24/03/2020

The effects of COVID-19 are likely to have many ramifications on organisations throughout Australia, including how an organisation complies with its governance obligations.  These obligations differ depending on how an organisation is incorporated, under which law it was established, and which regulatory body it reports to. Each organisation's internal governance framework will also differ in its requirements.

The information below is relevant to organisations which are:

  1. incorporated as Companies Limited by Guarantee (CLG); and
  2. registered as charities with the Australian Charities and Not-for-profits Commission (ACNC).

This update is current as at today but as you are aware, the responses to COVID-19 are evolving so there may be further changes to regulatory requirements as time goes on.

What rules apply to my organisation?

All CLG are registered with the Australian Securities and Investment Commission (ASIC), the regulator for companies under the Corporations Act 2001 (Cth) (Corporations Act).  However, if a CLG is also registered as a charity with ACNC then it will primarily be regulated by ACNC rather than ASIC and the relevant legislation and rules governing these organisations are the ACNC Act 2012, the Charities Act 2013 and ACNC's Governance Standards (contained in the ACNC Regulations).  This is important as certain Corporations Act provisions (including those relating to holding general meetings and reporting obligations) do not apply to CLGs who are registered with ACNC. Importantly, the duty to avoid insolvent trading under the Corporations Act does continue to apply to CLG.

Where a CLG is not registered with ACNC, then the relevant regulator is ASIC and the Corporations Act requirements apply.

A CLG will also be governed by the rules of its constitution, including those relating to the holding and conduct of general meetings.

Are CLG required to hold an annual general meeting?

The short answer is, not always, but most likely.

ACNC legislation does not require a CLG to hold an annual general meeting (AGM).  However, the organisation’s own constitution or rules might require an AGM to be held.

Even where a constitution does not require an AGM to be held, a CLG must comply with ACNC's Governance Standards.  Standard 2 requires an organisation to:

  • Take reasonable steps to be accountable to their members; and
  • Allow their members adequate opportunities to raise concerns about how the charity is run.

Many CLG therefore hold annual general meetings to satisfy this ongoing obligation.  Before deciding not to hold a meeting because of the COVID-19 situation, an organisation should check its constitution and, assuming it is permitted to not hold an AGM, consider how else it can meet this requirement to be open and accountable to its members.  This may include actions such as sending regular communications to your members or allowing members to participate in a virtual question and answer session. 

Where a constitution does require an AGM to be held during the expected period of disruption, this is likely to be problematic where meeting numbers are limited or a full lockdown eventuates.  It might be possible for meetings to be postponed or held using technology.  If these options are not expressly available under the constitution, we recommend that an organisation seek legal advice and communicate clearly with members and ACNC early about acceptable alternative approaches. 

Are we even able to hold an in-person meeting?

The response to COVID-19 is rapidly evolving.  The Australian Government has introduced strict measures relating to non-essential gatherings.  As from midnight 25 March 2020, there are even stricter controls in place relating to gatherings which may impact a CLG’s ability to hold an AGM.  Non-essential gatherings (both indoor and outdoor) are highly discouraged, and any indoor premises must provide a minimum of four square metres of space per person.  Practically speaking, it may be difficult for a CLG to hold a meeting under these directions.  CLG should also consider the typical location of AGMs and whether they are typically held or planned to be held in any of the venues which have been closed or restricted by the Government (i.e. indoor recreation facilities, places of public worship, and pubs and registered clubs).  As a practical matter, CLG considering holding a physical meeting should also consider whether enough members would attend to form a quorum in these times given the Government’s directive for all people to stay home other than for essential activities.  As you would know, a CLG’s constitution will specify the minimum number of members required to attend a meeting (i.e. a quorum) to hold a valid meeting.

ASIC, while not the regulator of charities on the issue of AGMs, has cautioned against holding an AGM while there are restrictions on large gatherings, unless the company can provide members as a whole with a reasonable opportunity to participate in the meeting.  This might indicate an approach ACNC could take on this issue.

Can organisations which have already called meetings postpone them? 

The answer depends on what is in a company’s constitution.

Directors may only cancel or postpone a general meeting of members if they are expressly given the power to do so in the company’s constitution.  If a constitution does not give directors the power to postpone a meeting, we recommend that an organisation seek legal advice and engage with your members and ACNC as soon as possible regarding arrangements for your AGM.

Does a meeting have to be face-to-face?

Once again, the answer to this depends on what an organisation’s constitution requires.

Subject to the provisions of a constitution, a CLG may hold a meeting via technology provided ACNC’s standards are upheld (i.e. that is, it remains accountable to its members and they have adequate opportunities to raise their concerns).  To that effect, your organisation should consider which technology is best suited to facilitate the meeting, whether all members have fair access to that technology, whether members can actively engage or not in the meeting via technology, and if members will be able to effectively raise their concerns.

It's unclear whether it is lawful to hold a meeting entirely via technology.  Provided ACNC’s standards are met, we consider holding a wholly virtual meeting is unlikely to cause a material issue with ACNC given the circumstances arising from COVID-19, but we recommend seeking direct guidance from ACNC for each organisation’s particular circumstances.

