Escher Constitutions – Why Clarity is Critical for Charity and Not-For-Profit Constitutions

The graphic artist M.C. Escher was famous for his lithographs, in which one object morphs into another, pathways turn back upon themselves and visual illusions create impossible objects. A poorly drafted not-for-profit constitution (sometimes referred to as “rules” or “articles of association”) is the written equivalent of an Escher drawing – interdependent clauses that contradict each other, terms that are not defined (or are defined improperly) and cross-references that lead nowhere. While even a small change to a model constitution can give rise to these issues, the more bespoke the document, the greater the risk of lack of clarity. Difficulty in interpreting and applying these “Escher Constitutions” leads to uncertainty in governance and can exacerbate not-for-profit disputes.

A constitution sets out matters such as an organisation’s purpose, how decisions are made, the composition and role of the board (which may also be known as the committee, council or trustees) and the role of any members. It is also the framework around which an organisation’s delegations and policies are built. Clarity matters. All not-for-profit boards should ensure they are satisfied that their constitution is clear, up to date and fit for purpose. We have highlighted some key considerations below.

Is your constitution clear?

As noted above, this is a fundamental consideration, both when the document is first prepared and when making amendments. A good constitution is clear, concise and written in plain English. Lack of clarity can result in unnecessary confusion and conflict over proper interpretation. It can even expose decisions made by the not-for-profit to legal challenge on the basis that the governing body was not properly constituted or the relevant decision was improperly made. Ensuring your constitution is clear includes making sure it is internally consistent, that key terms are properly defined and that cross referencing is correct.

Clarity isn’t everything – its possible to be clearly wrong! But it is an essential consideration.

Is your constitution past its prime?

We regularly see constitutions that were first prepared 20 or more years ago. Not-for-profit regulation and governance have changed a great deal over that time. So has plain English writing. Is it still appropriate to keep patching up your old document or do you need a fresh start? Your board agenda should provide for a regular ‘check-in’ (at least every three years) to consider whether the constitution is still up to date, taking into account any legislative change and changes within your organisation.

Does your constitution support good governance?

A good constitution will help rather than hinder, good governance. Consider matters such as term lengths for responsible persons, whether meetings via technology are supported (essential under recent COVID restrictions), how and when responsible persons or members can be removed and the ability for members to require the Board to convene a general meeting.

ACNC Governance Standards

All registered charities must comply with the ACNC Governance Standards. If your not-for-profit is a registered charity, does its constitution appropriately reference the standards? For example, can you remove responsible persons if they are disqualified by the ACNC or ASIC?

Considerations for companies

The Corporations Act 2001 (Cth) was recently amended to provide for virtual meetings and the electronic signing of documents. It is appropriate to update constitutions to take these new provisions into account.

Companies should also consider the impact of constitutional provisions relating to payments to board members. If a not-for-profit’s constitution does not expressly prohibit payments to board members, there may be impacts on: the applicability of related party transactions provisions in the Corporations Act; fundraising licences in New South Wales; eligibility for certain grants; the use of the term “Ltd” in the company name and other matters.

Finally, those companies that are registered charities should be aware that many sections of the Corporations Act do not apply to charitable companies. This gives charity companies flexibility, but also creates some ‘gaps’ that are not filled by the Corporations Act and may mean some matters need to be explicitly addressed in the constitution. Careful drafting is required to navigate the application of the Corporations Act to charitable companies.

Incorporated associations

Incorporated associations are subject to the legislation that applies in the state in which they were incorporated. State and territory legislation typically mandates that specified matters be covered in association constitutions. If your constitution has not been changed and the applicable legislation has, you need to review your constitution for compliance. South Australia, Queensland and the Australian Capital Territory have all significantly amended their associations legislation in the past five years (and Western Australia is currently under review). Looking further back, Victoria and New South Wales made significant changes in 2012 and 2016 respectively.

DGR winding up clauses

Not-for-profits that are endorsed as deductible gift recipients must have an appropriate winding up clause in their constitution. Failure to do so will affect your eligibility to receive tax deductible gifts.

Provision for DGR funds?

Does your organisation operate a tax-deductible fund? DGR funds include school building funds, scholarship funds, library funds, public funds (including funds listed on the Register of Environmental Organisations and Register of Cultural Organisations). It is important that you know where the rules for these funds are and ensure that the board has appropriate oversight of the fund operations. The board should consider embedding these rules in the constitution.

Sector specific considerations

Depending on the sector in which your not-for-profit operates there may be sector specific matters that must be provided for in the constitution. For example, a Victorian school that operates an Early Learning Centre (ELC) must expressly provide for the delivery of ELC services in its constitution.

Allowing time for the review process

Amending or replacing a constitution takes time. Many organisations will form a subcommittee for this purpose, but ultimately your entire board will need to review and approve the document. Once it is approved, you may need to allow time for a consultation period with members (if appropriate). Then you’ll need to formally adopt the constitution – unless your organisation is established as a trust or unincorporated association, this usually requires a special resolution, including convening a general meeting with a notice period of at least 21 days.

How we can help

Our For Purpose team regularly assists not-for-profits across the sector to ensure their constitution is compliant with relevant legislation, expressed in plain English and tailored to their unique governance requirements. We also support member consultation processes to help you communicate the proposed changes to members and get them on board.

Contact us

Please contact us for more detailed and tailored help.

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