Voluntary But Liable

governance npos accountability
Wednesday, 25 June, 2014 - 09:35

Increasing expectations of good governance could make you vulnerable to financial loss if you join a NPO and something goes wrong. However, through careful management, the risk can be minimised

Nonprofit organisations (NPOs) feature large in the lives of many South Africans. There are the multitudes on the receiving end, such as those benefiting from our charities. But there are probably just as many givers: donors, which range from large corporations to anyone dropping a few coins in a collection tin, and the many who give of their time and expertise to run these organisations - and who form the backbone of the NPO sector.

Unlike for-profit businesses, NPOs rely heavily on unpaid volunteers. Volunteers can be found at all levels, from selling raffle tickets to sitting on the board. They may be retirees who have time to spare, but they may equally be working people with full, busy lives.

Perhaps you are a volunteer, or are considering becoming involved in a cause that is dear to you. If so, you need to be aware - particularly if you are representing an organisation at board level - of the financial implications for you directly if something goes awry and the organisation and/or its board members is held liable for financial loss. The risk is greater than it used to be, but it can be minimised if it is managed correctly.

Although civil actions involving NPO board members are rare, the corporate landscape in South Africa has changed in line with greater global emphasis on good governance, increasing the likelihood of litigation in the future. Two developments in particular, over the past few years, have contributed to the changed landscape: the release of the so-called ‘King III’ report in 2009, which raised the bar for corporate governance in South Africa, and the promulgation in 2011 of the new Companies Act of 2008, which went much further than its predecessor in addressing governance issues.

Types of NPO:

To a large extent, NPOs operate in the same way that for-profit businesses do. They employ staff; provide services and/or products; contract with suppliers and landlords; deal with money coming in and going out, which must be accounted for; and fall under the ambit of laws (some of which do not differentiate between for-profit and nonprofit entities) that govern many aspects of the operations.

Under the Nonprofit Organisations Act of 1997, registration as an NPO, through the Department of Social Development’s Directorate for Nonprofit Organisations, is a voluntary. An organisation, whether registered with the directorate or not, can take one of three legal forms:

Voluntary Association

This is the most informal of the three structures. Ricardo Wyngaard, a Durbanville-based attorney specialising in the non-profit sector, has written a number of legal advice publications for NPOs. He says a voluntary association, in essence, is an agreement between three or more people to achieve a common object, which cannot be the making of profits.

“It is popular among smaller and informal community-based initiatives, and is regulated by common law, not statute. The association is not required to be registered with a public office in order for it to exist,” he says. According to The Law of Partnership and Voluntary Association in South Africa by Brian Bamford (Juta, 1982), for the association to have a legal personality, it must meet three requirements:

  • Have perpetual succession;
  • Be able to hold property distinct from its members; and
  • Stipulate that no member has any rights, by reason of his membership, to the property of the association.

Nonprofit trust

A trust is often set up if a large donation needs to be administered and the money directed to a specific cause. The NPO must be registered as a trust with the Master of the High Court, and is subject to the Trust Property Control Act of 1988.

Wyngaard says a trust is a very flexible structure that can take on different forms. “A trust is not a separate legal person, but a unique form of legal entity. The assets and liabilities of a trust vest in the trustees, but not in their personal capacity … the lack of legal personality on the part of the trust does not equate to personal liability [on the part of the trustees].”

The trustees constitute the nonprofit trust’s governing board. The Master authorises the appointment of the trustees, Wyngaard says. “There are no restrictions on the qualifications of trustees, except to the extent that … the Master has the discretion to remove trustees from office under certain circumstances, including situations where [they] have been convicted and imprisoned for an offense related to dishonesty,” he says. “Trustees may also be called on to account to the Master on the administration of the trust and the disposal of trust property.”

Nonprofit company

Under the Companies Act of 2008, an NPO may take the form of a nonprofit company, previously known as a Section 21 Company. The company must be registered with the Companies and Intellectual Property Commission and is subject to the provisions of the Companies Act and its regulations.

A nonprofit company can be incorporated for “a public benefit object or an object relating to cultural or social activities, or communal or group interests.” Like any company, a nonprofit company is a juristic person. Its governing board is made up of directors, of which there must be at least three. The directors are not liable for losses to the company, but a director may be held liable for losses as a result of a breach of his or her duty.

- Martin Hesse is a senior sub-editor for Personal Finance. This article first appeared in the NPO Legal Issues, an electronic newsletter produced by the Ricardo Wyngaard Attorneys.

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