When Protection Ends

The Fine Lines of Liability in Not-For-Profits' Governance in Australia

 

Introduction

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Imagine leading a non-profit or charity in Australia and facing a legal challenge. How protected are you? At the heart of this question is 'liability', the legal responsibility that leaders in Not-for-Profit (NFP) organisations carry. This isn't just about directors but extends to trustees and board members as well. It's about being accountable for your actions and decisions. Grasping the nuances of liability is essential—it shapes the way NFPs operate, handle risks, and safeguard stakeholder interests.

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Ever heard of 'limited liability' in the NFP world? It's like a protective shield for directors. Picture this: if an NFP faces financial troubles, a director's personal belongings—like houses and cars—are kept safe. But here's the catch: this shield isn't unbreakable. Certain situations can make it vanish, leaving directors personally on the hook.

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If you're a trustee for a charitable trust or a Private Ancillary Fund (PAF), you have a special job. Think of it as being the guardian of a treasure chest—you're entrusted to always act in the best interest of the trust and those it serves. Slip up or break this trust? You might find yourself personally responsible. And it's not just trustees—NFP board members are in the same boat. Their decisions, actions, and even how well they follow the rules can put them in the spotlight of liability.

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Embarking on this exploration, we'll demystify the intricacies of liability within Australia's NFP sector. We'll shed light on the conditions that can weaken a director's protective shield and highlight the challenges trustees and board members might encounter. Mastering these details is more than navigating legalities—it's foundational for the thriving and resilience of NFPs in Australia.

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 Liability of NFP Company Directors: When does the ‘Safety Net’ Disappear?

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Directors play a pivotal role in steering NFP organisations. But this leadership brings its own set of challenges, especially when it comes to legal issues. In simple terms, personal liability means that if a director makes a mistake or decision that leads to legal problems, they can be held personally responsible. This holds true even if the NFP has certain protections in place.

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Directors usually have what's called 'limited liability protection'. This, as stated in the Corporations Act 2001, means that directors aren't personally responsible for the NFP's debts. But this protection isn't guaranteed. There are specific situations mentioned in the Act where this shield can be taken away.

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1. Director's Responsibilities: Directors have key responsibilities to the NFP. These include taking care in their actions, being loyal to the organisation, and always acting with sincerity and honesty. If they do not meet these standards, they risk losing their protective shield from the Corporations Act. Moreover, they might face serious legal consequences, including fines or even jail time.

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• Duty of care and diligence: According to section 180 of the Corporations Act, directors and officers have a clear guideline: act as a reasonable person would in the same situation. This means making decisions with caution and care. If a director does not measure up, and their choices negatively impact the organisation or its stakeholders, they could be held personally accountable for the damage.​

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• Duty to act in good faith: Have you heard of Section 181 of the Corporations Act? It is pretty clear on one thing: directors should always act with the NFP's best interests at heart. It is about unwavering loyalty to the company's mission. So, if a director finds themselves in a situation where they have to choose between what is best for them and what's best for the company, the company should always come first. Choosing personal gains over the company's benefits? That is a big no-no and can be seen as breaking this important duty. However, it is worth mentioning that facing criminal charges is a big deal. It is usually for the most serious mistakes in duty. When a court looks at these cases, they weigh up many things. They will think about how serious the mistake was, what the director knew, how it impacted the company, and if the mistake was on purpose or just carelessness.

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2. The Risk of Insolvent Trading: Directors need to be careful about how they trade, especially if their NFP company does not have enough money. Making reckless trading decisions is like driving recklessly – it is risky, can harm the company's creditors, and shows an obvious lack of concern for the company's financial health. The law, specifically Section 588G of the Corporations Act 2001, is clear about this. If directors keep trading when they know (or should have known) that the company is running out of money, they can be held responsible for any debts the company racks up. This could even mean their own personal assets, like their home or car, might be used to pay off these debts. On top of that, they might not be allowed to be a director again in the future.

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3.  Keeping Clear Financial Records: If you are a director of an NFP company, you've got a job to keep a clear record of the company's finances. It is not just a good practice, it's the law – Section 286 of the Corporations Act to be exact. If the records are a mess, it can mess up the company's finances. And if that happens, directors might have to personally cover any losses.

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4. Proper Use of Power and Knowledge: Being a director comes with some perks, but it also means you can't take advantage of your position or any inside info for your own benefit. Doing so breaks the rules set out in sections 182 and 183 of the Corporations Act. If a director crosses this line, they might have to personally pay for any harm done.

