Australia: Update on Directors Duties in the Not-for-profit sector


Directors and officers of Australian companies which are incorporated under the Corporations Act 2001 (Cth) (Corporations Act) and which are also charities registered under the Australian Charities and Not-for-profits Commission Act 2012 (Cth) (ACNC Act) owe a number of responsibilities and duties. This article is a very brief summary of their duties.

Directors duties under Governance Standard 5 of the Australian Charities and Not-for-Profits Commission Regulation 2015 (Commonwealth) (ACNC Regulation) passed under the ACNC Act currently apply to directors of not-for-profit charities which are registered with the ACNC which are not Commonwealth companies or subsidiaries of Commonwealth authorities.

Part 1.6 of the Corporations Act states that certain sections of the Corporations Act do not apply to those charities, including sections 180 to 183 (directors duties) and section 185, to the extent that it relates to 180 to 183.

Note that some provisions of the Corporations Act still apply to charities, including some criminal offences.

Please note:

  • Many of the duties of directors in the Corporations Act are similar to duties in the Governance Standard 5;
  • The Commonwealth Government has announced that it will abolish the ACNC, the repealing legislation has not yet been passed1; and
  • Directors owe similar obligations in equity and common law.

Therefore, taking this all into consideration, we recommend that it would be prudent for directors and officers of charities to be mindful of directors duties both under the Corporations Act and Governance Standard 5.

Who is a "responsible entity"?

The ACNC Act refers to "responsible entity" of a "registered entity". A "responsible entity" of a company which is registered under the ACNC Act includes a director of that company, a person who performs the duties of director, and a member of the committee of management of the unincorporated association, regardless of the name of the position or whether or not he or she is validly appointed or duly authorized to act. If the registered entity is a trust, the responsible entity is a director of the corporate trustee.

Governance Standard 5

Governance Standard 5 requires a "registered entity" to take reasonable steps to ensure that its "responsible entities" (including directors) are subject to, and comply with, the following duties:

  1. to exercise the director's powers and discharge the director's duties with the degree of care and diligence that a reasonable individual would exercise if they were a director of the company;
  2. to act in good faith in the company's best interests, and to further the purposes of the registered entity;
  3. not to misuse the director's position;
  4. not to misuse information obtained in the performance of the director's duties as a director of the company;
  5. to disclose perceived or actual material conflicts of interest of the director. A perceived or actual material conflict of interest that must be disclosed includes a related party transaction;
  6. to ensure that the company's financial affairs are managed in a responsible manner; and
  7. not to allow the company to operate while insolvent.

Protections under Governance Standard 5

There are four areas of protection under the Governance Standard.

Protection 1

  1. A responsible entity meets this protection if the responsible entity, in the exercise of the responsible entity's duties, relies on information, including professional or expert advice, in good faith, and after the responsible entity has made an independent assessment of the information, if that information has been given by:
    1. an employee of the registered entity that the responsible entity believes on reasonable grounds to be reliable and competent in relation to the matters concerned; or
    2. a professional adviser or expert in relation to matters that the responsible entity believes on reasonable grounds to be within the individual's professional or expert competence; or
    3. another responsible entity in relation to matters within their authority or area of responsibility; or
    4. an authorised committee of responsible entities that does not include the responsible entity.
  1. In determining whether the responsible entity has made an independent assessment of the information or advice, regard must be had to the responsible entity's knowledge of the registered entity and the complexity of the structure and operations of the registered entity.

Protection 2

A responsible entity meets this protection if the responsible entity makes a decision in relation to the registered entity, and the responsible entity meets all of the following:

  1. the responsible entity makes the decision in good faith for a proper purpose;
  2. the responsible entity does not have a material personal interest in the subject matter of the decision;
  3. the responsible entity informs itself about the subject matter of the decision, to the extent the entity reasonably believes to be appropriate;
  4. the responsible entity rationally believes that the decision is in the best interests of the registered entity.

Protection 3

A responsible entity meets this protection if:

  1. at the time when the debt was incurred, the responsible entity had reasonable grounds to expect, and did expect, that the registered entity was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time; or
  2. the responsible entity took all reasonable steps to prevent the registered entity from incurring the debt.

Protection 4

This section is satisfied if, because of illness or for some other good reason, a responsible entity could not take part in the management of the registered entity at the relevant time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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