COMPANIES LIMITED BY GUARANTEE

COMPANIES LIMITED BY GUARANTEE Directors Duties Factsheets for Board Members Factsheet 1: Directors and companies limited by guarantee (The law is as stated at August 2012) The Australian Centre for Philanthropy and Nonprofit Studies Faculty of Business GPO Box 2434 Queensland University of Technology BRISBANE QLD 4001 Tel: +61 7 3138 1020 Fax: +61 7 3138 9131 CRICOS 00213J www.qut.edu.au/business/acpns Important Disclaimer: This publication is distributed on the understanding that (1) the authors and editors are not responsible for the results of any actions taken on the basis of information in this work, nor for any errors or omissions; and (2) the publisher is not engaged in rendering legal, accounting or other professional services. The publisher, authors and editors expressly disclaim all and any liability to any person, whether they are a purchaser of this publication or not, in respect of anything and of the consequences of anything done or omitted to be done by such person in reliance, whether Factsheet 1. Directors and companies limited by guarantee whole or partial, upon the whole or any part of the contents in this publication. If legal advice or other expert assistance is required, the services of a competent legal person should be sought. 1 P a g e

Factsheet 1: Directors and companies limited by guarantee Whom is this factsheet for? This factsheet is for officers of not-for-profit companies limited by guarantee (CLGs) which includes directors usually elected by the company s members to manage the company. It sketches the main obligations of office holders as an introduction to the subject. Further resources are suggested in Factsheet eight. Traditionally, companies are governed by a board of directors. It doesn t matter what you call the group of people governing the organisation they will have the same responsibilities as directors when they are put in similar positions of power. Directors owe their duties to the company and may face legal proceedings by the company and/or the corporate regulator, the Australian Securities and Investment Commission (ASIC). Directors may also face personal liability for breaches by the company of other legislation such as workplace health and safety, employment laws, tax laws, fundraising and environmental regulations. These duties need to be recognised and managed so that the company and directors do not breach their obligations. Some of the activities of the board of directors and staff (if any) will be devoted to ensuring that the activities of the company do not breach the law. A company limited by what? The Lawyer s View Section 9 of Corporations Act 2001 (Cth) (the CA) defines a company limited by guarantee (CLG) to mean: a company formed on the principle of having the liability of its members limited to the respective amounts that the members undertake to contribute to the property of the company if it is wound up. Often this sum (the guarantee) is only 50 cents or two dollars, a nominal amount. A member incurs no further liability (that is, the member has limited liability ) unless the constitution expressly expands members liability (which is rare) or they are exposed to liability in some other capacity, such as by acting as a director. Further, it is a public company (as opposed to a private or proprietary company), although it has members, rather than shareholders. As a public company it must have at least three directors (who must be 18 years or older; and two of whom must ordinarily reside in Australia), a secretary (who must 18 years or older), and at least one member. 2 P a g e

The Accountant s View A CLG is a public company and is open to much greater scrutiny than is a private company it must usually prepare financial statements in accordance with the Accounting Standards and have them audited unless it is very small. 1 CLGs have a three-tier reporting framework, as shown in the following table. This framework applies to financial years ending on or after 30 June 2010. Tier Type of company Obligations 1 Small company limited by guarantee. 2 Company limited by guarantee with annual (or consolidated) revenue of less than $1 million. 3 Company limited by guarantee with annual (or consolidated) revenue of $1 million or more. Unless directed by a member or ASIC, does not have to: prepare a financial report or have it audited prepare a directors report, or notify members of annual reports. Must prepare a financial report. Can elect to have its financial report reviewed, rather than audited. Must prepare a directors report, although with less detail than that required of other companies. Must give annual reports to any member who elects to receive them. Must prepare a financial report. Must have the financial report audited. Must prepare a directors report, although with less detail than that required of other companies. Must give annual reports to any member who elects to receive them. A review of a financial report provides a lower level of assurance than an audit, but may result in reduced costs for companies. The review need not be undertaken by a registered company auditor. However, the reviewer must be a member of and hold a practising certificate issued by: the Institute of Chartered Accountants in Australia CPA Australia Limited, or the Institute of Public Accountants. A CLG must send detailed financial information to its members. Small companies limited by guarantee no longer need to write to members each year informing them that the report has been 1 A company is a small company limited by guarantee in a particular financial year if: it is a company limited by guarantee for the whole of the financial year it is not a deductible gift recipient at any time during the financial year, and its revenue (or consolidated revenue if that applies) for the financial year is less than $250,000. 3 P a g e

