Governance Standards and Constitutions… a marriage of (in)convenience

September, 2013

The governance standards, which are not yet operative, set out basic standards that all charities except basic religious charities (referred to hereafter as Charities) must comply with.

If a charity does not comply with the governance standards, the Australian Charities and Not-for-Profits Commission (ACNC) has powers to de-register the charity and remove directors.

On 1 July 2013 certain rules in the Corporations Act 2001 will be switched off which, amongst other things, protect charities from the bad behaviour of directors. The intention is that the governance standards will be switched on in their place.

Once the governance standards commence, every Charity must comply with the governance standards to the extent that such compliance is not inconsistent with its governing document (i.e. its constitution).

A significant point to note is that once the governance standards commence, they will operate retrospectively. Any changes which a Charity has made to its constitution since 5 March 2013 must be not inconsistent with the governance standards.

If there are inconsistencies between what the governance standards require and what a Charity constitution allows, and those inconsistencies existed prior to 5 March 2013, then the Charity will have until 1 July 2017 to fix the problem.

While most Charities will already be complying with the governance standards, there are some things that Charities should do to ensure they are complying with the ACNC’s requirements and to protect themselves from the bad behaviour of directors. Charities will eventually be required to amend their constitutions, but there may be some interim measures that they should take now.

Timing: the governance standards may not be switched on in time – what happens then?

The governance standards are expected to become operative on 1 July 2013.

However, the law actually says that the governance standards will commence on the latter of 1 July 2013 or the last day on which the governance standards could be disallowed in either House of Parliament.

We understand that the Government intends for that date to be before 1 July 2013. However, if the Senate scheduling does not permit the governance standards to be considered, then the governance standards may not commence before Parliament goes into caretaker mode. For this reason, no one knows when the governance standards will commence.

If the governance standards do not commence by 1 July 2013, then there will effectively be a gap in the law. The Corporations Act 2001 provisions will be switched off, but the governance standards will not be switched on. For this reason, we think charities need to protect themselves.

Warning: the governance standards do not offer the same level of protection to charities as the Corporations Act did – protect yourselves!

Regardless of whether the governance standards commence in time or not, the governance standards do not provide charities with the same level of protection as was provided by the Corporations Act.

Previously a director was liable under the Corporations Act if that director failed to comply with directors’ duties, such as the duty to disclose conflicts of interest. Under the governance standards, a Charity can be held accountable if a director fails to disclose a conflict of interest, but the director himself/herself cannot be held accountable other than being suspended or removed from their role as director.

Charities should consider how best to protect themselves and ensure that directors are accountable in some way for their actions.

How do charities do this??

Charities should familiarise themselves with what the governance standards require. In summary, the five governance standards require the following:

Standard One: Purposes and not-for-profit nature of a registered entity

Charities must be not-for-profit and work towards their charitable purpose. They must be able to demonstrate this to the ACNC and provide information about their purpose to the public.

Standard Two: Accountability to members

Charities must take reasonable steps to be accountable to their members and provide their members adequate opportunity to raise concerns about how the charity is governed.

Standard Three: Compliance with Australian laws

A charity must not commit a serious offence (such as fraud) under any Australian law or breach a law that may result in a penalty of 60 penalty units ($10,200) or more.

Standard Four: Suitability of responsible entities

Charities must check that their responsible persons are not disqualified from managing a corporation (under the Corporations Act 2001) or currently disqualified from being a responsible person for a registered charity by the ACNC Commissioner. Charities must take reasonable steps to remove responsible persons that do not meet these requirements.

Standard Five: Duties of responsible entities

Charities must take reasonable steps to make sure that the members of their governing body know and understand their legal duties and that they carry out their duties. 1

Charities which have not changed their constitutions since 5 March 2013 do not have to change their constitutions until 1 July 2017. However, they still need to comply with the standards above. Therefore, if a Charity chooses not to update its constitution, it should take other steps to ensure compliance.

In particular, Charities should adopt policies to ensure that they are checking that their responsible persons have not been disqualified and that their directors are complying with certain standards. The following are examples of policies which Charities may adopt:

–     a policy that the Board will take reasonable steps to ensure that the Board does not at any time include a director who is disqualified from managing a corporation under the Corporations Act 2001 or from being a responsible entity under subsection 45.20(4) of the Australian Charities and Not-for-profits Commission Amendment Regulation 2013.

–     a policy requiring that every director sign an agreement with the Charity acknowledging that that director is subject to, and must comply at all times with, the duties set out in Governance Standard 5 in section 45.25 of the Australian Charities and Not-for-profits Commission Amendment Regulation 2013.

We recommend that Charities make changes to their constitutions. There are likely to be many inconsistencies in constitutions which would not prevent Charities from complying with the governance standards, but which should still be clarified in constitutions. For example, many constitutions will refer to certain sections of the Corporations Act, where that reference may now need to be removed or instead refer to a section of the governance standards or the Australian Charities and Not-for-Profits Commission Act 2012.

Further, the governance standards provide greater flexibility in terms of how Charities operate. For example, Charities must still be accountable to their members but will not necessarily have to hold AGMs. If Charities wish to take advantage of some of these more flexible arrangements, they will need to change their constitutions accordingly.

Charities which have changed their constitutions since 5 March 2013 should ensure that those provisions are not inconsistent with the governance standards. Charities should amend any such inconsistent clauses prior to 1 July 2013.

What does this mean for charities that aren’t companies?

The committee members of incorporated associations will still be subject to the relevant associations law in the relevant State/Territory. Incorporated associations should not be concerned by the gap in the law or the lack of protection against wayward committee members.

All Charities must comply with the governance standards regardless of their entity structure, so they should still ensure that they have measures in place to check that, for example, committee members are not disqualified.
All Charities should consider whether they wish to take advantage of the increased leniency for Charities under the governance standards.

2013 Federal Election

Just to throw a spanner in the works, the Federal Opposition Party has announced that if it comes into power in September 2013, it may wind back the ACNC and undo many of the changes the ACNC has introduced, including the governance standards. It is unclear how long it would take the Opposition Party to make any such changes.

 1 Source: ACNC Website (http://www.acnc.gov.au/ACNC/Manage/Ongoing_Obs/Governance/GovStds/ACNC/Edu/GovStds_overview.aspx?hkey=18fdef33-9f88-4a3f-ac61-e3a8ba3fdac6)

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vera-visevic-mills-oakley

Vera Visevic | Partner
T: +61 2 8289 5812
E: vvisevic@millsoakley.com.au

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