Since 2012, if a company is incorporated under the Corporations Act but also registered as a charity or not-for-profit under the Australian Charities and Not-for-Profits Commission Act, certain provisions of the Corporations Act do not apply to the company.
These include:
- Directors’ duties in sections 180 to 183 (inclusive)
- declarations of interest in sections 191 to 194 (but strangely, s195 still applies)
- the meetings provisions in Part 2G.2 (but again strangely, the new virtual meetings provisions apply)
- the financial reporting and audit provisions in Parts 2M.1, 2M.2 and 2M.3.
Instead, the ACNC “Governance Standards” and annual reporting obligations apply. As a result, there are two different legal regimes that apply to Australian companies in the crucial areas of directors’ duties, conflicts of interest, company meetings, and accounts and audit.
The ACNC governance standards seek to apply a “lighter touch” regulatory regime to charities and not-for-profits, which cover a range of entities including co-operatives, incorporated associations, unincorporated associations and indigenous corporations, as well as companies. However, the “one size fits all” approach results in lower standards which are not necessarily in the best interests of companies regulated by the ACNC, or their directors and members. (Note that most companies registered with the ACNC are companies limited by guarantee, and are therefore technically public companies.)
It also appears that the compliance and enforcement activities of the ACNC are placing a greater, rather than lesser, administrative burden on charities.
Directors duties and conflicts of interest
The duties of directors (responsible persons) of companies registered with the ACNC are set out in Governance Standard 5. It is important to note that the obligation under this standard is on the charity to take reasonable steps to make sure its responsible people (directors) meet certain duties. There is no direct obligation on the directors themselves. These duties are described in different terms in different places on the ACNC website:
- 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 obtain as a Responsible Person
- to disclose conflicts of interest
- to ensure that the financial affairs of the charity are managed responsibly
- not to allow the charity to operate while it is insolvent
Directors of companies registered with the ACNC should be aware that the disapplication of the equivalent Corporations Act provisions has the following consequences:
- no regulator has power to enforce these duties and obligations against an individual director
- directors are not liable to civil penalties for breaching their duties (although they remain liable to criminal penalties for dishonest conduct)
- the duty to act with reasonable care and diligence is general rather than specific to the circumstances of the director and the company
- the business judgment rule does not apply
- 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
- the obligation to disclose conflicts of interest is very broad, with no exclusion of the types of interests for which notice is not required under s191 of the Corporations Act
- as a consequence, directors of companies limited by guarantee are prohibited from participating in meetings and voting on matters in which they have a material personal interest under s195 (unless permitted by disinterested directors), including those matters that would otherwise be exempt under s191. A breach of s195 is a strict liability offence.
Meetings and accounts
The extensive provisions concerning company meetings are replaced with a general obligation on the company under Governance Standard 2 to:
- take reasonable steps to be accountable to their members, and
- allow their members adequate opportunities to raise concerns about how the charity is run.
As a result, there is no actual obligation to hold an annual general meeting, although ACNC guidance suggests that holding an AGM is a good way to comply with this standard.
Directors of companies registered with the ACNC should be aware that the disapplication of the meetings provisions, in conjunction with the disapplication of the accounts and audit provisions, means that:
- members have no rights to call a members’ meeting or put a resolution at a members’ meeting
- members have no explicit right to receive accounts, although the ACNC encourages charities to make financial information available
- directors have no direct obligation to ensure that the accounts of the company give a true and fair view, to ensure that they comply with accounting standards, or to prepare a directors’ report. Under the Corporations Act, the directors of every company limited by guarantee must prepare a directors’ report
- only large charities with annual revenues of at least $3 million are required to be audited. The Corporations Act requires companies limited by guarantee to be audited if they have revenues above $1 million)
Commentary
These shortcomings in the regulatory framework applicable to companies registered with the ACNC, and their directors, have led to significant concerns about the inability of the ACNC to respond to breaches of duty by directors of charities, particularly to misuse of charitable funds. There have been several recent examples of misuse of charitable funds, including by people associated with the NSW branch of the RSL and Guide Dogs Victoria. Professor Rosemary Langton has published an article raising these issues,[1] recommending that the directors duties provisions in the Corporations Act be “turned back on”.
It may be that Parliament should go further, and reapply all of the provisions of the Corporations Act that have been disapplied under the ACNC regime, to ensure that people who are responsible for managing the finances and affairs of charities are subject to the same enforceable statutory obligations as the directors of all Australian “for profit” companies.
It is also very strange that other types of entities, including incorporated associations, co-operatives and indigenous corporations continue to be subject to specific statutory obligations of the type that have been disapplied to companies: in those cases, the ACNC Governance Standards apply alongside the specific statutory requirements, not in place of them. There does not appear to be any justification for this inconsistent treatment.
After ten years of operation, it is time for a thorough review of the ACNC regulatory regime.
References
[1] UNSW Law Journal Volume 45 at p70
