14 Mar 2013

Up to their standards: Governance Standards for ACNC Registered Charities made

by David Landy, Nick Miller, Simon Bowden

Charities must meet the five ACNC Governance Standards from 1 July 2013 if they are registered with the Australian Charities and Not-for-profits Commission.

Regulations containing five standards for the governance of charities registered with the Australian Charities and Not-for-profits Commission (ACNC) were made on 1 March 2013.

The Governance Standards themselves are generally principle-based, rather than prescriptive. They specify outcomes to be achieved rather than methods for achieving them. Your charity can therefore assess how it chooses to meet the Governance Standards in ways that suit its particular circumstances. The ACNC is expected to publish further guidance to assist charities to comply.

The Governance Standards will affect the duties of directors, management committee members, trustees and other responsible entities of registered charities. Essentially these duties will be equivalent to those imposed on directors of companies under the Corporations Act. However, under the Governance Standards, the obligation falls on the registered charity to ensure their responsible entities comply with the duties.

Background

An NFP entity will have to comply with the Governance Standards in order to be registered (and remain registered) under the Australian Charities and Not-for-profits Commission Act 2012 (ACNC Act). Once an entity is registered, compliance with the Governance Standards will be enforced by the ACNC Commissioner.

The ACNC Commissioner will be able to address non-compliance by those charities which are federally regulated entities (including charities which are Corporations Act companies) by issuing formal warnings, giving written directions, suspending or removing a responsible entity, and appointing acting responsible entities.

The Governance Standards must be interpreted in accordance with both the objects of the ACNC Act and the matters which the ACNC Commissioner must consider in exercising his or her powers.

The objects of the ACNC Act are:

  • to maintain, protect and enhance public trust and confidence in the Australian NFP sector;
  • to support and sustain a robust, vibrant, independent and innovative Australian NFP sector; and
  • to promote the reduction of unnecessary regulatory obligations on the Australian NFP sector.

The matters to be considered by the ACNC Commissioner include:

  • the principles of regulatory necessity, reflecting risk and proportionate regulation; and
  • the unique nature and diversity of NFP entities and the distinctive role they play in Australia.

ACNC Governance Standard 1: Purposes and NFP nature

A registered entity must demonstrate its purposes and character as a NFP entity, make information about its purposes available to the public and comply with its purposes and its character as a NFP entity.

Information will be available to the public if it appears on the Australian Charities and Not-for-profits Register or in an Australian law on www.comlaw.gov.au or www.austlii.edu.au, or it is otherwise made available on request.

ACNC Governance Standard 2: Accountability to members

A registered entity with members must take reasonable steps to ensure that it is accountable to its members and that its members have an adequate opportunity to raise concerns about the governance of the registered entity.

Examples of steps which registered entities could take to comply with this standard include:

  • accountability to members: holding annual general meetings, providing members with annual reports or providing for elections of responsible entities; and
  • adequate opportunity to raise concerns: holding annual general meetings with a question and answer session or allowing members to propose and vote on resolutions.

Where the governing rules of a registered entity include appropriate accountability mechanisms, compliance with those rules would demonstrate compliance with this standard.

ACNC Governance Standard 3: Compliance with Australian laws

A registered entity must not engage in conduct, or omit to engage in conduct, that may be dealt with as an indictable offence under Australian law or by way of a civil penalty of 60 penalty units or more (a penalty unit is currently $170).

A serious infringement of this standard may allow the ACNC Commissioner to exercise his or her enforcement powers.

ACNC Governance Standard 4: Suitability of responsible entities

A registered entity must take reasonable steps to ensure that its responsible entities are not disqualified from managing a corporation or have not, during the preceding 12 months, been disqualified by the ACNC Commissioner from being a responsible entity of a registered entity. After taking those steps, a registered entity must be satisfied that each responsible entity meets those requirements; if not, it must take reasonable steps to remove that responsible entity.

Examples of steps which registered entities could take to comply with this standard include:

  • obtaining declarations from responsible entities and searching public registers on appointment; and
  • obtaining a commitment from a responsible entity that, if its circumstances change, it will advise the registered entity.

