Directors’ obligations: A guide to the legal duties of not-for-profit health board directors

People who work in the health and medical industries often put the heart at the centre of what they do. With so many worthy causes in this sector, it is common for professionals in these fields to be asked to serve on a board of a not-for-profit organisation as a director.

There are many types of directors in Australia. Alongside the traditional corporate board, there are also not-for-profit, commonly called NFP, board directors.

A not-for-profit organisation exists for the public benefit and can include charities and sporting clubs. This article focuses on directors of NFP companies in the health sector in Australia, specifically those incorporated as companies limited by guarantee.

NFP companies limited by guarantee have a board of directors and those directors have many obligations and duties (Directors’ Duties). If a director breaches a directors’ duty, such as a directors duty to avoid a conflict of interest, the director can be held personally liable.

In some cases, individuals can agree to be appointed to a board without realising the obligations and potential risk that comes with acting as a director. The personal liability of a director applies regardless of whether the director is a volunteer or paid board member and it can put the directors personal assets such as their home at risk, which means it is important to be aware of these duties before agreeing to a director appointment.

What are Directors’ Duties?

Directors’ Duties in health NFP companies are governed by the Corporations Act 2001 (Cth) and include the duty:

  • to act with care and diligence;

  • to act in good faith;

  • not to use the director’s position improperly;

  • not to use information improperly;

  • to comply with laws around relating to financial record keeping, consumer law, the environment and workplace health and safety;

  • of disclosure; and

  • to prevent insolvent trading.

We unpack each of these directors’ duties below and take a look at associated obligations all directors must meet, such as the requirement for a director identification number.

Duty to act with care and diligence

Directors of a health not-for-profit board must exercise their directors duties with the care and diligence expected by a reasonable person in the same circumstances.

A board director must take their role seriously and give sufficient time and energy to all board tasks and decisions. This obligation extends to monitoring the financial position of the NFP organisation at all times to ensure that the financial affairs of the organisation are managed correctly and the NFP health organisation does not trade while insolvent.

To ensure a director meets this duty to act with care and diligence, it is important that directors on NFP health boards:

  • read all materials circulated to directors, including financial statements;

  • attend all board and committee meetings;

  • ask questions when they do not understand something, including in relation to the finances of the organisation;

  • proactively follow up and complete actions they have volunteered for or are expected to complete; and

  • ask themselves the question, “have I exercised the degree of care and diligence a director on board should exercise?”

Duty to act in good faith

In performing their duties, directors must exercise their powers and discharge their duties in good faith and in the best interests of the company. To be considered as acting in good faith, the director must hold an honest and reasonable belief that the actions taken by the director are in the best interests of the organisation. This is also sometimes described as acting in the bona fide interests of the organisation.

Where there are competing interests between stakeholders in the NFP health company, it is the directors duty to balance those interests fairly and do what the director believes is in the best interests of the NFP.

Duty not to use a director’s position improperly

A director must not improperly use their position as director to gain an advantage for themselves or someone else, or to cause detriment to the health NFP company that they sit on the board for.

An example of improper use would be using the funds of the NFP health company for the directors’ own personal use. Using funds for personal use is a breach of both the fiduciary and statutory directors duties placed on the director.

Duty not to use information improperly

Similarly, information obtained as part of the position of director of a health NFP company must not be used to gain an advantage for the director or anyone else or to cause detriment to the company.

An example of improper use of information would be where a director obtained information as part of their role and used that information to assist a family member tender for a contract using that information.

This obligation comes from the duty to avoid conflicts of interest.

Disclosure and managing directors conflicts of interest

The director of a health NFP company has a duty to disclose material personal interests in a wide range of circumstances. This is necessary to identify and disclose the directors conflict of interest to the board so that the board can decide how to manage the conflict. There are many ways a conflict can be managed once disclosed, such as removing that director from discussion about the issue in conflict or in more extreme cases, resigning from the board. The important thing is that it is disclosed so it is out in the open and can be managed.

Compliance with statutory duties

Compliance with statutory duties around financial record keeping, consumer law, the environment and workplace health and safety are critical for directors of NFP boards. Directors can be found personally liable for the debts and actions of the NFP company if the following laws are not complied with by the company:

  • the Australian Consumer Law (ACL);

  • anti-discrimination legislation;

  • tax law, including payment of GST, PAYG or superannuation;

  • trading whilst insolvent;

  • environmental protection laws;

  • employment laws and the Fair Work Act 2009 (Cth); and

  • work health and safety laws.

A director has the duty to ensure that these laws are being met within an organisation as part of the role of director appointed to the board of a company. Not asking (or omitting to ask) if the laws are being complied with could amount to a breach of directors duties by a director.

A duty to prevent insolvent trading

A director also has a duty to ensure a company does not trade whilst insolvent or where the director suspects the company could be insolvent.

Section 588G of the Corporations Act requires a director of a company to prevent the company from incurring a debt if:

  1. the company is already insolvent at the time the debt is incurred;

  2. by incurring that debt, or by incurring a range of debts including that debt, the company becomes insolvent; and

  3. at the time of incurring the debt, there are reasonable grounds for suspecting that the company is already insolvent, or would become insolvent by incurring the debt.

If a director is found by a court to have contravened this duty to prevent insolvent trading, the director can be ordered to personally pay compensation to the company equal to the loss suffered by the company, or to pay a fine of the greater of $1,565,000 or 3x the benefit obtained by trading whilst the company was insolvent.

To fulfill the duty to prevent insolvent trading, a director should:

  • ensure proper financial records are kept by the company and take reasonable steps to remain fully informed of the financial position of the company;

  • regularly ask questions in relation to the financial records of the company and regularly review the company statements;

  • notify the board and take steps to obtain professional advice if the director has concerns about the finances of the company or believes insolvency is a risk; and

  • if the director is ill or for another good reason cannot take part in the management of the company, consider the director’s future in that company on an ongoing basis.

Director Identification Numbers

All directors, including directors of NFP Companies in Australia, are required to have a director identification number (DIN). A Director is obliged to apply for their DIN personally as they must verify their identity. This is required before a director appointment can take a place on a board.

A final note on NFPs that are also charities

Some NFPs are also registered charities. Where this is the case, the NFP must also comply with the governance standards of the Australian Charities and Not-for-Profits Commission (ACNC). You can check if an organisation is a registered charity here.

Next Steps

It is important for board members of NFP health companies to meet their directors’ duties. Failure to do so could mean the director is found personally liable for a breach of duties and be forced to pay any debts or costs caused by their negligence from their personal funds. A breach of duties can result in fines, disqualification as a director or imprisonment in very extreme situations.

If you are a director of a not-for-profit health company or are a NFP health company board there are options to protect yourself, including entering into a document which can protect you called a Deed of Indemnity, Access and Insurance. Our Fast Track solution page has more information on how this document can protect you from liability: Deed of Indemnity, Access and Insurance.

Our team has extensive experience in providing advice and insights into best practices for not-for-profit organisations in the health space. To discuss your potential next steps, contact our team here, and we will put you in touch with the best professional for your needs.

Related Articles: Directors’ Duties in Focus; Directing a Not-for-Profit Organisation

Sarah Bartholomeusz