Considerations for Directors of NFP's (Corporations Act 2001)

Considerations for Directors of NFPs (Corporations Act 2001)

In Australia, directors of not-for-profit organisations (NFPs) are generally subject to the same core duties as directors of for-profit companies under the Corporations Act 2001 (Cth). However, NFPs, due to their unique focus on public service rather than profit, come with specific additional considerations for their directors.

Common Duties for All Directors

Directors of both for-profit and not-for-profit entities share several fundamental duties under the Corporations Act, including:

• Duty of Care and Diligence (Section 180)

• Duty to Act in Good Faith and for a Proper Purpose (Section 181)

• Duty to Avoid Conflicts of Interest (Sections 182 & 183)

• Duty to Prevent Insolvent Trading (Section 588G)

• Duty to Disclose Interests (Section 191)

• Duty to Keep Proper Financial Records (Section 286)

Specific Considerations for Not-for-Profit Directors

While these duties apply broadly, directors of NFPs have additional responsibilities and sometimes differing rules because of the unique nature of NFP organisations.

Purpose-Driven Focus

• Primary Objective: Unlike for-profit companies, which primarily aim to maximise shareholder value, NFPs exist to serve a specific charitable, social, or community purpose. Directors must prioritise achieving these objectives over financial gain. This distinction shapes many of their decisions and activities.

• Proper Purpose: The duty to act for a proper purpose (Section 181) is especially important for NFP directors. They must ensure that all decisions align with the NFP's charitable mission, furthering the public or community good rather than personal or financial benefit.

Duty to Apply Funds Towards the Non-Profit’s Purpose

• Restriction on Profits: Directors must ensure that any profits or surpluses generated by the NFP are reinvested back into the organisation’s activities. These funds should not be distributed to members or directors except as reasonable compensation for services rendered. This aligns with the core not-for-profit principle.

Insolvency and Financial Management

• Different Financial Contexts: While the duty to prevent insolvent trading (Section 588G) applies to all directors, NFP directors must navigate financial management with an eye on sustainability and stability. NFPs often rely on donations, grants, and other non-commercial revenue sources, which means directors must be particularly diligent in managing finances to avoid insolvency.

Governance and Accountability

• Reporting Requirements: NFPs, especially those registered with the Australian Charities and Not-for-Profits Commission (ACNC), face additional governance standards and financial reporting requirements. These standards are designed to ensure transparency, protect stakeholders, and enhance accountability.

• ACNC Governance Standards: The ACNC requires that NFPs comply with governance standards, which set out specific duties regarding accountability to members, management of conflicts of interest, and ensuring financial controls are in place.

Conflicts of Interest

• Additional Scrutiny: Directors of NFPs must be especially vigilant about conflicts of interest, as NFPs often rely heavily on public trust, donations, and external funding. Conflicts could jeopardise public confidence in the organisation.

• Disclosure Obligations: NFP directors often have stricter obligations to disclose conflicts of interest to the board and, in some cases, to the ACNC, which monitors compliance in the sector.

Volunteer Directors

• Protection for Volunteers: Many NFP directors serve in a voluntary capacity. While the duties under the Corporations Act still apply, there are additional protections under the ACNC and other regulatory bodies for volunteer directors. This often includes protections against personal liability if they have acted honestly and reasonably.

Relief and Protections for Non-Profit Directors

• ACNC’s Power to Waive Penalties: The ACNC can waive penalties for NFP directors who have acted in good faith and in a reasonable manner, helping to ensure that those who make honest mistakes are not unfairly penalised.

• Statutory Indemnity: NFPs can provide indemnity to directors against certain liabilities (except for breaches such as acting in bad faith or gross negligence). This offers directors some protection as long as they are performing their duties in accordance with the law.

Additional Governance Frameworks for NFPs

• ACNC Governance Standards: NFPs registered with the ACNC must comply with governance standards, which offer further guidance and context on good governance practices beyond the Corporations Act.

• Incorporated Associations: Some NFPs operate under state or territory-based legislation, such as the Associations Incorporation Acts. While these often align closely with the Corporations Act, they may also have unique requirements and duties that apply specifically to NFPs in that jurisdiction.

Summary of Key Differences

• Primary Objective: NFP directors focus on achieving the organisation’s mission rather than financial gain or shareholder value.

• Financial Management: The emphasis is on the sustainability of funding sources and proper use of funds, rather than on making profits.

• Reporting and Accountability: NFPs face more stringent transparency and reporting obligations to stakeholders and regulatory bodies such as the ACNC.

• Conflict of Interest: NFP directors face heightened scrutiny regarding conflicts of interest, given the reliance on public trust and funding.

• Volunteer Protections: Volunteer directors are afforded additional protections and considerations, especially regarding liability.

These unique responsibilities highlight the importance of directors aligning their governance practices with the public and community-focused missions of NFP organisations, ensuring they remain accountable and compliant with legal and ethical standards.

[Updated: March 2025]