ACNC Governance Standard 5: Duties of responsible entities

A registered entity must take reasonable steps to ensure that its responsible entities are subject to, and comply with, the following duties:

  • to exercise the responsible entity’s powers and discharge its duties with the degree of care and diligence that a reasonable individual would exercise if they were a responsible entity of the registered entity;
  • to act in good faith in the best interests of the registered entity, and to further the purposes of the registered entity;
  • not to misuse the responsible entity’s position;
  • not to misuse information obtained in the performance of the responsible entity’s duties;
  • to disclose perceived or actual material conflicts of interest of the responsible entity, including related party transactions;
  • to ensure that the registered entity's financial affairs are managed in a responsible manner, including putting in place appropriate and tailored financial systems and procedures (see below); and
  • not to allow the registered entity to operate while insolvent.

The systems and procedures of a registered entity to ensure its financial affairs are responsibly managed responsible management of financial affairs requirement will depend upon its size and circumstances and the complexity of its financial affairs, and may include:

  • procedures relating to spending funds (for example, the approval of expenditure or the signing of cheques); and
  • having insurance that is appropriate for the registered entity's requirements.

Defences to ACNC Governance Standard 5

If a responsible entity satisfies one of the following defences, the registered entity will have taken all reasonable steps to ensure that its responsible entities have complied with Governance Standard 5:

(a) Reliance on information: The responsible entity has, in good faith, relied on certain information and has made an independent assessment of the information. This applies to information given by:

  • an employee of the registered entity that the responsible entity believes on reasonable grounds to be reliable and competent in relation to the matters concerned;
  • a professional adviser or expert in relation to matters that the responsible entity believes on reasonable grounds to be within the individual's professional or expert competence;
  • another responsible entity in relation to matters within their authority or area of responsibility; or
  • an authorised committee of responsible entities that does not include the responsible entity.

(b) Business judgement: The responsible entity has made a decision in relation to the operations of the registered entity where:

  • the decision was made in good faith for a proper purpose;
  • the responsible entity did not have a material personal interest in the subject matter of the decision;
  • the responsible entity informed itself about the subject matter of the decision (to the extent the entity reasonably believed to be appropriate); and
  • the responsible entity rationally believed that the decision was in the best interests of the registered entity.

(c) Belief that the entity was solvent: In relation to the duty not to allow the registered entity to operate while insolvent, the responsible entity had reasonable grounds to expect, and did expect, that the registered entity was solvent or the responsible entity took all reasonable steps to prevent the registered entity from incurring the debt.

(d) Illness: The responsible entity could not take part in the management of the registered entity at the relevant time because of illness or for some other good reason.

Application and transitional arrangements

The Governance Standards do not come into effect until 1 July 2013, providing time for the Parliament to confirm or disallow the regulations.

A registered entity must comply with the requirements of the Governance Standards as far as is possible, without breaching its governing rules. If its governing rules prevent it from complying with a requirement of the Governance Standards, the registered entity will be exempt from that requirement until 1 July 2017.

Until 1 July 2017, a registered entity which is an incorporated association under a State or Territory law which sets out duties of responsible entities to the registered entity will be taken to comply with Governance Standard 5 (duties of responsible entities) if the registered entity and each of its responsible entities is complying with that law. This ceases to apply if the relevant provisions of the State or Territory law are amended to set out duties for responsible entities that are the same as those in Governance Standard 5 or otherwise adopts the content of 8 Governance Standard 5.

What should you do?

If your charity is registered with the ACNC, it should start considering whether it can or does comply with the Governance Standards. This will include considering:

  • your charity's purposes, whether these are clear and made publicly available and whether they still reflect what your charity does;
  • the terms of your charity's governing rules and whether any amendments are needed to bring your charity into compliance with the standards;
  • what policies and procedures does your charity have to ensure its accountability to its members (if any), such as whether it holds members' meetings or otherwise keeps members informed of its activities; and
  • what policies and procedures does your charity have to ensure its responsible entities are meeting their duties and for identifying any breaches of those duties.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.