The Governance Standards applying to charities required to be registered with the Australian Charities and Not-for-profits Commission have been released in final form.
Until 1 July 2017, the transitional provisions exempt registered charities from the requirements of the Standards where the charity’s constitution “prevents” compliance. Nevertheless, a charity must comply “as far as possible” without breaching its constitution. From 1 July 2017, registered charities must amend their constitutions to be consistent with the Standards. This obligation applies regardless of whether a charity has the power to amend its constitution. In the case of a company limited by guarantee or incorporated association, this power is vested in the members by law. In the case of a charitable trust, the power to amend may be vested in the courts under State legislation (if the trust instrument does not give plenary power to the trustees). Given the vagueness of the Standards, it would appear prudent for registered charities to ascertain the processes and lead time necessary to change their constituent documents, and then to wait and see how the Standards are interpreted over the next few years before initiating any amendments.
Standard 1 – Purposes and NFP nature of a registered entity
Standard 1 requires a registered charity to demonstrate at all times that it is complying with its purposes and character as a NFP entity. Of course at present, companies limited by guarantee, incorporated associations and charitable trusts must all pursue charitable non-profit purposes to comply with their constituent documents. Compliance is a legal matter determined by the courts. Standard 1, therefore, has no impact on a charity’s governance, but adds to existing governance obligations a condition of eligibility for registration as a charity that is assessed solely by the Australian Charities and Not-for-profits Commission ACNC.
An administrative decision by the ACNC will ultimately determine whether or not a particular charity is complying with its purposes. This increases compliance risk for registered charities especially because Standard 1 makes none of the distinctions that have been found relevant in other contexts, e.g. there is often a distinction between core purposes and ancillary purposes. If a charity disagrees with a decision of the ACNC it can appeal the decision for internal review, and then to the Administrative Appeals Tribunal. The charity has the burden of proving that the decision made by the ACNC should not have been made or should have been made differently.
Recommendation: Given the question of compliance with NFP purposes is now a matter for administrative determination by the ACNC, it is advisable for registered charities to review their current and any proposed new activities, especially those that will produce commercial income, in order to be assured there is sufficient connection with their charitable purposes as there is a risk that any activities they undertake that are not clearly core purposes may be questioned by the ACNC.
Standard 2 – Accountability to members
A registered charity must take “reasonable steps” to ensure that it is accountable to its members and that its members have an adequate opportunity to raise any governance concerns. Charitable trusts are not covered by this standard as they do not have members. From 1 July 2013, existing requirements of the Corporations Act which give members the right to participate in governance, e.g. convene general meetings, will be “turned-off” for registered charities. The reason is unclear, as Standard 2 does not give members any rights whatsoever. Further, unlike the Corporations Act provisions which cease to apply, corresponding requirements applying to incorporated associations under state legislation will remain in force. In fact, in Victoria, the incorporated associations legislation has recently been amended to replicate a number of provisions of the Corporations Act.
The ACNC believes that removing the strict requirements of the Corporations Act will provide “additionally flexibility” to registered charities that are companies limited by guarantee in deciding how best to be accountable to their members. In reality, however, this standard has replaced clear rights of members with an uncertain requirement, enforceable by the ACNC as a condition of eligibility for registration as a charity. The resulting legislative muddle does nothing to enhance governance standards.
Recommendation: As with Standard 1 above, whether or not a charity is taking “reasonable steps” to comply with Standard 2 is a vague criterion that cannot be objectively determined. This is a matter for determination by the ACNC. Compliance risk has, therefore, increased. Companies limited by guarantee should review their constitutions in order to ascertain whether provisions relating to accountability to members are expressly set out in their constitution or simply refer to sections of the Corporations Act. Where mere reference is made to legislative provisions which have been “turned-off”, it may be advisable to reinstate the relevant provisions in the company’s constitution.
Standard 3 – Compliance with Australian laws
Standard 3 requires registered charities not to engage in conduct that “may be dealt with” as a criminal or civil penalty matter involving possible penalties exceeding $6,600 or 1 year’s imprisonment. As all legal persons in Australia must already comply with the law, this standard again adds another layer of compliance for registered charities and, most importantly, it lowers the threshold at which a registered charity’s compliance with conditions of registration can be questioned by the ACNC. This standard presents a risk to registered charities that they could be found to have breached the standard even though no criminal or civil proceedings have been brought or even alleged against the registered charity. This standard gives the ACNC broad powers to act where it believes the registered charity “may” have acted in a way that breaches Australian laws.