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NFP company directors have a unique role. Apart from the usual duties, they have some added responsibilities that come with the territory of running an NFP. 

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1.  Staying True to the Mission: As a director of an NFP, every decision should reflect the organisation's mission. Whether it is charity work or community activities, directors need to stay on track. Going off course without a good reason could land them in hot water.

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2. Handling Funds Carefully: NFPs often run on donations and funding. It is up to the directors to make sure every penny is accounted for and used wisely. If funds are not managed right, directors might be held responsible for any losses.

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3. Keeping the Public's Trust: People keep a close eye on NFPs because of the good work they do. Directors need to act wisely and keep the public's trust. If their actions hurt the organisation's reputation, they could be held accountable.

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Responsibilities and Risks for Charitable Trust Trustees

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Trustees of charitable trusts hold a special position. They manage assets meant only for charitable reasons. And, depending on where the trust is based, they have to follow certain rules, like the Trustee Act of their state or territory.

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1.  Staying True to the Trust: Trustees, much like NFP directors, have a few key responsibilities. They should be loyal, act in good faith, and always put the charitable goals first. If they do not and the trust loses money, they could be held responsible. Plus, if they do not act right, beneficiaries or others might take them to court or even ask for their removal.

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2. Managing Assets Wisely: The responsibility of a trustee doesn't just stop at making decisions. They need to ensure the trust's assets are used correctly and in alignment with its charitable goals. If they mismanage or misuse these assets, they could be personally liable for any financial setbacks. However, if trustees act based on expert advice or get prior court approval for certain actions, they might be safeguarded from potential liabilities.

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3. roper Distribution of Income: Trustees have a major role in ensuring the income generated from the trust's assets reaches the intended beneficiaries. If they fail in this, they could be held responsible. The ATO closely monitors these distributions. A failure here might lead to the trust losing its tax exemptions, which could reduce the funds available for its charitable activities.

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4. Steering Clear of Unauthorised Transactions: Trustees should only engage in transactions they are authorised to make. If they exceed their authority, they could be held liable for any resulting losses. However, if they can show they believed their actions were correct, or if they get retrospective court approval, they might avoid liability. In extreme cases of non-compliance, regulatory authorities might step in to protect the beneficiaries and ensure the trust's charitable intent remains intact.

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Understanding the Liability of Private Ancillary Fund (PAF) Trustees

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Private Ancillary Funds (PAFs) hold a special place in the charitable landscape. They collect tax-deductible donations from individuals, families, or businesses to boost eligible charitable activities. PAF trustees play a pivotal role in ensuring these funds are used effectively and as intended, following the guidelines set by the Australian Taxation Office (ATO). Let's delve into where these trustees might encounter risks:

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1. Sticking to the Trust Deed:  Every PAF operates based on a trust deed, a sort of rulebook for the fund. If trustees don't follow this, they could be personally on the line for any financial setbacks the PAF faces. Moreover, the ATO might step in with penalties or even strip away the PAF's tax perks, which could affect the donors' tax benefits.

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2. Failure to Meet Ancillary Fund Guidelines: The ATO isn't just watching from the sidelines; they've set clear guidelines for PAFs. Here's a snapshot of what they expect:

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 3. Minimum Distributions: Every financial year, PAF trustees need to give away at least 5% of their net assets, based on the market value, to suitable charitable groups.

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 4. Picking the Right Recipients: It's not just about giving; it's about giving to the right entities. PAF trustees should only support those with the Deductible Gift Recipients status. This includes groups like registered charities, public benevolent institutions, or even government schools.

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 5. Smart Investing: Investing is part of the game, but PAF trustees need to be careful. Their investment choices should line up with the fund's charitable aims and shouldn't be too risky.

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 6. Administrative Obligations: A PAF's paperwork is crucial. Trustees should keep detailed logs of all transactions, financial statements, and the donations they make. Plus, they need to have their books checked every year.

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If trustees slip up and don't follow these guidelines, they might find themselves in a tough spot. The ATO could hand out fines or penalties. In the worst cases, if there's serious rule-breaking, trustees might even lose their position.

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Navigating the Responsibilities and Risks for NFP Board Members

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Board members wear many hats when it comes to Non-Profit Organisations (NFPs). Whether they're directors, trustees, or committee members, they're at the helm, steering the ship. They set the direction, make sure everything's legitimate, and always aim to do what's best for the organisation and the people it serves.

