Nonprofit Law in Plain English
Board Legal Responsibilities and
Liability Issues
by
Myles McGregor-Lowndes
Centre of Philanthropy and
Nonprofit Studies
Building Better Boards, Saturday 11.30-1pm 13/7/02
Further Information
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The information from which these slides
are drawn come from the following
working papers from the Centre:
Waller CPNS 2
Sievers PONC 7
McGregor-Lowndes PONC 11
To obtain an order form, visit the web site
at http://cpns.bus.qut.edu.au
Corporate Governance is NOT just
•Duties under the Corporations Act
2001, Associations Acts, Trust Law
•Fiduciary Duties
•Due care and attention - negligence
Paradoxes
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Does it really matter?
Who is responsible?
Independence vs Team?
Knowledge ?
Representation?
Does Conformance bring
Performance?
SO – JUST TELL ME!
• Sources of Liability
• General Laws
• Specific Entity Laws
– Company
– Trust
• How to manage your legal duties and
liabilities
JUDGES FAIL THE COMMON
SENSE TEST
• Judges have failed to recognise the
reality of associations of people
• They adhere rigidly to ancient
protocols
• Causes problems for all types of
nonprofit associations
GIFT OF THE CROWN
• The gift of “persona” is reserved
for the Crown
• Delegated to government
departments
• But judges still see nothing but a
crowd of people without it!
What is the legal form of your
association?
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Unincorporated association
Incorporated association
Company limited by guarantee
Company limited by guarantee and shares
Charitable Trust
Co-operative
Special Act of Parliament
Sources of Liability
1. General Statutes/Legislation
2. Specific Entity Law
• Common Law
• Statute Law
General Statutes
• Use of Corporation to
catch “for profit” and
“non-profit”
organisations.
• Environmental, tax,
workplace health and
safety, collections,
Trade Practices Act
• Officers as liable as
the corporation
An Act of
Parliament
Place Names
Act
Executive officers must ensure
corporation complies with Act
(1) The executive officers of a
corporation must ensure that the
corporation complies with this Act.
(2) If a corporation commits an
offence against a provision of this
Act, each of the corporation’s
executive officers also commits an
offence
“executive officer”, of a
corporation, means a person who is
concerned with, or takes part in,
the corporation’s management,
whether or not the person is a
director or the person’s position is
given the name of executive
officer.
• However, it is a defence for
an executive officer to
prove—
–the officer exercised
reasonable diligence to ensure
the corporation complied with
the provision.
Defences and Mitigation
• Usual to have a due diligence defence
– Use of standards and legal compliance plans
• Requires documentation and evidence to
show that there was an implementation
process and monitoring.
• Line Managers sign off on a regular basis
• Use of computer programs to assist control
major areas of exposure.
SPECIFIC ENTITY LAWS
• Entity is liable from its property
–Members, directors, committee
not primarily liable
• Trustees are liable
–It is a relationship not an entity
Common Law Exception
• Piercing the
Corporate Veil
– Fraud
– Avoid legal
obligations
– Groups
History of Duties
• The Charitable Corporation v Sir Robert Sutton
1742
• Trustee standards
– Imposed a high standard
– All 50 responsible for breaches of trust, even though
some did not participate – non-attendance
– No excuse that honorary
– Not a subjective test
Victorian Era Directors
• A director need not in the performance of his
duties exhibit a greater degree of skill than
reasonably expected of a person of his knowledge
and experience
• Not bound to give continuous attention to the
affairs of the company
• Director justified in trusting management to
perform their duties honestly
• SUBJECTIVE
Australian 1990 Judicial Reform
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More objective standard
General understanding of the business
General financial understanding
Friedrich’s case
Daniels v Anderson
Voluntary/executive/non-executive
Statutory reforms
Daniels v Anderson
1. Directors keep abreast and exercise
control – obvious risks cannot be blindly
left to others
2. Monitor business, policies and finances –
duty to inquire if suspicions.
3. Directors must be capable of monitoring –
ignorance no excuse – suspicions must act
4. Added tort of negligence - carelessness
Specific Corporations Act Duties
• Public Company
• Duty to exercise the degree of care and
diligence that a reasonable person would
exercise in the same position in a company
in the same circumstances
( s180 Corporations Act)
• Duty to exercise powers in good faith in the
best interests of the company and for a
proper purpose
– Trustee exception
(s181 Corporations Act)
• Duty not to make improper use of their
position as a director to gain advantage for
the director or for anyone else
s182 Corporations Act
• Duty not to make improper use of
information obtained as a director to gain
an advantage for the director or for anyone
else
s183 Corporations Act
• Duty not to delegate their discretionary
powers to anyone else
• Duty to avoid conflicts of interest
• The relevant provisions of the Corporations
Act require, of a director of a company
limited by guarantee in such a position, that:
– the director discloses to the other board
members the “material personal interest” which
the director has in the subject matter of the
discussion.
