Article from the Book Board Basics – Company Limited by Guarantee.
By Warren Tapp.
If you are on the Board of a not-for-profit entity (NFP), it will be either an Incorporated Association, regulated at state level, or a company limited by guarantee, regulated at the Federal level (ASIC).
What the ‘guarantee’ means is that the members of the company have their liability for the debts of the company limited to a minimal amount. It will be written in your Constitution and is usually $5 or $10 or even less. If your NFP goes bust owing money, then the members are protected up to that amount they will have to pay towards all the debts.
On the other hand, the Directors of the NFP will be liable for all the debts of the company limited by guarantee or incorporated association and may not have the same protection. They may have directors and officer’s insurance to cover part of this, but if the Board has allowed the NFP to trade while insolvent then the insurance will probably not apply. Being a volunteer director also does not provide any reason to not be liable for the debts either.
This is why it is important for NFP directors to know what they are doing, particularly in relation to the finances of the NFP, so they do not end up personally liable for all the debts.
Ignorance is no defence at law.!
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