Third Dimension – Directors’ Rights: Moving Beyond The Call Of Duty

March, 2016

By Elizabeth Lathlean, Associate

Directors of not-for-profit organisations are regularly encouraged to ensure they are aware of, and comply with, the duties and obligations required by the role. However, in addition to knowing what a director must do, and what a director is prohibited from doing, it is also important for a director to know what rights he or she has, and how those rights can be relied on and enforced.

Directors’ rights are outlined in a variety of sources, including the organisation’s constitution, under the Corporations Act 2001 (Cth) (Corporations Act) (for public companies limited by guarantee), under the various State / Territory associations incorporation acts (for incorporated associations) and under the general law. Such rights allow directors to enforce the constitution, provide freedom for directors to participate in the decisions of the organisation and remain in office, and also ensure directors have access to the information and resources they need to efficiently and effectively carry out their valuable role.

The primary rights of a director of a not-for-profit organisation, and some suggestions regarding how to protect and enforce these rights, are set out below.

1. Right to enforce constitution

Section 140(1)(b) of the Corporations Act states that “[a] company’s constitution (if any) and any replaceable rules that apply to the company have effect as a contract … between the company and each director and company secretary”. Similar provisions are contained in some State / Territory legislation for incorporated associations. For example, section 26(1) of the Associations Incorporation Act 2009 (NSW) provides that “an association’s constitution binds the association and its members to the same extent as if it were a contract between them under which they each agree to observe its provisions.”

Whilst there has been an increasing trend for companies to enter into specific, individual contracts with directors, the absence of such contracts does not mean directors are disentitled to enforce their rights. Constitutional rights which may be important to individual directors include remuneration, indemnity and participation in board decisions.

2. Right to participate in board decisions

Directors generally have a right to participate in board decisions, including through receiving notice of board meetings, attending and voting at board meetings, and signing resolutions. The rights, and the mechanisms to ensure these rights are made available, are generally set out in the constitution.

Directors should be aware of the constitutional provisions regarding board meetings and decisions, and ensure any notice provisions are complied with. That being said, the constitution may provide that an accidental omission to send a notice of a meeting to a director, or the non-receipt of such notice, does not invalidate the proceedings of the board meeting, or any resolution passed at the meeting.

3. Right to remain in office until validly removed

The constitution will likely contain provisions permitting a director to resign, and circumstances in which a director may be validly removed, including upon the conclusion of his or her term (unless validly re-elected / reappointed).

In addition to any such constitutional provisions, section 203D of the Corporations Act provides that a director may be removed by ordinary resolution of the members. However, this is contingent on special notice being given and the other procedures required by section 203D of the Corporations Act being complied with. The requirements of this section cannot be overwritten by the constitution, and any non-compliance (including regarding the notice period and requirement to circulate a written statement) will likely result in any purported removal of a director being invalid. In some circumstances, failure to comply with certain provisions of the section may give rise to a criminal offence of strict liability.

Section 203E of the Corporations Act also provides a protection for directors to not be invalidly removed from office. The section provides that any notice, request or resolution of any or all of the directors that purports to remove a director from office is void.

Incorporated associations should consult their constitution and the applicable legislation in their State / Territory for the circumstances in which a director may be validly removed. For example, section 78 of the Associations Incorporation Reform Act 2012 provides for certain circumstances in which a director (or committee member) may be removed from office, which includes by special resolution of the members. Removal of a director in these circumstances is unlikely to come with the same threshold of protection afforded to directors under the Corporations Act.

It is important for directors to be aware of their term of office, and the constitution and statutory situations in which they are able to be validly removed, before the conclusion of that term.

4. Right to access financial records and other corporate information
Directors have a right to access financial records and other information in the possession of the organisation regarding its affairs. In relation to this important right, the Court has stated:

“It would be difficult for the court to overemphasise the importance of the director’s statutory and common law rights of access to corporate information. They are the foundation of the system of corporate governance as it exists in Australia today. Directors cannot be expected to carry out any of their substantial responsibilities … unless they can be sure of having full and unfettered access to the documents of the company … What should happen, when documents are demanded by a director, is that the gate is opened wide and the director has full and unfettered access at all reasonable times.”
(Fox v Gadsen (2003) 46 ACSR 713)

Directors’ rights of access include a right, provided certain criteria are met, to:

(a) access to the financial records at all reasonable times (s 290(1) Corporations Act); and

(b) inspect the books (but not the financial records, which is covered under (a)) for the purpose of legal proceedings (and extends the right to former directors who have ceased to hold office within the last seven years) (s 198F Corporations Act).

It is important for directors to understand the circumstances and scope of these rights, in relation to both the fulfilment of their duties and any potential or actual legal proceedings or disputes. Directors may wish to enter into a Deed of Access, Indemnity and Insurance with the organisation in order to confirm and protect the application of these rights (including a continuation of such rights after they cease to be a director).

5. Right to indemnity

A director may be entitled to be indemnified against losses and expenses properly incurred in the due performance of their duties. However, this right is subject to any contrary provision in the Corporations Act, applicable State / Territory legislation and the organisation’s constitution.

The Corporations Act places certain limitations on the circumstances in which a company may indemnify its officers (including directors), or otherwise exempt them from liability. Similarly, State / Territory legislation for incorporated associations provides varying degrees of prescription regarding the circumstances in which a director may be indemnified. Despite such limitations, there is still scope for indemnity to be provided for directors.

In order to strengthen the protection of former directors (and other officers of the organisation), it is often advisable for directors to enter into a Deed of Access, Indemnity and Insurance with the organisation.

6. Right to access assistance and advice, including to engage external advisors, at the organisation’s expense

There is currently no express statutory right for directors to access assistance and advice in relation to the discharge of their duties, at the organisation’s expense. Such assistance, through proper procedures, may come from the organisation’s officers, employees or external advisors.

Where such a right is desirable, it may be covered contractually, either in the constitution or through individual agreements between the organisation and each director.

7. Right to enforce statutory provisions

Directors, by virtue of their position, generally have no right to enforce provisions of the Corporations Act or other legislation. However, they may have such a right by virtue of other positions held, such as being a member of the organisation.

In addition to understanding their obligations, directors should ensure they are aware of their rights, under the constitution, the Corporations Act (for public companies limited by guarantee), applicable State / Territory associations incorporation legislation (for incorporated associations) and the general law. Organisations that are registered as charities with the ACNC should also consider any additional requirements that may arise from registration. Knowing about these rights, and the circumstances in which they can be relied on and enforced, is an important part of a director’s role, and one that should not be overlooked.

This article originally appeared in Third Dimension – Summer 2016

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