COVID-19 and NFPs: What directors need to know and helpful resources

This is a challenging time and we recognise all not-for profits (NFPs) and charities are facing extraordinary challenges across multiple fronts, ranging from solvency and liquidity concerns to employee and volunteer issues to operational matters.

This article includes some guidance and links to key resources to assist directors during this unprecedented time.

Federal government support for eligible charities

State and federal governments have announced special measures to help keep businesses operating and staff employed during the crisis.

The main measure announced in March by the federal government was the Boosting Cash Flow for Employers measure which will grant up to $100,000 to eligible NFPs and small and medium-sized businesses, with a minimum payment of $20,000. This measure will benefit around 690,000 businesses employing around 7.8 million people, and around 30,000 NFPs (including charities).

Charities and small and medium-sized business entities that employ workers and have an aggregated annual turnover under $50 million are eligible.

Please refer to the ATO’s website here for further information about the temporary cash flow support available to NFPs and charities.

As part of its initial package of economic reforms, the federal government announced a six-month temporary relief for directors from personal liability for trading while insolvent. More recently, the ACNC has confirmed this safe harbour relief will also extend to all charities, and not just those that operate as companies limited by guarantee, for the period of 25 March 2020 until 25 September 2020. See here for further detail.

This is an important and significant reform given the need for directors to potentially make urgent decisions regarding incurring debt. The temporary safe harbour is designed to give directors the confidence to continue to trade, pay their bills and retain staff through the COVID-19 crisis without pressure to enter their organisation into administration if there is a chance it might be insolvent.

How can I rely on the temporary relief?

Directors will be able to rely on the temporary relief in relation to a debt incurred by the company if:

• the debt is incurred in the ‘ordinary course of the company’s business’;
• the debt is incurred during the six-month period starting on 25 March 2020, or a longer period as prescribed by the regulations; and
• the debt is incurred before any appointment of an administrator or liquidator of the company during the temporary safe harbour application period.

The economic impacts of COVID-19 and health measures to prevent its spread could see many otherwise profitable and viable businesses temporarily undergoing financial distress. Accordingly, the government’s measures to provide businesses a safety net and reduce the risk of personal liability for company debts, at a time when otherwise many directors may feel compelled to place their company into voluntary administration, are to be applauded.

ACNC Governance Standards

For charities, ACNC Governance Standard 5(2)(g) requires charities to take reasonable steps to ensure that the charity does not operate while insolvent continues to apply to registered charities. The impact of this reform will mean all charities will be temporary relieved from this requirement, provided (i) charities have an achievable aim to return to viability once the crisis has passed; and (ii) inform members and the ACNC if trading insolvent.

Incorporated associations

At this time, committee members of not-for-profits and charities structured as incorporated associations are not captured by the federal government insolvency reform. The AICD is speaking with the ACNC and states and territories to ensure such individuals benefit from the same relief available to NFPs and charities structured as companies limited by guarantee.

Other duties still apply

The AICD has emphasised that, of course, directors must continue to mitigate the risks of falling into insolvency by taking reasonable steps to inform themselves about the company’s current and ongoing financial viability as well as assessing the impact of incurring any further debts.

In particular, directors must think carefully about their duty to act in the best interests of the corporation (including the interests of creditors when approaching insolvency), and whether incurring additional liabilities would be a prudent course of action, and consistent with their obligation of care and diligence.

The ACNC has a dedicated webpage for information relating to the COVID-19 crisis. It can be found here and is being updated regularly.

Charity meetings and AGMs

The ACNC has confirmed that if a charity or NFP delays or postpones its AGM because it cannot conduct it safely due to COVID-19, it will not take action against the charity or NFP unless there is evidence of wider non-compliance.

If a charity or NFP decides to cancel its AGM due to social distancing requirements and an inability to hold it electronically, it should consider alternate ways to demonstrate accountability to members within the context of its current operational circumstances.

If the charity’s governing document does not provide guidance on whether it can hold its AGM using technology, or whether it should delay it until its key people can gather in the one location, directors and responsible persons (as appropriate) should ensure that a proper record of a decision not to proceed with the AGM (together with reasons for the decision) is recorded. Record keeping is vital at this time.

Some charities may need to speak to state regulators for further information regarding delays or postponements to AGMs. Notably the ACNC is speaking to states and territories to ensure they take a similar position if an AGM is postponed due to COVID-19.

Further ACNC information for charities regarding the COVID-19 crisis can be found here.

Annual Statements

Dr Gary Johns, ACNC Commissioner, has approved a recommendation that charities with AIS due dates between 12 March 2020 and 30 August 2020 now have an extension until 31 August 2020.This latest extension also includes bushfire-affected charities that had previously been granted an AIS submission extension to May.

Charitable purpose

A charity is required to pursue its purpose(s), as set out in its governing document. Governance Standard 1 and External Conduct Standard 1 make it clear that charities cannot operate outside of their charitable purpose. However, the AICD understands that some charities may need to repurpose resources and equipment (such as masks and medical equipment) to assist with the fight against COVID-19. This may be out of step with a charity’s purpose and therefore impact its charitable status.

In welcome news, the ACNC Commissioner has confirmed that it will accept a charity applying a broad interpretation to its purpose(s), as long as the charity is acting in good faith to assist in the response to COVID-19.

The Commissioner will consider that an activity to assist with the response to COVID-19 is aligned with a charity’s purposes on the following conditions:

• The charity can reasonably show that its members would approve of the activity; and
• The charity documents how it believes the activity to assist in the response to COVID-19 aligns with its purpose prior to undertaking the activity.

Communication

Some charity operations may be affected by COVID-19. The ACNC has acknowledged that some or all of a charity's activities may need to be modified or even temporarily halted; this is a reasonable course of action for charities to take.

It is important all charities keep the relevant persons informed of what it is doing, and why. Regular communication about a charity's changed activities should be a priority.

Navigating workplace relations through COVID-19

A lot of organisations are grappling with difficult employee issues in this sudden and unexpected health and economic crisis. Many companies and their boards are considering what options are available to them.

Boards want to do the right thing by their employees; however, for many, wages are the single most significant cost and a call on cash at a time when cash flow may be tight.

MinterEllison has published a handy FAQ answering questions many directors might have on their legal rights under the Fair Work Act. These include whether employees may be eligible for personal leave when self-isolating or unable to work from home and whether businesses may have the right to stand their employees down. We encourage all interested directors to read it. The Fair Work Ombudsman has also set up a website providing information for employers that directors may wish to study.

Registrar of Indigenous Corporations response to COVID-19

The Registrar of Indigenous Corporations is aware of the challenges COVID-19 poses for Aboriginal and Torres Strait Islander corporations. It is working on temporary provisions to support operations and governance or indigenous corporations.

See here for latest updates from the Registrar of Indigenous Corporations.

Other useful AICD articles

• Eight tips for effective digital board meetings
• COVID-19: Effective internal and external crisis communications
  

The regulatory environment is evolving quickly. The AICD Advocacy Team will continue to keep you updated with latest insights through this time and welcomes your feedback on areas of concern. Please get in touch with the team at policy@aicd.com.au

For more COVID-19 information and tools please visit our Resource Hub