On this page
- Introduction
- Climate governance duties
- The duty to act in good faith in the best interests of the organisation and for a proper purpose
- The duty to act with reasonable care, skill and diligence (including the duty to prevent insolvent trading)
- The duty not to use information or position improperly
- The duty to disclose and manage conflicts of interest
- Who must comply with the legal duties?
- What is the extent of a director, committee member or office holder's obligation to prepare for a disaster?
- What if compliance with legal duties is not possible due to a disaster or emergency?
- What happens if a director, committee member or office holder breaches a duty?
Introduction
Legal duties apply to people involved in governing a not-for-profit organisation, which includes people who sit on a committee or board, or are office holders (people with control and influence over the governance of an organisation, even if they don’t hold an official position).
These duties play a critical role in ensuring that organisations are prepared for, respond effectively to, and recover from disasters. By understanding and fulfilling their legal duties, directors, committee members and office holders can help protect their organisations and the communities they serve.
The legal duties that apply depend on the legal structure of an organisation (duties can apply to an unincorporated group) and whether the organisation is registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC).
A director, committee member or office holder of an organisation has the following four main legal duties:
- Good faith – the duty to act in good faith in the best interests of the organisation and for a proper purpose
- Reasonable care – the duty to act with reasonable care, skill and diligence (including the duty to prevent insolvent trading)
- Use of information or position – the duty not to use the position (or information gained as a result of that position) improperly. This duty flows from the duty relating to conflicts
- Conflicts of interest – the duty to disclose and manage conflicts of interest
We have simplified the main legal duties by listing them as four main duties below. For more information about the legal duties that apply to your organisation, see our Duties guide.
We’ve set out more information about these duties with examples of how they may apply during a disaster below.
Note
The legal duties discussed here apply to all people who have a governance role in a not-for-profit organisation, including directors, committee members and office holders, regardless of the size, structure or purpose of the organisation.
The legal duties of a director, committee member or office holder continue to apply even in the event of a disaster.
Climate governance duties
Climate governance duties are the obligations of directors, committee members or office holders to consider the interests of the climate in their decision making and actions.
Climate governance duties are not standalone duties, but are integral to the legal duties of a director, committee member or office holder.
In performing their legal duties (which are discussed in more detail below), directors, committee members and office holders must consider the impact of their organisation on the climate.
The Australian Institute of Company Directors’ (AICD) Not-for-Profit Governance Principles (Principle 7 titled 'Sustainability') provides guidance to directors and committee members on sustainability considerations.
Under this sustainability principle, the AICD says:
- directors, committee members or office holders should consider the environment when discharging their duty to act in the best interests of the organisation and for a proper purpose to protect the organisation’s reputation and ensure its sustainability
- sustainability is the focus by a board (or committee) on how the organisation impacts, and is impacted by, the environmental, social and human elements that are central to its operations
- the board (or committee) of a charity registered with the ACNC should make sure its sustainability measures are consistent with the charitable purpose under which it is registered
The AICD also provides a list of potential areas where organisations can focus on sustainability. These areas include air and water pollution, biodiversity and nature, carbon emissions, climate change and energy efficiency.
For more information
See the Australian Institute of Company Directors’ (AICD) updated Not-for-Profit Governance Principles which reflect the demands of the changing governance environment (with new principles on sustainability and organisational culture and a governance checklist for smaller not-for-profits and real-life case studies).
Also see the Victorian Government’s guide to 'Directors' duties with respect to climate risk – which recommends following the ‘6 Es Framework – Educate, Enquire, Examine, Evaluate, Express and Execute’.
The duty to act in good faith in the best interests of the organisation and for a proper purpose
The phrase 'in good faith' is generally accepted to mean that a director, committee member or office holder must act honestly, fairly and loyally when making decisions for an organisation.
As a director, committee member or office holder, your decisions must be based on what is best for the organisation, having regard to the organisation’s purpose, membership, finances and operations. You should not make decisions based on your own personal interests, preferences or alliances or those of other people or organisations you may be involved in.
Case study – acting in good faith in the best interests of the organisation and for a proper purpose during a disaster
Jessie is a committee member for an incorporated association that runs an opportunity shop in the central shopping strip of the town.
A major storm causes significant damage to the shops along the street, including the shop rented by the association, rendering the space unusable. Volunteers manage to salvage most of the shop’s stock and Jessie, in a panic, immediately begins negotiations to lease a new space in a new location, even though it is significantly more expensive than the current space. Jessie convinces the committee to approve the new lease, arguing that it will allow the association to expand its operations and generate more revenue. When pressed on the financial viability of the decision, or the feasibility of alternatives, Jessie fabricates answers since she thinks that the most important outcome is that the committee approve the new lease.