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Being a board member isn't just about making decisions; it's about taking responsibility. Let's break down some of their key duties and the potential pitfalls:

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  1. Walking the Tightrope of Duty: Board members have a special responsibility, often called a fiduciary duty. This means they should always act honestly, with care, and put the NFP's interests first. If they slip up—say by making a careless decision that harms the NFP—they might be held personally responsible.

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  2. Keeping Everything Legal: Board members also need to be on top of all the rules. Whether it's about taxes, fundraising, or just regular reporting, they need to make sure the NFP ticks all the boxes. Falling short here can lead to trouble.

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But it's not all risks and pitfalls. Board members can protect themselves by:

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• Keeping the organisation's rulebook up to date.

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• Getting legal advice when things get tricky.

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• Learning continuously to stay ahead of their duties.

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• Talking openly with their team and the people they serve.

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• And always aiming for clear, transparent, and accountable governance.

 

Assuming a board position

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Upon assuming a position on a board, one undertakes a fiduciary duty – specifically, the responsibility to act in utmost good faith for the betterment or in the interests of the organisation under their oversight. Any violation of this duty exposes board members to potential risks.

 

Incorporation serves to mitigate liability, but board members and officers of incorporated associations remain susceptible to liability if their personal breach of duty results in personal injury or property damage. They may be held liable if they either directly caused the loss or damage or authorized and directed actions leading to such liability.

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In principle, board members may also face liability, even if they themselves have not engaged in objectionable conduct, if they fail to adequately oversee the activities of the CEO and staff. However, in practice, such cases are exceedingly rare, with only one documented instance in Australia over the past four decades. For this reason, among others, it is imperative to establish robust accountability procedures for the CEO.

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In instances where liability is proven, the personal assets of board members can be seized to cover any damages. In an example involving the Conservation Council of South Australia, both the organisation and certain officeholders were found liable for defaming developers by claiming that they used libel threats to stifle freedom of speech.

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Negligence arises when a person entrusted with care allows harm to befall the party they are responsible for safeguarding.

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In legal terms, a cause of action emerges when:

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1. You owe a duty of care to an individual.

2. You breach that duty due to a failure to exercise reasonable care in preventing a foreseeable hazard.

3. The affected party incurs tangible harm.

 

Being a volunteer does not serve as a defence. Nor does it matter whether the injured party was not charged, acted recklessly, disregarded instructions, or was uninvited onto the premises. This principle can even apply to intruders who sustain injuries on your property if it is reasonable to anticipate that your premises might attract trespassers.

 

You might contemplate requesting individuals who use your services to sign waivers or a Deed of Indemnity. However, waivers do not absolve individuals or organisations from liability arising from negligent actions. Moreover, a waiver does not exempt the college from its duty of care toward the signatory. A waiver is only legally valid if all foreseeable risks have been fully disclosed, and all reasonable measures have been taken to eliminate, minimize, or control these risks. This area is legally intricate, and waivers often carry limited weight in courts. Nevertheless, having individuals acknowledge the inherent risks associated with an activity through a signed document may discourage them from pursuing legal action.

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Summary

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Working in the world of Not-for-Profit (NFP) and Charitable organisations brings with it a unique blend of rewards and responsibilities. While there's the satisfaction of making a difference, there are also serious legal responsibilities to consider.

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Directors might feel protected, but a single misstep can make them personally accountable. Charitable trust trustees need to be on their toes, always putting the trust's goals first. Those managing Private Ancillary Funds (PAFs) have their own rulebook to follow, making sure they stick to both the trust's rules and what the ATO expects. And let's not forget board members, who need to keep everything above board, from finances to record-keeping.

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In short, by knowing their roles and responsibilities inside out, these dedicated individuals can help NFPs shine, making a lasting positive impact on the communities they touch.

 

 

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Legislations:

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Corporations Act 2001 (Cth)

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Sources, useful websites and links:

1. www.asic.gov.au

2. www.acnc.gov.au

3. www.ato.gov.au

4. https://asic.gov.au/for-business/running-a-company/company-officeholder-duties/your-company-and-the-law/

5. https://asic.gov.au/for-business/small-business/starting-a-small-business-company/small-business-company-directors/company-director-liabilities-when-things-go-wrong/

6. https://asic.gov.au/for-business/running-a-company/company-officeholder-duties/guidance-on-the-duties-of-directors-of-mutual-companies/

7. https://www.ato.gov.au/Non-profit/Getting-started/In-detail/Types-of-DGRs/Private-ancillary-funds/