Uncertain Times for Volunteer Directors
Published in Goverance Directions.
In the past, many people, without hesitation, would volunteer to be a director or board member of a not-for-profit organisation, however, we are in uncertain times as recent litigation has caused concern for some volunteer directors and many more are now seeking some form of protection from their not-for-profit organisations for their potential exposure in these roles.
The concern generally speaking, arises from the disparity between the level of comfort a not-for-profit organisation can provide a volunteer director and the level of comfort of the volunteer director seeks.
For the most part, the duties of a volunteer director are the same as those of any company director under the Corporations Act 2001 (Cth) (the Act), consisting namely of the duty,
- to avoid allowing the company to trade whilst insolvent
- to act in good faith
- to act honestly
- to act with reasonable care and diligence
- not to misuse position or information obtained whilst acting as a director
- to disclose any material personal interest or conflict
If you are a director of a not for profit company under the Act and the company is also registered as a charity with the ACNC (but not as a Basic Religious Charity), then in addition to the duties under the Act you must also observe the 5 Governance Standards ,prescribed by the Australian Charities and Not-for-profits Commission Act 2012 (Cth). In particular, you as a director, must ensure that the financial affairs of the charity are managed responsibly.
The ACNC prescribes that:
“As minimum, responsible persons should have good processes to prevent problems and to manage money responsibly”, such as “reading financial statements” as well has “having a process to ask questions if they don’t understand.”
The types of processes for risk management to be implemented will depend on the size of the charity and the nature of its financial affairs.
For example, to ensure uniform observance of the 5 Governance Standards throughout all the operations of the Charity, it is recommended that the employment contracts or handbook of non-director officers and committee members (whether they are volunteers or paid employees) of an entity impose these same obligations on such persons.
Where a charity, registered with the ACNC is not a company incorporated under the Act, but is a legally recognised entity (such as an association) the governing body must also adhere to the 5 Governance Standards.
Importantly, to fulfil the duty of good faith under the Act directors must exercise “independent judgement”. In the case of Blackwell v Moray (1991) 5 ACSR 255 the Supreme Court found that a director who simply adopted the preferences of the company’s majority shareholder, without exercising independent judgement, had breached his duty of good faith, namely, to act bona fide in the exercise of the discretion required of a director so as to act for the benefit of the entity.
This means that merely turning up to meetings of the board is not sufficient to meet the requirements of acting as a director; a director must be actively involved in exercising independent judgment when it comes to voting on resolutions of the meeting including as a minimum “considering the views of the relevant materials” (Per Cohen J) not just follow the majority decision because it is the “popular” opinion.
Volunteer directors must always declare perceived or actual conflicts of interest.
ACNC offers volunteer directors this advice “Don’t be embarrassed to declare a conflict of interest!”
Failure of a director to declare a conflict can, as the ACNC has correctly pointed out on its website, “damage your charity’s reputation”, and will constitute a breach of the Act.
For example, recently the UK equivalent of the ACNC, the Charity Commission, announced a statutory inquiry into the Manchester based charity “My Community UK” for an alleged failure to manage conflicts of interest.
In another instance earlier this year the Charity Commission advised the Tate Britain to “follow its policies and processes concerning the management of conflicts of interest” after the gallery displayed artworks of Tomma Abts, who was also one of the Tate’s trustees.
Of the 23 investigations undertaken by the UK Commission in 2013 nine involved “unmanaged conflicts of interest”. Directors should ensure that there are adequate procedures in place as to how to deal with conflicts of interest, if and when they arise.
Directors should take extreme care not to allow their company or not for profit organisation to trade while insolvent. Where an entity continues to trade whilst insolvent, and it is found by a Court that the director has not acted with appropriate care and diligence the directors may lose the protection of the corporate veil and be found personally liable for the company’s debts. Additionally, these directors may be the subject of criminal proceedings for their breaches of the Act (S588G of the Act) – A director will be found to have breached his duties if he is aware that there are grounds for suspecting the company of being insolvent and/or a reasonable person in a similar situation in the company’s circumstances would have been so aware.
In the 1991 National Safety Case (1991) 9 ACLC 946 the Chairman of a not-for-profit organisation was held personally liable for the losses incurred after he signed an annual financial statement attesting that the company was solvent when in fact it was not.
All companies and not-for-profit organisations that can afford to do so should maintain Directors & Officers Liability Insurance. Most constitutions provide that the entity must at all times maintain such cover. If such cover is unaffordable, entities may indemnify their Directors by Deed.
Insurance and indemnities cannot assist a director who is guilty of any criminal offence or reckless act.
It was noted in Federal Parliaments’ Standing Committee on Economics, the ACNC Act endeavours to “ensure that the individuals do not seek to hide behind the protection of a corporate veil to protect themselves from acts of deliberate misconduct”.
Justice Tadgell said in the National Safety Case at 1012,
“It is in the public interest that, while directors should be held accountable of their conduct, able people should not be deterred from offering their voluntary services for want of adequate protection.”
Every effort should be made to inform volunteer directors about their real exposure, without unnecessarily alarming them, to ensure their work continues for the benefit of the charity. In particular, volunteer directors should be steered towards the ACNC website which provides an abundance of useful and accessible plain English advice on good governance and tips as well as warnings about common traps for directors.
The duties of the directors under the Act although not binding on the governing group of these entities may be used as a reference point and benchmark to achieve best practice.