Dedicated people should not be held back by fear of personal risk from becoming actively involved in their management, but they need to understand their duties and take an active role in properly managing the association.
The excellent work of many incorporated associations in the not-for-profit sector would not be possible without the commitment of the association's office-holders. Many volunteer their time without thought of remuneration or reward, but also without thought of the personal risks involved.
This article focuses on the duties and risks of committee members of an association incorporated in the ACT under the Associations Incorporation Act 1991 (ACT), but the laws in other jurisdictions are similar.
What are the duties of office-holders of incorporated associations?
Each incorporated association must have a committee of at least three members, which controls and manages the association's affairs in accordance with its rules and the Act; it typically includes its president, vice-president, treasurer and secretary. It must also appoint a "public officer" who acts as the contact between the association and the Office of Regulatory Services (ORS). ORS must be told of any changes in the officers' identity or contact details within one month after the change.
The relationship between an office-holder and the association is one of trust, known as a "fiduciary relationship". This means that each office-holder must act in good faith in the best interests of the association and for a proper purpose, act with reasonable care and skill, not improperly use information or their position, and disclose and manage any conflicts of interest. It doesn't matter if the office-holder is inexperienced or a volunteer, or the association is small or informal. The public officer and other people who are concerned in the management of an association's affairs can also have similar common law duties, where a similar position of trust exists.
In practice, an office-holder who is actively involved in the association's business and financial affairs, attends committee meetings regularly, and behaves ethically and with common sense, is unlikely to breach their common law duties. Office-holders risk running into trouble if they don't attend meetings, hide from issues, or don't get involved when problems arise.
Each office-holder must take all reasonable steps to ensure that the association complies with the Act.
Each association must hold an annual general meeting once each calendar year, within five months after the end of its financial year. It must present the audited statement of the associations accounts and auditor's report to members at the annual general meeting, as well as a report signed by two committee members relating to the financial year, including its principal activities and net profit or loss.
If an association has gross receipts exceeding $150,000 per annum, gross assets exceeding $150,000, more than 1,000 members, or holds a liquor licence, its accounts must be audited by a CA, CPA, public accountant or an auditor registered under the Corporations Act 2001. The auditor must not be an officer of the association or related party to an officer of the association.
If the association's gross receipts exceed $500,000, the auditor must be registered under the Corporations Act who is not an officer or a related part of an officer of the association. Each association must lodge an annual return with ORS, including its audited accounts, within 6 months of the end of its financial year.
In practice, many associations (particularly small not-for-profit associations) have difficulty complying with these requirements, either because they don't fully understand them or don't have the resources to comply.
In addition, there are duties arising under other Acts, and office-holders must ensure the association complies with these too.
What are the personal risks office-holders face?
Office-holders may think they have limited liability because section 51 of the Act indicates office-holders generally have no liability to pay the association's debts if it's wound up. There are however various civil penalties for breach of statutory duties, or compensation claims for breach of common law duties. Further, an office-holder risks uncapped personal liability for the association's debts or liabilities which are incurred because the office-holder has committed an offence by knowingly failing to take all reasonable steps to ensure that the association does not trade or secure pecuniary gain for its members. An office-holder may also be disqualified from holding an office in an incorporated association for a period of time.
The most serious personal risk that an office-holder faces is the risk of criminal conviction, fines and, in serious cases, imprisonment. It is a criminal offence for an office-holder to knowingly fail to take reasonable steps to ensure that the association complies with the Act. An office-holder can be prosecuted for breaching other statutory duties, or for failing to take reasonable steps to prevent the association from committing offences.
How should these personal risks be managed?
There are several steps that an office-holder can take to reduce their personal risks. Office-holders should exercise due diligence before accepting the position and while in office, and confirm that the association has adequate systems to ensure that it complies with its statutory obligations. Office-holders should take an active interest, and ensure that they understand the association's activities and finances. They should also seek training and legal advice on the scope of their duties and the relevant laws.
Associations may indemnify office-holders against costs incurred through their position, but these are usually limited (eg. they will not protect against money owed to the association or for breach of duty to it) and in any event the association could only ever make a payment under such an indemnity to the extent that it has funds available. Directors and Officers insurance provides some protection for an office-holder against liability for "wrongful acts". However, it will be important to review the terms of any policy carefully, as they are typically subject to exclusions and will not protect against criminal penalties or fraudulent acts.
Incorporated associations play a vital role in Australia's economic and social landscape. It is important that the fear of personal risk does not prevent dedicated people from becoming actively involved in their management, but they need to understand their duties and take an active role in properly managing the association.
In a future article we'll discuss some of an office-holder's specific statutory duties.
You might also be interested in...
- Not-for-Profit Boards – Legal Health Checklist
- Not-for-Profit organisations: Understanding the new ACNC – Part 1
- Not-for-Profit organisations: Understanding the new ACNC – Part 2
- Not-for-Profit organisations: Understanding the new ACNC – Part 3
- Not-for-Profit organisations: Understanding the new ACNC – Part 4
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.