A new era in governance of incorporated associations

Accusations of poor governance at not-for-profit organisations, notably Surf Lifesaving Australia and the RSL NSW branch, have been making recent media headlines.¹

The Associations Incorporation Act 2015 (WA) (Act), which came into force on 1 July 2016, has brought in a new era of corporate governance.  The duties owed by members of the management committee of incorporated associations, who are typically volunteers, have now been brought into line with those owed by directors under the Corporations Act 2001 (Cth) (Corporations Act).  Further, the State Administrative Tribunal (SAT) now has the power to determine disputes between members and incorporated associations.

Who is the management committee?

The management committee comprises the people who manage the affairs of the incorporated association.

The affairs of community or sporting clubs that own no property will not be particularly complex.  Most of their business will relate to the operation of bank accounts, collection of membership fees and holding fundraising events.

On the other hand, the affairs of a club that owns or leases a clubhouse, and operates licensed premises are likely to be much more complex.

The courts in Western Australia have previously held that members of a management committee probably have the same common law and equitable duties as company directors, but there remained uncertainty.²

The Act now expressly provides that committee members owe similar duties as company directors.  Significant penalties are prescribed of up to $10,000 for contravention of those duties.

What are those duties?

Duty to disclose a material personal interest

A member of the management committee must disclose any material personal interest in a matter being considered by the management committee.  That interest must also be disclosed at the next general meeting of the association.³

Financial and non-financial interests must be disclosed.  For example, a committee member would need to disclose an interest where the management committee is considering the employment of a relative, or the award of a contract to a relative.

Once a disclosure is made, then the committee member must not be present while that matter is being considered, or vote on the matter.⁴

Duty of care and diligence

Committee members must exercise care, skill and diligence in the performance of their duties of a reasonable person.⁵

In particular, each committee member has a duty to understand the association’s financial position.  This duty cannot be passed on to other committee members.  Ignorance will not be a defence.

A committee member may be able to rely on the “business judgment rule”.  A decision must, however, be made in good faith and for a proper purpose, with no material personal interest in the decision, and the committee member has informed himself or herself about the subject matter and rationally believed that the judgment was in the best interests of the incorporated association.⁶   This rule cannot be relied upon if the committee member did not ensure he or she understood the incorporated association’s finances.

Duty of good faith and proper purpose

A committee member must exercise his or her powers or duties in good faith and for a proper purpose.⁷  This means the committee member must use their powers, and make decisions, which are for the benefit of the incorporated association only, and not to secure a private advantage.

Use of position and information

A committee member must not improperly use his or her position to gain an advantage for that person, or any other person, or cause detriment to the association.⁸

A committee member who obtains information as a result of his or her position, must not improperly use that information to gain advantage for the committee member or another person, or cause detriment to the incorporated association.⁹

Information may include decisions or discussions about a tender, employee information, client lists, proposals for the sale or disposition of property, or financial information.

Duties with respect to incurring debts while insolvent

The Act also provides that a member of a management committee commits an offence if the incorporated association incurs a debt, at the time the incorporated association was insolvent, or became insolvent as a result of that debt and that there were reasonable grounds to suspect insolvency.¹⁰  The penalty for contravention is $5,000.¹¹

Remedies

So what does an aggrieved member do, if they believe that there has been a breach of a duty by a committee member?

Previously, the only avenue was to bring an action in the Supreme Court.  Even then, the Court only had limited jurisdiction to determine disputes between members of an incorporated association.

This has now changed.  Under the Act, all constitutions must have a procedure for dealing with any dispute under the rules.  Under the Model Rules¹², the procedure is to refer the dispute to mediation.

If the dispute cannot be resolved, then the association or the member may apply to the SAT for relief.

Alternatively, a complaint may be made to the Commissioner, who may investigate the complaint, and take action as required, which may include prosecution for breach of the Act.

Since the Act has come into force, there have been at least two reported decisions of SAT, both involving the revocation or termination of the applicant’s membership.  As the incorporated associations in both matters did not have a grievance procedure in their constitutions, the aggrieved members applied directly to SAT.

Alternatively, a member can complain to the Commissioner, who may investigate the complaint, and take action as required, which may include prosecution for breach of the Act.

Lavan comment

Incorporated associations are an important part of our lives and the economy.  They range from simple sporting groups to larger organisations providing a wide range of services, upon which the livelihoods of members and other stakeholders rely.

The Act has now provided that the committee members who manage the affairs of these organisations have duties and obligations that generally correspond with those of directors of corporations under the Corporations Act.  Further, there is now a grievance procedure available to members to ensure committee members comply with the rules and their duties.   

For committee members, who are generally volunteers, it is important more than ever to ensure you understand your rights and obligations – and ensure that you have appropriate directors and officers insurance in place.

What Lavan can do

If you are an aggrieved member Lavan can:

• advise you of your rights and different courses of action that you may take.
• advise and represent you in any application to the Commissioner, or to SAT.

If you are an association or the member of a management committee Lavan can:

• ensure that the constitution of your incorporated association is up to date, with appropriate protections built in for members and committee members.
• advise you with respect to your rights and obligations under the Act, and to provide some training and guidance to your committee.
• represent you should you or the committee be the subject of a complaint.

With respect to any grievance, early intervention is usually effective, and also cost effective in quelling any dispute.  It also increased the likelihood of preserving the relationships between members who contribute to an important part of our society.