While Jessie may have had good intentions to protect the association’s operations, Jessie has not acted in good faith in the best interests of the association. This is because Jessie was not honest with the other members of the committee, and advanced her own agenda without allowing them to engage with possible alternatives.
Even in times of crisis, committee members must act in good faith which includes a fundamental duty of honesty to the organisation.
The duty to act with reasonable care, skill and diligence (including the duty to prevent insolvent trading)
Directors, committee members and office holders must take their roles seriously and use their skills and experience for the organisation’s benefit.
They should give sufficient time, thought and energy to their tasks and decisions, and monitor the organisation’s affairs, activities, strategic direction and financial position of the organisation which includes understanding the organisation’s current financial position and preventing the organisation from continuing to incur debts if it can’t meet its debts.
The standard of conduct required is informed by the context – during disasters, extra attention is needed.
Increasingly, organisations must navigate environmental and social risks, like climate change and modern slavery. The legal duty to act with reasonable care and diligence requires considering physical and transition risks posed by a changing climate. Directors, committee members and office holders should speak up about what they know and seek expert guidance when necessary.
Case study – acting with reasonable care, skill and diligence in a disaster
Zan is a committee member for a not-for-profit organisation that provides emergency accommodation services to people experiencing homelessness. Zan attends a committee meeting to discuss the acquisition of property so the organisation can expand and provide emergency accommodation in another area.
Brad, another committee member, introduces the proposal and outlines the sale prices for the properties which he thinks will be a bargain. Knowing the organisation's financial position, Zan thinks it would be a stretch, but it could be done. However, because Zan lives in the suburb next to this area, she knows the area has become increasingly at risk of more severe flooding linked to climate change. For this reason, many people are moving out of the area. Zan is worried about whether the organisation would be able to secure insurance and, even if it could, the amount it would cost. Zan is also worried about the long term sustainability of investing in and upgrading property in such a high-risk area and what would happen if there was another flood.
Zan should speak up about what she knows and, if she can’t point to any specific evidence, seek expert guidance on the environmental risks in the area.
The duty not to use information or position improperly
A current or former director, committee member or office holder must avoid using their position or information obtained through the position to gain an advantage for themself or others or to harm the organisation.
This duty of loyalty applies both during and after the director, committee member or office holder’s tenure on the board or committee. It is also closely linked to the duty to avoid conflicts of interest (see below).
Case study – using information or position improperly in a disaster
Pat, a director of a community organisation, is running a disaster relief fund in response to a severe drought.
Through his position as director, Pat and the organisation’s directors receive a briefing from a government department on the most at-risk areas for drought. Pat realises that this modelling means that certain properties owned by his family are likely to decrease in value in the future. He lets the family know, and they sell the properties at prevailing market rates.
This is a breach of Pat’s duties, as he used information that he came to know in the context of his position as a director for his own personal advantage (even though it did not necessarily cause harm to the community organisation).
The duty to disclose and manage conflicts of interest
A conflict of interest arises when a director or committee member’s personal benefit could influence their decision. This is also known as a 'material personal interest'.
This legal duty requires a process for handling conflict-of-interest situations. Organisations can face a wide range of conflict-of-interest scenarios. The duty applies to both actual and potential conflicts, and in the case of charities registered with the ACNC, actual or perceived conflicts.
Case study – conflict of interest in a disaster
Lionel is the president of the local branch of a community organisation in Queensland. After a particularly bad tropical storm, the organisation resolves to distribute bottled water to affected communities, which is permitted by the charitable objects contained in the organisation’s constitution.
Lionel also runs the IGA in the local town, which is the obvious choice of supplier of the bottled water. This presents a conflict of interest because Lionel’s duties as a director of the community organisation conflict with his interests as a director and shareholder of his private business.
Even though Lionel has no intention to act dishonestly or charge the community organisation uncommercial prices for the bottled water, he knows that he must disclose this conflict of interest and recuse himself from participating in the decision-making around the plan to purchase and distribute bottled water.
Now that the conflict of interest has been appropriately managed, the other board directors are permitted to independently consider whether to purchase the bottled water from Lionel’s store. They aren’t prohibited from doing so simply because Lionel is a director, provided that the conflict has been properly managed.
When a conflict of interest arises, it must be disclosed to the board, committee or members. Once a conflict has been disclosed at the earliest possible opportunity, the next step is to manage the conflict by not participating in the decision-making about that issue.
A director or committee member who has a personal interest in a matter that is being considered at a board or committee meeting should not be present in discussion, votes or decision-making on the matter. Minutes should record the conflict, absence, and non-participation. The director or committee member should also avoid discussing or influencing the decision outside meetings.