prepared. Members wishing to obtain a hard copy or an electronic copy of the company s latest annual report can choose to obtain this from the company free of charge, and the CLG must comply with the request. The choice made by a member whether to receive a hard copy or an electronic copy stands for subsequent financial years members do not need to repeat their request for a copy of the report each year, unless they wish to change their selection of hard copy or electronic. The Sociologist s View There are about 11,000 CLGs in Australia, and the number has been growing at 6 per cent per annum in recent years. The size of these organisations is predominantly small, close to 70 per cent having operating revenue of less than $1,000,000. They include organisations devoted to sports and recreation organisations (21 per cent), community services (19 per cent), education (15 per cent) and religion (10 per cent). The structure is a direct clone of an English corporate structure established in 1862. Many organisations originally chose this corporate structure because there was no viable alternative when they sought the protection of limited liability and the other benefits of incorporation e.g. prior to the enactment by the various states of legislation to enable unincorporated entities to register as incorporated associations. Today, an organisation may choose to register as a CLG because it allows more flexibility in the structure of membership rights and other corporate constitutional provisions, incorporation is quicker than previously, and national and international operation is easier with a company structure. The structure allows interstate organisations to be administered more easily, given that incorporated associations legislation is state-based and varies from state to state as a federal Act, the CA provides uniform regulation across Australia. The advent of the Australian Charities and Not-for-profits Commission (ACNC) will probably favour CLGs with less red tape. An experienced Chair s view For the day to day operations of a community organisation nobody pays much attention to the fact that it is a CLG they can even apply to drop the formal limited from their name. Incorporated associations for the last three decades have been the structure of choice because they are cheaper to set up and run, more visible, they seem to be easier to establish and operate, with a less highprofile regulator than ASIC. The coming of the ACNC will probably mean that more start-ups choose the CLG route. Others will migrate from being incorporated associations or letters patent to CLGs. However, the basics remain, no matter what structure they choose: 4 P a g e

Nonprofit organisations are 'mission' driven, not 'profit' driven. There is no one way to measure achievement of mission. Nonprofit organisations often have multiple stakeholders who are all critically important to the organisation, often with conflicting primary interests. Many nonprofit organisations are small in size, but subject to accountability standards drawn from regimes involving large 'for profit' organisations. Nonprofit board or management committee positions are generally voluntary (unpaid). Nonprofit boards and management committees, like their organisations, are generally under-resourced. In addition, government funders and regulators may prescribe quality standards for nonprofit boards and management committees receiving government funding, which impacts on governance. In reality, these companies as with all nonprofit legal forms still: suffer internal disputes if their leaders do not have good leadership and management skills; struggle to get all the resources needed to achieve their purposes; require good leadership to prosper, with board members who are willing to evaluate their own performance regularly, review their practices and procedures in a meaningful way and continue to learn from their own and others experience; need a good measure of good fortune. Where do the duties applying to those involved in CLGs come from? The Lawyer s View The sources of duties and responsibilities come from: the constitution or rules of the company which set out the rights and obligations of members, officers and the company, and form an enforceable contract between them; the CA which has a significant number of requirements and responsibilities for those involved in companies and the company itself; other Acts and Regulations with provisions that apply to corporations and their officers and may apply to your organisation, e.g. taxation, workplace health and safety and environmental legislation; the general law which imposes a duty of care not to cause harm to others, financially, physically or by reputation; 5 P a g e

