law. Directors should be aware of the potential personal liability for breaches of State and Federal legislation dealing with matters such as: customs and excise, stamp duty, payroll tax and land tax under all of which the persons in control of a corporation may be personally liable in cases where the corporation has failed to pay.

Directors can be personally liable for any unpaid superannuation. Directors must ensure that the organisation either meets its obligations to pay superannuation, or goes promptly into voluntary administration or liquidation. The penalty which could be imposed on a Director is equal to the unpaid amount of the organisation’s liability under its obligation. This duty applies to Directors of incorporated organisations as well as members of a committee of an unincorporated association.

Directors of registered charities can be personally liable if the charity is found to have committed an offence where the Director aided, abetted, counselled or procured the relevant act or omission and did not take reasonable steps to ensure the charity did not commit the offence.

Defences and indemnities

(1) Defences

Given the amount of legislation imposing personal liability on Directors, it is not surprising that there are also numerous defences available to Directors. The main defence available to a Director is where the Director reasonably relied on information or expert advice.

Generally, it is reasonable for a Director to rely on expert advice where the Director believes on reasonable grounds that the person who gave the advice was an expert in that area and the Director relied on that advice in good faith and after making an independent assessment of the information. We note that the independent assessment criterion is an important one – the Director must still understand the advice and assess that advice in the context of the Director’s knowledge of the organisation, and the complexity of the structure and operations of the organisation.

A Director is responsible for the exercise of a power by a person to whom that Director delegated the power. However, it is a defence for that Director if the Director believed on reasonable grounds that the delegate would exercise the power in accordance with the duties imposed on Directors, and the Director believed on reasonable grounds and after making proper inquires that the delegate was reliable and competent in relation to the power delegated.

Directors of charities will not be liable for an offence committed by the charity if the Director could not take part in the management of the charity at the relevant time due to illness, or the Director took all reasonable steps to ensure that the charity did not commit the offence.

(2) Indemnities

Most Directors have some level of protection from certain personal liabilities through indemnity clauses in the organisation’s governing document which favour the organisation’s Directors and officers. Many organisations are finding that such indemnity clauses are not sufficient, and hence are also protecting their Directors by means of a deed of indemnity in favour of each individual Director.

However, there are important restrictions imposed by statute on the liabilities that may be indemnified by a company. The Corporations Act restricts the liabilities that may be indemnified by a company so that a company cannot indemnify a Director for:

• conduct involving a wilful breach of duty in relation to the company;
• a contravention of sections 182 or 183 of the Corporations Act which prohibit a Director from making improper use of information or improper use of their position; or
• liabilities incurred as a Director including: a liability owed to the company; a liability for a pecuniary penalty, or a compensation order, resulting from a breach of a civil penalty provision (including the insolvent trading provisions); or a liability that is owed to someone other than the company/related company and did not arise out of conduct in good faith.

(3) Insurance

As well as indemnities provided by an organisation to its Directors, many organisations pay for Directors and officers insurance (D&O Insurance). Generally, D&O Insurance consists of the following components:

• a direct cover component which provides indemnification to Directors where the company itself is unable or unwilling to do so;
• a company reimbursement component, which provides for the company to seek reimbursement for those amounts which it is required (or in some cases allowed), under its constitution, to indemnify the Directors; and
• optional extra protections, for example, providing cover for spouses of Directors.

A company can pay the premiums for an insurance policy that covers certain breaches of duty only. The company cannot pay premiums on policies that seek to protect the Director from a wilful breach of duty, or a breach of sections 182 or 183 of the Corporations Act – the Director would have to take out a policy to protect himself or herself from those breaches.

D&O Insurance generally excludes claims brought by one insured party against another insured party. Therefore, actions brought by the company (which are a significant source of liability for a Director) are excluded. It is also worth noting that any D&O Insurance policy must not be inconsistent with the indemnities provided in the organisation’s constitution, so that one document does not negate the protections provided by the other.

More information:

• Australian Securities and Investments Commission (compliance) http://www.asic.gov.au/

• NSW Fair Trading (committee obligations) http://www.fairtrading.nsw.gov.au

• Australian Taxation Office www.ato.gov.au

• Australian Charities and Not-For-Profits Commission

http://www.acnc.gov.au/

• Office of Liquor, Gaming and Racing (fundraising)

www.olgr.nsw.gov.au/charitable_home.asp

• Office of the Privacy Commissioner

www.privacy.nsw.gov.au

• Anti-Discrimination Board

www.lawlink.nsw.gov.au/adb

• NSW Industrial Relations (employment)

www.industrialrelations.nsw.gov.au

• Fair Work Ombudsman (employment)

www.fairwork.gov.au

• Workcover Authority of NSW (safety)

www.workcover.nsw.gov.au

About the author: Clementine Baker is a Lawyer in Mills Oakley’s Sydney Not for Profit team. Baker has experience acting for numerous charities and Not for Profit providing advice on a range of matters including governance and fundraising issues, ACNC registration and ATO endorsement and constitutions.