Although the context will determine what is required of directors, committee members and office holders to meet their legal duties, they must always make decisions and otherwise act in accordance with these duties, including in a disaster.
Other sources of duties and personal liability
Directors, committee members, or office holders can face personal liability under various Australian laws, including competition and consumer law, work health and safety, employment law, environmental law, and tax law. If an organisation breaches these laws, directors or committee members may be held personally responsible, in addition to the organisation.
These laws remain applicable during disasters and emergencies, so they must be considered when making decisions that affect the organisation's interests.
It's important to remember that individual action against directors or committee members is rare and typically reserved for the most serious breaches.
Who must comply with the legal duties?
Any person who is on the governing body of a not-for-profit organisation must comply with these legal duties, including an organisation registered as a charity with the ACNC.
If a person has been elected to (or invited to) a position on the board or committee of an organisation, they are part of the governing body of the organisation and must comply with these duties. This includes all office holders (such as chairperson, president, treasurer, secretary), as well as ordinary committee members. Also, in some cases the senior officers of an organisation, like a manager, coordinator, chief executive officer or executive director can be considered part of the 'governing body'.
People who may also be considered part of the governing body of an organisation, even though they are not officially committee members include:
- people who are in a position of control or influence within the organisation
- people who participate in making key decisions that affect the operations of the organisation
- people whose instructions or wishes the other committee members are accustomed to act on (excluding people who are asked to provide professional advice), and
- people who have the capacity to significantly affect the organisation’s financial standing
These people are sometimes known as 'honorary', 'shadow' or 'de facto' directors or committee members.
When experiencing a disaster, the list of directors, committee members or office holders who are considered part of the governing body may change or expand depending on the circumstances the organisation faces and decisions made by the organisation’s board or committee.
Organisations must be diligent to ensure all directors, committee members or office holders who may be in a ‘de facto’ governance position during a disaster are aware of their legal duties and educated on how to fulfil them and comply with the relevant requirements of their position.
In a disaster, new people may step up to take on more responsibility and control of an organisation. Even if these people are not officially directors, committee members or office holders, they should still consider whether they are bound by these duties.
Note
While we refer to duties applying to directors, committee members and office holders in this resource – remember that anyone who effectively directs or controls the organisation must comply with these legal duties. If you are unclear about whether these legal duties apply to your role, seek legal advice.
What is the extent of a director, committee member or office holder's obligation to prepare for a disaster?
The extent of a director, committee member, or office holder's obligation to prepare for a disaster depends on several factors, including:
- the organisation's nature and operations – organisations operating in disaster-prone regions or involved in activities that could be significantly impacted by disasters have a higher obligation to prepare
- the organisation’s governing documents – the organisation's constitution, rules, or other governing documents may outline specific responsibilities related to disaster preparedness
- industry standards and regulations – certain industries may have specific standards or regulations regarding disaster preparedness that apply to organisations operating in those sectors
- risk assessment – the organisation should conduct a risk assessment to identify potential hazards and vulnerabilities and help determine the appropriate level of preparedness
Directors and committee members should review the organisation's business continuity plan as a minimum action.
In the AICD’s Not-for-Profit Governance Principles, under principle 4 titled 'Risk Management', not-for-profit organisations’ boards should be vigilant in preparing for unexpected events and be ready to act decisively when needed. Boards should be intentional about making time to scenario plan for potential disasters.
Generally, directors, committee members, and office holders have a duty to:
- develop disaster plans, including a business continuity plan (pre-disaster preparation), an emergency action plan (disaster response), and a recovery plan (post-disaster recovery)
- communicate the disaster plans – ensure that all employees and stakeholders are aware of the disaster plans and their roles in them
- train staff on how to implement the disaster plans and respond to emergencies
- test the disaster plans – this could include drills and exercises to test the effectiveness of the plans and identify areas for improvement
- maintain adequate insurance
- comply with any relevant laws, regulations, or industry standards related to disaster preparedness
The specific steps required to prepare for a disaster will vary depending on the organisation's circumstances and the types of hazards it faces. It is essential for directors, committee members, and office holders to stay informed about current best practices and to seek professional advice if needed.
What if compliance with legal duties is not possible due to a disaster or emergency?
During disasters and emergencies directors, committee members and office holders must make time sensitive decisions with reasonable care, skill, and diligence.
This involves using their skills, devoting sufficient time and effort to tasks and decisions, and monitoring the organisation’s affairs, activities, strategic direction and financial position.
It is important to remember that whether a director, committee member or office holder has complied with this duty will depend on what is reasonable in the circumstances.