For non-ACNC regulated entities it's generally agreed that the Corporations Act does not permit wholly virtual meetings.  However, since the COVID-19 crisis ASIC has indicated it will not take any action against companies which hold a virtual AGM.  Once again, this might be indicative of the stance ACNC might adopt, but it is not yet clear.

CLG's may wish to consider a hybrid meeting, whereby members may choose to attend the meeting in person or join via technological means and limit the number of people attending face-to-face to meet current restrictions on gatherings.

What about reporting obligations?

CLG registered with ACNC (except for corporations registered with ORIC) must submit an Annual Information Statement and (depending on size) may need to lodge annual financial reports.  These are due within 6 months of the end of the relevant CLG's reporting period.  If an organisation anticipates COVID-19 will cause a delay in lodging these statements, ACNC has recommended that it be contacted and an extension sought in advance of the deadline for lodgement.

As at 25 March 2020, instructions on how to seek an extension are available here.

Are there any indications about how the regulator might act where an organisation cannot meet its governance obligations due to the impact of COVID-19?

ACNC’s latest guidance on its approach to COVID-19 can be found here.  ACNC has advised charities to contact them if the company believes it might need to delay or postpone its AGM or if it will be unable to submit its Annual Information Statement by the due date. 

ASIC has been more explicit than ACNC in giving an undertaking that it will not take action against companies who are unable to comply with certain AGM requirements under the Corporations Act and ACNC may come to this position.  However, as at 25 March 2020, the ACNC guidance recommends you engage with the regulator if you are concerned that you cannot meet your obligations.   

What about meetings of directors?

CLG should consult its constitution for specific guidance on how often directors’ meetings are required to be held and whether they can be postponed.  Unlike with general meetings, the conduct of directors’ meetings of all organisations, whether a charity or not, are governed by the Corporations Act not the ACNC Act.

Subject to your constitution, the Corporations Act allows directors meetings to be held using technology provided the directors have each provided consent.  The directors may also pass resolutions without the need to hold a meeting by signing a circulating resolution.  However, because this is a 'replaceable rule' of the Corporations Act it can be excluded from constitutions, therefore any CLG wanting to pass a circular resolution should ensure its constitution has not excluded this right. 

What about the duties of directors?

Under ACNC Governance Standard 5, a CLG must take reasonable steps to ensure its directors / responsible persons meet their duties which include:

  • to act with reasonable care and diligence;
  • to act honestly in the best interests of the charity / CLG and for its purposes;
  • not to misuse their position;
  • not to misuse information obtained in performing duties;
  • to disclose any actual or perceived conflict of interest;
  • to ensure that the charity / CLG's financial affairs are managed responsibility; and
  • not to allow a charity / CLG to operate while insolvent.

These duties require directors / responsible persons to keep themselves up-to-date with the latest COVID-19 advice and regulator guidance and continue to observe their duties.  Given the current market and supply volatility, directors should take care to limit their company’s exposure to insolvency.  Insolvency occurs where a company cannot meet its debts when they become due and payable.

In normal circumstances, directors are personally liable if a company is insolvent and continues to incur debts without entering an insolvency procedure.  However, the Government has recognised that the COVID-19 situation may lead to increased risk of insolvency.  Consequently, to ensure companies have confidence to trade through the COVID-19 health crisis with the aim of returning to viability when the crisis has passed, the Government is intending to introduce legislation which means directors will be temporarily relieved of their duty to prevent insolvent trading with respect to any debts incurred in the ordinary course of the company’s business.  Subject to the final terms of the legislation, this will relieve the director of personal liability that would otherwise be associated with insolvent trading. It is intended to apply for six months.  

What other legal obligations might arise due to the COVID-19 situation? 

It is likely that CLG will be affected in multiple ways by the COVID-19 situation.  For example, the situation may affect the company’s ability to meet its contractual obligations (such its obligation to supply services or pay for goods) or even its ability to pay its rent.  Whether or not the law can provide any relief for CLG in these situations will depend on the terms of the relevant contract or lease.  Some contracts may include a clause which reduces liability if a party cannot perform the contract due to circumstances beyond its control (a force majeure clause).  However, whether COVID-19 meets this standard will depend on the terms and context of the contract.  Similarly, the extent to which you may be covered by insurance for any losses incurred as a result of COVID-19 will depend very much on the terms of your insurance policy. 

If you have concerns about your legal obligations which may arise due to the COVID-19 situation, please contact us for further assistance.  Gilbert + Tobin have released a separate publication on options open to employers, available here.

What government relief is available to an organisation?

The Commonwealth Government has announced that it will provide assistance to small and medium sized business entities (including not for profits) who employ people and have an aggregated annual turnover under $50 million.  Eligible businesses will receive a payment amount based on the amount of salary and wages they pay.  These payments will be delivered by the ATO as an automatic credit from 28 April 2020 upon businesses lodging eligible upcoming activity statements. 

The Government has also increased the thresholds at which creditors can issue statutory demands and allowed companies more time to pay their debts. 

Further details of these reforms and other taxable concessions are available from the Treasury.  Gilbert + Tobin have also prepared a more detailed analysis of the proposed tax concessions, available here.

 

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