Guiding the Good: Duties of Charity Directors, Board and Committee Members

Operating in the charity and not-for-profit space comes with many and varied responsibilities. From the time the decision is made to register a charity, and throughout the charity’s life, directors, board members and committee members must meet their obligations to ensure the ongoing prosperity of the organisation and shield themselves against personal liability. In this article we consider some of the main responsibilities required of directors, board members and committee members by the Australian Charities and Not-for-profit Commission (the ACNC).

Overview

Prior to the introduction of the ACNC and the associated regime, directors of charities were primarily governed by the directors’ duties provisions in the Corporations Act 2001 (Cth) (the ‘Corporations Act’). However the Corporations Act did not take into account the nuances of operating in the charity sector, and seemed to impose an ever increasing level of liability on those directors (as seen in the Centro case ASIC v Healey [2011] FCA 717). The introduction of the Australia Charities and Not-for-profit Commission Act 2012 (Cth) (the ‘ACNC Act’) marked a significant shift, and meant that the Centro decision and the related civil penalty provisions of the Corporations Act would no longer apply to registered charities.

Whilst a collective exhale could be heard across charity boardrooms Australia wide, the question remains, what is the standard of diligence required from charity directors and in what circumstances would liability for a charity director arise?

Australian Charities and Not-for-profit Commission

Many reading this article will be familiar with the ACNC, who is the independent regulator of registered charities in Australia. It is prudent here to note that not all charities in Australia are registered charities, and the contents of this article specially relate to people involved with charities that are in fact registered. The ACNC uses the term ‘Responsible People’ to refer to the different roles that attract duties within a registered charity (as each registered charity will have one of several different legal structures). These roles generally include each director of a company limited by guarantee, each of the members of an association’s committee of management of an incorporated association, each trustee of a trust and each director of a corporate trustee[1]. Each of these Responsible People has duties that they must comply with, the most pertinent of which are set out below.

ACNC Governance Standards

There are six governance standards set out in the Australian Charities and Not-for-profits Commission Regulations 2022 (Cth) (the ACNC Regulations) which entities are required to meet (in order to become registered, and on an ongoing basis). According to Governance Standard 5, charities must take reasonable steps to ensure that their Responsible People comply with their duties as follows[2]:

•  To act with reasonable care and diligence. It is the responsibility of the registered charity’s Responsible People to manage the charity. This includes staying informed of the charity’s activities and finances. Whilst is it at times necessary for a responsible person to rely on the expertise of others, this does not alleviate the requirement to make an independent assessment of the information provided.
• To act honestly and fairly in the best interests of the charity and for its charitable purposes. Responsible People are obligated to act in the best interests of the charity in order to further its charitable purposes. It would be a breach of this duty if their dealings were not honestly in the charities best interests, but rather in the best interests of the Responsible People or their associates.

• Not to misuse their position or information they gain as a Responsible Person. Often responsible people will need to make decisions about the finances or other resources of the charity. It would be a misuse of that position to use information for their own benefit or benefit of others such as family and friends.

• To disclose conflicts of interest. A conflict of interest between a responsible persons duty to the charity and their own personal interest, whether actual or perceived, must be disclosed to the other Responsible People of the registered charity. That person should also then refrain from voting on any issue relating to the conflict of interest. A key here is early and full disclosure, even in a circumstance where it may only look as though there is a conflict of interest.

• To ensure that the financial affairs of the charity are managed responsibly. This includes reading financial statements and making enquiries in relation to anything the responsible person doesn’t understand (those familiar with the Centro case may notice a similar representation here). Improper financial management is the most common way in which directors and other responsible persons get themselves into trouble. There is no substitute for taking care to discharge due diligence when it come to the charity’s financial management.
• Not to allow the charity to operate while it is insolvent. If the Responsible Person reasonably suspects that the charity cannot pay all its debts when they become due, then they must take all reasonable steps to prevent the charity from incurring any more debt.

Whilst the ACNC Regulations outline some protections for Responsible People, failure to comply with any of the above requirements of Governance Standard 5 can attract regulatory action by the ACNC and in some more extreme circumstances (discussed below) the criminal sanctions set out in the Corporations Act may apply.

ACNC Compliance Powers

As the national regulator the ACNC has statutory powers to ensure that the regulatory framework is complied with. These powers include the ability to take action against the charities ‘Responsible Persons’ and the registered charity itself. It may suspend or remove a Responsible Person (for example a member of the charity’s board or committee) and also disqualify them from being eligible to be on the governing body of another registered charity. If a person is disqualified they will be listed on the ACNC disqualified persons register.

In relation to the charity itself, the ACNC may issue a warning, a direction (directing the charity to do or not do something) or an enforceable undertaking (these arrangements can be enforced by a court). It may also seek an injunction from a court to make the charity do or not do something. In exceptional circumstances the ACNC may revoke the charity’s registration, which may in turn affect their ability to access government funding, exemptions, and tax concessions. The ACNC can apply administrative penalties if a charity makes false or misleading statements or fails to lodge documents on time. Ultimately it is the responsibility of the registered charity as an entity to ensure that the Responsible People comply with the governance standards, which in turn makes this a collective duty of all of the organisations Responsible People.

Criminal Offences of the Corporations Act

Unlike the civil sanctions that apply to directors for breaching their duties – which are generally not applicable to charity directors – there are criminal offences under the Corporations Act that still apply. Charity directors may face criminal penalties for breaching duties such as acting in good faith, acting for a proper purpose and not misusing their position or information. These sanctions will generally only apply in circumstances where directors are intentionally dishonest or reckless towards fulling their duties.

Furthermore, the duty to prevent insolvent trading under s588G of the Corporations Act continues to apply to directors of registered charities.

Breaching these duties can attract significant penalties. As such it is important that directors and Responsible Persons of registered charities act with a high level of care and diligence.

Practical guidance

There are some steps that you can take to ensure that you limit your exposure to personal liability, and in turn your charities exposure to risk as well, including;

1. 1. Always act with a high level of care and your discharge your due diligence;
   2. Read documents thoroughly, make sure you understand what you’re signing off on;
   3. Ask questions: if there’s something you don’t understand, seek clarification;
   4. If you consult an expert, ensure that you understand and accept their advice, consider their methods, and enquire to ensure they’ve acted according to industry standard;
   5. Keep records: ensure appropriate and accurate records are kept by the charity;
   6. Seek advice: if you are uncertain, seek advice from a qualified advisor before signing off.

The governance standards outlined within the ACNC Act create a minimum standard of operation for registered charities in Australia. Ensuring compliance to the governance standards is a requirement for a charity to maintain its registered status.

Vocare Law is well equipped to assist our charity and not-for-profit clients with a wealth of collective knowledge and over two decades experience providing insight and advice in this area. Please don’t hesitate to contact our office if you have any questions on ensuring your charity is able to adequately comply with the ACNC governance standards.

This article was written by Alice Osborne & Simon Mason.

**The information contained herein does not, and is not intended to, constitute legal advice and is for general informational purposes only.  

Footnotes

[1] This is a non-exhaustive list. There are other structures of registered charities that will attract duties and other roles within the organisations listed that will also attract duties.

[2] Whilst governance standard 5 relates directly to the duties of Responsible People, there are other related governance standards that Responsible People should also be aware of.