During disasters, directors, committee members, and office holders may need to exercise higher levels of care than usual.
However, disasters can be exceptionally difficult to deal with and a director, committee member or office holder may not have specific disaster-related skills. As a result, they are not expected to make perfect decisions in response to a disaster.
If a director, committee member or office holder can’t fulfil their duty due to a disaster, they should:
- notify the rest of the board or committee as soon as possible
- allow the board or committee to make any necessary arrangements to replace them on a temporary basis, and
- consider resigning if they can’t fulfill their duties permanently
If a disaster means that a director cannot devote time or energy to an organisation as they are required to deal with issues in their personal life, they should consider whether they can still dedicate enough resources to the organisation to discharge their duties.
If the organisation’s constitution allows it, the board or committee may be able to appoint an ‘alternate’ director in the place of the director that can’t fulfil their duties. This can be done according to the requirements of the organisation’s constitution.
If the organisation is not registered with the ACNC, ASIC must be notified within 28 days. If the organisation is registered with the ACNC, the organisation must notify the ACNC of the change.
What happens if a director, committee member or office holder breaches a duty?
The law recognises that decision-making can be a challenging, so there are a limited range of defences available to directors, committee members or office holders who are accused of a breach of duty.
The 'business judgement' rule defence can be used to defend a director, committee member or office holder’s decision if they can show that they:
- acted in good faith and for a proper purpose
- had no material interest in the decision
- informed themself about the subject matter to an appropriate extent, and
- reasonably believed the decision was in the organisation’s best interests
This defence only applies to the duty to use reasonable care, diligence and skill, but is not a defence to a claim of insolvent trading.
Case study – exercising ‘business judgement’ in a disaster
Kelly-Anne, a committee member of the New England Koala Project, faced a difficult decision following a local bushfire. She cancelled in-person fundraising events and attempted to transition to online fundraisers. Unfortunately, the online events weren’t successful, leading to a shortage of operating capital forcing a scaling back of operations.
A disgruntled member accuses Kelly-Anne of negligence, claiming she should have maintained the physical fundraisers.
Kelly-Anne can potentially rely on the ‘business judgement’ rule to defend her actions because:
- she acted in good faith, and for the benefit of the Koala Project
- she did not benefit personally from her actions (no conflict of interest)
- she carefully considered the risks and benefits of both in-person and online fundraisers, and
- she reasonably believed that transitioning to online fundraisers was the best course of action given the circumstances
While the ultimate outcome was unfavourable, Kelly-Anne's decision-making process aligns with the principles of the business judgement rule.
Other defences may be available to directors, committee members or office holders in times of disaster. The specific facts of each case will determine if a defence applies. If you face accusations or legal action for a breach of legal duty, seek legal advice.
For more information about the defences available to a breach of duty, see our Duties guide.
Penalties for breaching director’s duties can include fines, disqualification or, in severe cases, criminal penalties.
One of the key benefits of incorporation is limited liability, protecting members from using personal resources to pay organisational debts. However, directors or committee members who breach legal duties may be personally liable. This is rare and typically involves deliberate wrongdoing or gross negligence. If you suspect a breach or face consequences, seek legal advice.
Possible protection for directors or committee members from personal liability
Some organisations may have an indemnity clause in their rules or constitution, protecting directors or committee members from personal liability.
However, an indemnity clause has limitations:
- the indemnity may be restricted by law
- the indemnity extends only to the organisation’s funds, which can be low
- deliberate recklessness, gross negligence, dishonesty or fraudulent are usually not covered
- indemnity often only occurs after court action, requiring directors and committee members to cover initial costs
A deed of indemnity (an arrangement between a company and a company director) can provide additional protection for directors.
Directors and Officers (D&O) insurance offers further protection. Some policies reimburse organisations that have indemnified directors.
D&O policies generally cover nominated directors against liability for 'wrongful acts' committed during their time in office. These acts may include breaches of duty, neglect, misstatement, incompetence or other acts as set out in the policy.
D&O policies often exclude cover for dishonest or fraudulent actions, insolvent trading, or a wilful breaches of duty.
If your organisation has or is considering D&O insurance, carefully review the policy to understand its coverage, exclusions, and time limits.
Directors should check if their D&O insurance covers actions taken during disasters. Claims arising from extraordinary circumstances outside the ordinary course of business may not be covered.
For more information, see our guide to insurance and risk management for community organisations.
Disclaimer: These resources provide general information about legal issues that may arise for not-for-profit organisations in managing disasters. This information is a guide only and is not legal advice. If you or your organisation has a specific legal issue, you should seek legal advice before deciding what to do. See full disclaimer and copyright notice.
The content on this webpage was last updated in December 2024.