– to fulfil this duty directors to make an initial
standing disclosure of all material interests
which are then taken, on an ongoing basis, to
have been notified to all other board members.
Conflicts
• Corporate opportunities
• Misuse confidential information
• Personal profits
• Competing
• Bribes
Business Judgment Rule
• Defence against breaches of duty of care
• Directors should not be liable for decisions
made in an HONEST, INFORMED and
RATIONAL WAY.
• Good faith, proper purpose, no conflict,
appropriately informed, rational
• Rational unless “no reasonable person”
There is more!
• Insolvent trading provisions
– s 588G Corporations Law
– Coy incurs a debt + there were reasonable
grounds for suspecting that the company was
insolvent or would become insolvent
– confined to directors - but note wide def of
directors
– National Safety Council Case
• It is expected that board members acting
carefully and diligently must:
• be well prepared – read board papers in
advance of meetings (and require staff to
provide them)
• attend all meetings with only limited
exceptions
• ask questions at those meetings and seek
further information, especially if they do not
understand the information presented
• attend the office of the company to see that
it operates as they are told it operates
• attend functions and activities of the
company, for the same reason
• put in place systems to check the
compliance by the company with laws,
policies of the board and industry standards
Incorporated Associations
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Duties vary
Some States already have the 588G test
Part 5.7 body argument may be applicable
Those Inc assoc which trade interstateARB
Trusts
• Trustees are personally liable for improper
actions
• In certain circumstances the trustees may be
indemnified from the trust fund
• Pure fiduciary duties
• Standard – “ordinary prudent man (sic) of
business”– higher for investments!
• Loyalty to the trust deed and purposes
• Duty to adhere to the terms of the
trust
• Duty to keep and render accounts
• Duty to act personally
• Undivided loyalty
– No conflict of interest and duty
– No unauthorised benefit
– No conflict of duty and duty
• Investment duties
Risk Management
• Risk Management is the
term applied to a logical
and systematic method
to minimise losses and
maximise opportunities.
• COMMON SENSE
• AS 4360 Aust Standard
Compliance Programs
• Primary aim is to fully comply with the law
and eliminate all risk of breaching the law.
• Identify the specific penalties
• Determine how breaches could occur
• Design a program to eliminate breaches
• Ensure that the program is working and
revised
• AS 3806 Australian Standard
RM
• Reduces and
manages risk
• control with an eye
on costs
• set your own
standards
vs
Compliance
• Eliminates and
prevents
• Can’t decline on the
grounds of cost
• Standards set by
Law and Courts
Director’s and Officer’s Insurance
• Part of a risk management strategy
• Usual for a $5m cap
• For the company in indemnification of its
officers, officers directly and legal expense
insurance
• Often officers pay some portion personally
• Who is covered?
What is covered?
• Claims made policy
• Run off cover -50% of cost
• Exclusions
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Professional capacity
Personal injury
Claims by the organisation
Fraud & dishonesty
Fines
Environment
Disclosure
• Full disclosure of all relevant facts and
circumstances must be made
• One mistake may void the whole policy for
all concerned
• Be very careful
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You should fully understand the nature and
extent of the cover provided by the policy of
insurance.
Be aware of the obligations imposed upon them
by the policy and take steps to ensure that they
comply with those obligations.
Seek appropriate advice from the organisation's
lawyers and insurance brokers and ensure that
those providing the advice have a sufficient
understanding of the issues involved.
Implement procedures to ensure that full
disclosure is made to the insurer prior to taking
out or renewing D&O insurance.
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Implement procedures for identification of
claims and potential claims and notification of
claims and potential claims prior to expiry of the
policy.
As the protection provided by the policy is
personal to the officer, they should take
independent advice if they are uncertain about
the nature and extent of cover provided or if they
are not satisfied with arrangements made by
their organisation.
Importantly, be aware that if the organisation
decides not to renew the insurance, the officer
will not be covered in respect of claims
subsequently made.
• Dr Myles McGregor-Lowndes
• Centre of Philanthropy and Nonprofit
Studies
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Phone (07) 38642936
FAX (07) 38641812
E-mail m.mcgregor@qut.edu.au
http://cpns.bus.qut.edu.au