Due diligence is key.
Working for a not-for-profit board can be an incredibly rewarding experience. Not-for-profit (NFP) organisations exist to support important causes and improve the lives of those in need, and board members play a critical role in helping these organisations achieve their goals.
People interested in working for a not-for-profit board, likely have a passion for making a positive impact in the world or care deeply about a particular cause or issue. They see working for a not-for-profit board as a way to contribute their time, skills, and expertise to support that cause.
While working for a not-for-profit board has a myriad of benefits people may consent to these roles thinking solely of these benefits without giving due consideration as to the risks associated with taking up one of these positions (including a volunteer capacity) especially in circumstances where the NFP ends up insolvent.
As most readers know, director duties are governed by the Corporations Act 2001. Director duties include, but are not limited to:
Section 180. Care and diligence—exercise their powers and discharge their duties with the care and diligence.
Section 181. Good faith—exercise their powers and discharge their duties in good faith in the company’s best interests and for a proper purpose.
Section 182. Improper use of position—not to improperly use their position to gain an advantage for themselves or someone else, or to cause detriment to the company.
Section 183. Improper use of information—not to improperly use information obtained through their position to gain an advantage for themselves or someone else, or to cause detriment to the company.
Disclosure—material personal interests must be disclosed in a wide range of circumstances.
Insolvency—prevent the company from insolvent trading.
In the event of insolvency, each of the duties above can carry significant sanctions including personal liability for directors. A failure to prevent insolvent trading for example, may result in civil penalties of up to $200,000; criminal charges (with possible imprisonment of up to five years); order(s) to compensate the organisation or any interested person for damage suffered because of their misconduct and disqualification.
Typically, NFP’s are established as either:
companies limited by guarantee
As a result of their structure, NFPs are typically registered under state/territory legislation and not the Corporations Act; however, in the event of insolvency (e.g. a liquidation) the incorporated association becomes an applied Corporations matter. When this happens, board members are faced with analogous director duties and therefore breaches of duties and/or insolvent trading claims can be made against board members—volunteers or otherwise.
NFPs often attempt to mitigate these potential risks and associated personal liabilities by taking out Directors and Officers insurance policies. While this is a positive step, recently we’ve observed some policies exclude any insolvent trading claims brought by a liquidator of the association, which we know can result in significant personal liability.
When taking up a role on a NFP board, it is important to undertake due diligence to ensure all the risks and obligations that come with the position are understood. While far from being an exhaustive list, below are some of the key matters to consider before consenting to act on a NFP board:
What are the appointment terms?
Who is in the management team? What are their qualifications, skills, knowledge, experience, and reputation?
What is the primary source of funding?
Have there been any serious issues in recent years? If so, how were they handled?
What is the current cash position of the organisation, and how has this trended over the past three or more years?
Are there appropriate internal controls and policies for major processes?
Is there evidence of financial stress in recent financial statements?
Is the organisation current with its pay as you go (PAYG) withholding and superannuation guarantee charge payments to the Australian Taxation Office?
Without these steps, a well-intentioned person volunteering to help a worthwhile cause may unwittingly open themselves up to unnecessary risk and personal liability if the NFP becomes insolvent.