contractual relations which impose duties, such as grant contracts with governments; and the general law and trust deeds if the company acts as a trustee, in particular if it is a charitable trustee which brings higher duties and responsibilities. An experienced Chair s view The duties and responsibilities seem to come from everywhere and their number seems to increase every year, but the same could be said of our duties and responsibilities as ordinary citizens who merely go to work, come home and go to the beach with the family on the weekend. The most common failings of those involved with CLGs include: overlooking their own company s constitutional provisions; failing to file returns with regulators on time; not complying with tax provisions; not complying with terms in government grant agreements; and breaching workplace health and safety or other workplace laws, including allowing bullying. It s important to remember that being a volunteer board member, or being a charitable or nonprofit organisation does not excuse you from compliance with the multiplicity of legal and other duties and responsibilities. And their consequences can be just as serious for unpaid board members as they are for those working in the commercial sphere. 2 Who is responsible for these duties? The Lawyer s View In many cases the company will be the entity responsible for its actions. In a growing number of situations, legislation also makes the controllers of the company responsible personally. The CA is an example where directors owe personal obligations as well as being responsible for certain breaches of the law by the company. Other officers, e.g. the chief executive, chief financial officer and senior managers may also be responsible. In any instance, it is important to know who is defined as an officer and then to discover what their legal duties are. The definition of officer in section 9 of the CA (also found in sections 82A and 179(2)) includes a director or secretary of the corporation; or a person who makes decisions that 2 There is some respite in volunteer liability see https://wiki.qut.edu.au/display/cpns/volunteer+liability+and+the+civil+liability+act 6 P a g e

affect the whole or a substantial part of the business (executives), or who has the capacity to affect significantly the corporation s financial standing. An officer is also defined as a person in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (i.e. shadow directors, which could include a dominant corporate member). So this can extend to a senior employee such as a general manager, chief executive officer, or chief financial officer, or those who can effectively dictate to the board. An experienced Chair s view Many understand the legal concept that, in the eyes of the law, a company is separate from the members, directors, staff, funders or volunteers, but some find it hard to understand that the law will make individuals responsible for what the company does. It is a bit like holding a parent responsible for what their child does in some, but not all instances. But the net spreads also to include maybe the grandparents, aunts, siblings and others of the extended family network who may also influence the child. The bottom line is that all those involved in the board and management of the company need to be aware of their individual responsibilities and act accordingly, as well as keeping a close watch on the activities of the company and taking responsibility for ensuring it complies with all legal obligations. What legal duties do officers of CLGs have to comply with? The Lawyer s View There are many duties and responsibilities which board members have to comply with and those specific to officers in their corporate role are probably top of the agenda. Officers corporate duties are drawn from the CA itself and the common law, which has evolved through judge-made case law over the centuries. There are four main duties: Duty to act in good faith and act for a proper purpose; Duty to act with due care, skill and diligence; Duty to avoid conflicts of interests; Duty not to misuse position or information. Other duties fall under the main duties, but are more specific, often specified by the CA. ASIC s view There is a summary of the requirements on the ASIC s website: http://www.asic.gov.au/asic/asic.nsf/byheadline/company+officeholders 7 P a g e

An experienced Chair s view You are unlikely to get into trouble if you: are honest and careful in dealing with your organisation, and on its behalf with others; understand your legal obligations and make compliance with them part of your business; keep informed about your organisation's financial position and performance; get professional advice or more information when you are in doubt; and give the interests of the organisation, its members and its creditors top priority i.e. above your own interests when the two are in conflict. But in fact, to survive as an organisation you may need to exceed the legal duties. Nonprofit organisations' clients, members, funders, other stakeholders and the public expect the highest standards of ethical conduct and accountability. Expectations keep getting higher and the ACNC is likely to accelerate this trend. It is all about relationships: the quality of the relationship between the board members and the chair, relationships within the board; and relationships between the board and the paid managers and volunteers, as well as with members and key stakeholders, in particular, with funders. Two important spheres of relationship problems are within the board itself and between the board and the senior management. In terms of the latter, some authority has to be delegated to senior management, usually a CEO, but it s vital for integrity of the relationship, that delegations are clearly defined and boundaries are respected. Board members need to develop a relationship of respect, trust and collaboration with the CEO and senior management team. This will allow your board to influence the culture of your organisation in many ways, primarily through developing a tone at the top. The trust and collaboration with managers striving towards shared goals is also essential to the board's fundamental role, that is, overseeing administration and management of your organisation. For this to be effective the boundary between board and management must be understood and respected and the board must never allow its relationship with management to diminish its vigilance regarding performance and conformance. 8 P a g e