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Back to "Community & Associations Newsletter - November 2022"


Incorporated works of charitable organisations: a potential minefield for governance

Many charitable organisations, particularly religious communities or church communities have adopted a common practice of incorporating not-for-profit companies or associations to guarantee the perpetual advancement of their purposes.  In the religious context, this has been accompanied by the need to supplement the “workforce” of diminishing members of religious congregations by replacing those persons with lay people of like mind and commitment.

The obvious challenge of this model may not have been apparent in the earlier years of this practice, but increasingly, disagreements/discords as to the strategic direction and practices of some not-for-profit organisations are appearing between the volunteer lay members of boards of directors and the individuals or organisations comprising the membership of those entities.

It is universally known that individuals who agree to act as directors of companies are rightfully entitled to insist that practices do not prevent them from adhering to their governance obligations under ACNC legislation and to act in the best interests of the company as a whole including in particular to ensure the company at all times complies with its statutory and other regulatory obligations.

Directors of such companies must always bear the following in mind:

  • As directors they are not accountable to shareholders; however they are accountable to the charitable mission of the company which in most part, aligns with the charitable mission of the organisation which created the company.
  • That the best interests of the company as a whole must align with the objects articulated in the constitution of the company.
  • That the members are not motivated by profit or gain, but by the pursuit and longevity of the charitable work. The directors should also have that as their central focus.
  • That where transactions are planned involving asset acquisition any conflicts of interest between the company and the seller, such as where the seller is a related party, must be managed by the directors carefully under the company’s conflict of interest policy and related parties transactions policy (see AASB124 which will commence 1 July 2023) including by ensuring those transactions are on an arms-length basis with proper transparency including reference to market valuations and independent advice. .

While an ultimate but undesirable remedy for resolving disputes between directors appointed by the members and those members, may be to terminate the directors’ appointments, or appoint administrators, these measures are a last resort and to be avoided, as they remove ongoing trust . It would be far better for the members as stewards of the work devolved to the company to carry on, to form the directors as appointees in the mission of the work and to remain constantly supportive of their commitment.

Josephine Heesh, Partner

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