Recommendation: Depending on the activities of a registered charity, it may be necessary to consider the compliance risk relating to, e.g. fundraising activities, interstate activities of incorporated associations, and occupational health and safety requirements. Registered charities must remain cognisant of the risk that notwithstanding an absence of issues raised by a law enforcement body, the ACNC can still find a registered charity has breached Standard 3.
Standard 4 – Suitability of responsible entities
A registered charity must take “reasonable steps” to “ensure” that its directors or trustees are not disqualified under the Corporations Act or disqualified by the ACNC (and if so, to remove that director or trustee). The standard fails to recognise that removal of directors is governed by the Corporations Act, and removal of trustees is governed by the terms of the trust deed and state law. Removal is generally not included in the unilateral power of the charity. The Explanatory Statement indicates that registered charities would be expected to obtain declarations from officers that they are not disqualified and to search the disqualified persons registers.
Recommendation: Registered charities should put in place processes to search the disqualified persons registers and companies limited by guarantee and incorporated associations should also obtain declarations from officers at the time of each officer’s appointment and any subsequent re-appointment.
Standard 5 – Duties of responsible entities
Registered charities must take “reasonable steps” to ensure that their directors or trustees comply with the duties specified in Standard 5 (which correspond to, and so duplicate, existing directors’ duties in the Corporations Act and trustee duties under the general law and State legislation). The standard imposes an obligation on the charity not on the directors or trustees thus giving the ACNC the power to impose sanctions on the charity if it does not comply. The standard therefore serves no purpose with regard to governance. The duties specified in the standard are:
- to act with due care and diligence in the best interests of the charity
- not to misuse their position or information obtained through their position
- to disclose material personal interests to other directors and the members of a corporate charity (in the case of charitable trusts, the trustees must disclose material personal interests to the ACNC)
- to ensure the charity’s financial affairs are managed in a responsible manner, and
- to ensure that the charity does not trade while insolvent.
In the case of companies limited by guarantee, Corporations Act duties and disclosure of material personal interest provisions are being “turned-off” on 1 July 2013. However, the Corporations Act duty to prevent insolvent trading remains in effect. Although directors will remain bound by general law and fiduciary duties, they will no longer be subject to statutory duties as Standard 5 does not impose duties on directors. It is not clear whether registered charities will need to amend their constitutions to effectively reinstate the Corporations Act duties which have been “turned-off”. Absent this, the legal rights and remedies of charities against directors or trustees are diminished by the changes.
For incorporated associations, in some cases (e.g. Victoria) the State legislation has been amended to impose duties that are closely aligned to existing Corporations Act duties. Until 1 July 2017, the Regulations expressly provide that where the directors of an incorporated association comply with existing duties set out in the relevant incorporated associations legislation, the charity is taken to be complying with Standard 5 for the duration of the transitional period.
In relation to responsible management of financial affairs, the Explanatory Statement and the notes in the standard indicate that “reasonable steps” may include ensuring appropriate insurance is maintained. The legal implications of charities imposing such a duty on directors are unclear but could be far-reaching. Under previous law, the fundamental principle of corporate law is that directors are not responsible in the same way as, e.g. trustees for the investment of company funds. In the case of charitable trusts, Standard 5 fails to recognise that the trust is not a legal entity. The trustees are the relevant legal entity and are personally liable for debts incurred (thus there is no need for a trust to impose personal liability on trustees if the trust trades while insolvent). In relation to investment duties of trustees, State trustee legislation specifies in detail the duties of trustees regarding financial management and liability (and defences) for breach of those duties. Standard 5 creates uncertainty whether registered charities must re-write these statutory duties and in the case of directors of charities which are companies limited by guarantee also make them subject to personal duties in relation to financial management similar to those applying to trustees.
Recommendations: Companies limited by guarantee should review their constitutions to establish whether provisions which deal with directors duties and disclosure of material personal interests become ineffective as a result of the Corporations Act provisions being “turned-off”. It may be necessary for companies limited by guarantee to amend their constitutions so that the statutory duties are reinstated in their constitution to make directors and officers subject to the required duties in Standard 5. The apparent need for companies limited by guarantee to review directors duties raises a conflict of interest and will require that directors obtain independent advice as to their exposure of the company. Given the legislative muddle, it would be imprudent and unreasonable for registered charities to take action to amend constitutions without full understanding of the implications for directors, the possible impact on directors and officers insurance, and the interaction with general law duties and defences. In particular, we do not believe it is appropriate at this time for a charity to amend its constitution or trust deed to impose on directors or trustees duties in the terms specified in Standard 5.