It is often said that whether you are on the board of a not-for-profit (NFP) or for-profit organisation, the same director duties apply. Similarly, whether paid or not, the same duties apply.
While we would always recommend that directors aim for the highest bar when it comes to fulfilling their duties, there has been much discussion recently about whether directors’ duties actually differ between NFP and for-profit companies.
The purpose of this article is to explore those differences and consider the practical approach that directors might take.
Directors’ duties
The Corporations Act provides that directors have the following duties:
- Duties of loyalty and good faith, that is, a directors’ state of mind (in sections 181 to 183 and 191) which includes to:
- act in good faith in the best interests of the organisation for a proper purpose
- not to misuse their position or information
- avoid conflicts of interest (and duty)
- Duty to exercise reasonable care and diligence, (that is, the standard to which they perform their role (in section 180)
- Duty to avoid insolvent trading (in section 588G).
These duties also apply to ‘officers’ with the exception of the duty to avoid insolvent trading.
The Corporations Act defines an ‘officer’ of a corporation to include its directors and company secretary, and also people:
- who make, or participate in making, decisions that affect the whole, or a substantial part, of the business of a corporation
- that have the capacity to significantly affect a corporation’s financial standing, or
- in accordance with whose instructions or wishes, the directors of a corporation are accustomed to act.
Civil and criminal penalties variously apply for breaching these duties.
Whether directors of companies incorporated under the Corporations Act are paid or not is irrelevant to the requirement to fulfil these duties.
NFP companies and charities
NFP companies have certain key features, namely:
- they are established for a purpose other than to make profit or personal gain for their ‘owners’
- any profit made goes back to advancing the organisation’s purpose, and
- on winding up, profits must be distributed to an organisation with a like purpose.
Some NFPs are also charities. To be a charity, an organisation must meet one of the charitable criteria in the Charities Act 2013 (Cth) and be recognised as such by the Australian Charities and Non-profits Commission (ACNC). On registration with the ACNC, charities may also gain certain tax exemptions. The laws relating to directors’ duties are also modified.
Even if a registered charity is incorporated under the Corporations Act, the directors’ duties under sections 180-183 and 191 of that Act (outlined above) are ‘switched off’ and instead ACNC governance standard 5 applies.[1]
The duties in Governance standard 5 are as follows:
- to act with reasonable care and diligence
- to act honestly and fairly in the best interests of the charity and for its charitable purposes
- not to misuse their position or information they gain as a Responsible Person
- to disclose conflicts of interest
- to ensure that the financial affairs of the charity are managed responsibly, and
- not to allow the charity to operate while it is insolvent.
While this standard broadly replicates the terminology used in the Corporations Act duties, its application is different in some key aspects.
Firstly, the standard requires the charity (rather than the individual director) to take reasonable steps to make sure its Responsible People meet certain duties – rather than a direct obligation on the directors themselves[2]. Responsible People include someone responsible for governing a charity and hence generally is the board, management committee members or trustees.
Secondly, the penalty provisions are lower. For example:
- directors are not liable to civil penalties for breaching their director duties
- the duty to act with reasonable care and diligence is general rather than specific to the circumstances of the director and the company
- the obligation to act in good faith and for a proper purpose is replaced with a more limited obligation to act honestly and fairly and for charitable purposes
- it is not an offence to fail to declare a material personal interest, and the obligation to disclose conflicts of interest is very broad.
However, the following provisions of the Corporations Act still apply to directors of companies that are registered charities:
- criminal offences relating to breaches of duties of good faith and acting for a proper purpose and misuse of position or information (section 184), and
- the duty to prevent insolvent trading (section 588G).[3]
In a review of the ACNC legislation in 2017/18, the review panel noted that there was some uncertainty about how the provisions relating to directors’ duties applied and recommended that the duties for directors of charities under the Corporations Act be ‘turned on’ to resolve any uncertainty.
Various other provisions of the Corporations Act relating to company meetings and accounts and audit are also replaced with general obligations under other Governance Standards.
Volunteer versus paid board members
A range of other legislation places duties on directors and failure to comply may expose directors to personal liability and penalties. Much of this legislation doesn’t distinguish whether the organisation is a not-for-profit or for-profit entity. However, in some circumstances there is a difference in the protection afforded to volunteer versus paid directors.
Model workplace health and safety legislation has been adopted in most Australian jurisdictions.
Not-for-profit organisations who employ workers are considered to be a person conducting a business or undertaking (PCBU) under this legislation (the WHS Act). Their officers (which includes directors) have a duty of care to ensure, so far as is reasonably practicable, the health and safety of their workers at work and that the health and safety of other people is not affected by the way in which the organisation conducts its business or undertaking[4].
However, the WHS Act does not apply to not-for-profit organisations that are ”volunteer associations’ – that is, volunteer directors and volunteer staff.[5]
As noted by WorkSafe Queensland, in cases where a not-for-profit organisation is a PCBU, a volunteer officer cannot be prosecuted for failing to comply with their ‘officer duties’ under the WHS Act. This immunity from prosecution is designed to ensure that voluntary participation at the officer level is not discouraged. However, a volunteer officer can be prosecuted in their capacity as a worker if they fail to meet their duties as a worker.
Similarly, Australian civil liability laws, allowing legal action and compensation for persons suffering injury, property damage or financial loss, exempt volunteer board members from personal civil liability in some circumstances such as requiring the director to have acted in good faith.
Our suggested approach
In summary, there are various aspects of the law that seek to differentiate – and lower – the personal liability of directors on not-for-profit boards, especially those who volunteer their time. However, the law in this area is complex.
Putting aside the moral and ethical imperative of ‘doing the right thing’, even if not caught by laws such as WHS legislation, it is foreseeable that other duties might apply to directors of volunteer organisations including the duty of reasonable care and diligence. For these reasons, always acting in line with the directors’ duties as set out in the Corporations Act is considered prudent. A board’s demonstration of its compliance with the Corporations Act duties in principle might also bring other benefits including:
- safeguarding the reputation of the NFP, and
- attracting and retaining the charity’s funders (donors or government).
**Nothing in this article should be construed in any way whatsoever as legal advice. It is the reader’s responsibility to obtain expert legal advice on any issue which requires a professional legal opinion.
[1] For further information regarding other Corporations Act provisions which don’t apply to charities see: https://asic.gov.au/for-business/running-a-company/charities-registered-with-the-acnc/
[2] For further information regarding Responsible Persons see: https://www.acnc.gov.au/for-charities/manage-your-charity/governance-hub/5-duties-responsible-people
[3] https://asic.gov.au/for-business/running-a-company/charities-registered-with-the-acnc/#corps-act-apply
[4] https://www.safeworkaustralia.gov.au/law-and-regulation/duties-under-whs-laws
[5] https://www.worksafe.qld.gov.au/laws-and-compliance/work-health-and-safety-laws/specific-obligations/non-profit-organisations-and-volunteers
Katie Simpson
General Manager, Advisory
