How Do Directors’ Duties Differ for Not for Profits?

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Table of Contents

• Which Duties Under the Corporations Act Do Not Apply?
• Different Consequences Between Directors’ Duties and ACNC Duties 
• Steps to Take to Ensure Compliance
• Key Takeaways

Under the Corporations Act 2001 (Cth) (Corporations Act), directors’ duties exist to protect a company from dishonest and damaging actions to the company by a director (directors’ duties). However, the Australian Charities and Not-for-Profits Commission’s (ACNC) Governance Standards (ACNC Standards) replace certain directors’ duties for not-for-profit charity companies (NFP) and provide for an interesting switch to who is in charge of enforcing compliance. The ACNC Standards describe directors of NFPs as “responsible people” instead of directors, reflecting the requirements in the Australian Charities and Not-for-profit Commission Act 2012 (Cth) (ACNC Act). 

Generally, if you breach your directors’ duties, the legal consequences lie with you and, in certain instances, your company. However, if you breach the ACNC Standards (ACNC Duties), there may be severe legal consequences for your NFP and whether your company can continue on as a NFP. 

This article will outline the key differences between directors’ duties, which apply to for-profit companies and NFPs under the Corporations Act, and ACNC Duties, which only apply to NFPs. This article will specifically focus on a NFP that is a company limited by guarantee. 

Which Duties Under the Corporations Act Do Not Apply?

If you are a responsible person in an NFP, ACNC Duties will replace some duties under the Corporations Act, including the duty:

• to exercise reasonable care and diligence;
• to act in good faith and proper purpose;
• not to improperly use position;
• not to improperly use information; and
• to notify other directors of material personal interest when conflict arises.

However, you must remember that the following directors’ duties still apply:

• criminal offences relating to breaches of duties of good faith and acting for a proper purpose and misuse of position or information, and
• the duty to prevent insolvent trading.

Different Consequences Between Directors’ Duties and ACNC Duties 

Consequences for Directors/Responsible People

ACNC Duties replace certain directors’ duties and the personal liability that is attached to those. However, you should keep in mind some directors’ duties and their consequences still remain. Generally, ACNC Duties also provide for perceived “lesser” consequences for breaches. 

On one hand, where you would be personally liable for a breach of directors’ duties, the NFP itself is liable for a responsible person’s breach of ACNC Duties. The penalties for breaching directors’ duties would fall on you personally, which include:

• criminal sanctions; 
• significant civil penalties; 
• a combination of the two; or 
• disqualification from directorship, amongst others. 

On the other hand, non-compliance with ACNC Duties can result in the ACNC exercising its formal enforcement powers against your NFP. These include:

• a direction to stop the responsible person from doing a particular action;
• directing them to take a particular action;
• replacing the NFP’s responsible persons; 
• disqualifying a responsible person who has previously been suspended or removed or a combination of these, amongst others.

Generally, where the consequences lie for a breach of each regime differs. Most breaches of directors’ duties result in the possibility that you could be personally liable, whether that is through a civil or criminal sanction. Most breaches of ACNC Duties lay the consequences on the NFP with few instances where the responsible person is personally liable, such as the examples of the Corporations Act requirements that still apply mentioned above. 

Consequences for the NFP

The punishments for breaching directors’ duties can be severe and will most likely impact the purpose and progress of your NFP. The punishment for breaching ACNC Duties is centred on the NFP’s status as a NFP. The ACNC can revoke charity registration for non-compliance with ACNC Duties. This can cause a loss of access to certain government funding, exemptions, concessions and benefits. Further, consequences can be incredibly detrimental to your NFP. 

Another key difference is that breaches under the directors’ duties regime can apply to former directors of for-profit companies even after that company is deregistered. The ACNC Standards do not allow for this.

Steps to Take to Ensure Compliance

You can take several steps to ensure you are in the best position to protect your NFP from exposure as a result of the wrongdoings of your responsible people. 

These include: 

• bringing the ACNC Standards to the attention of your responsible people; 
• regularly providing information or training on their duties;
• having processes for the responsible management of money;
• implementing processes in place to manage conflicts of interest; and
• ensuring appropriate processes to take action if responsible people are failing to meet their duties.

Importantly, remember that if your company’s charitable status is removed, whether voluntarily or not, you must comply with all directors’ duties as a director of that company.

Not-For-Profit Legal Health Checklist

This legal health checklist will help you to identify areas in your NFP that may need further protection or assistance to ensure that you are legally compliant.

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Key Takeaways

Due to the public trust and confidence in NFPs, compliance with the ACNC Standards is vital. However, it is essential to understand the differences between your and your NFP’s obligations under the directors’ duties regime and the ACNC Standards regime. 

The ACNC Standards are far leaner than the traditional directors’ duties regime, potentially exposing the NFP where its responsible people breach the ACNC Standards. Therefore, understanding the difference between the traditional directors’ duties and the ACNC Standards is crucial. Understanding the difference allows you to make informed decisions about the preventative steps you can and should take to protect your NFP.

For more information, our experienced charity lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.