All registered charities must now review their governance procedures every three years. We have heard it said that this is simply another burden for charities. We disagree and here’s why.

 

Why this requirement has been introduced

The policy goal seems to be to help charities succeed.

Some charities are large, well-established entities with robust governance procedures and highly-experienced people governing them. There is a reasonable likelihood that they review their governance procedures routinely.

However, a large proportion of charities are small and many are governed by people with mixed governance understanding and capability. We talk to many people governing charities who have not looked at their governance documents for years and some who are operating outside of what their rules allow. This places the people governing the charity at risk of doing something that is not legally permitted. It can also lead to charities not being well run and potentially failing.

We see this new obligation as the codification of good practice. Every charity (every legal entity) should regularly pause and reflect on how they operate. It will be time well invested.

 

What are ‘governance procedures’?

What does the term ‘governance procedures’ refer to? The Charities Act does not provide any firm answers, but we suggest governance procedures include, but are not limited to:

• Key documents
  • The key governing document – a charitable trust deed for charitable trusts, a constitution/rules for charitable incorporated societies, or the constitution for charitable companies.
  • Secondary documents supporting the rules, such as bylaws, regulations, charters or policies.
• Important practices
  • How the charity deals with conflicts of interest.
  • How does the charity deal with disputes and complaints.
  • How the charity recruits and onboards new trustees or officers.
  • The effectiveness of meetings and relationships.
  • Financial practices.

 

How to satisfy the legal requirements

Below is a simple approach which can be tailored to your charity and circumstances. We suggest you focus on what you feel needs most work, most urgently. You do not have to do all of this at once and that is not the intention. You have a three-year window so we suggest scheduling the reviews across your calendar of meetings.

 

Step 1 – Look at your rules

• When were your rules drafted or last updated?
• Do you follow the rules? If not, why not? Do the rules need to be updated to reflect how you operate in practice?
• Do the rules reflect recent legal changes such as the Charities Amendment Act 2023, the Trusts Act 2019 and the Incorporated Societies Act 2022? Remember, the legislation will usually trump the rules, so being aware of the legal changes is important for keeping those in governance safe.
• Do you understand what every part of your rules mean? Ask for legal advice if something in the rules is unclear – you need to know what you are required to do and why.
• Document your review briefly, setting out what you considered and what action you propose to take.

 

Step 2 – Update your rules (if NECESSARY)

• Consider updating your rules if they do not reflect current practice and/or do not take account of recent law updates.
• You may need legal advice to do this properly. Don’t forget to update Companies Office and Charities Services.
• Document that you have amended your rules or why you haven’t if they are fit for purpose.

 

Step 3 – Review your supporting documents

• Read over the documents. Do they correspond with your rules? Do they make sense? Is anything out of date?
• If you don’t have a Board Charter, consider creating one. These make it easier to onboard new governors and make it clear how relationships are to work. There are excellent templates available free online that you can tailor to your circumstances.
• If you do not have a Health and Safety Policy or a Privacy Policy, we recommend having these drafted to ensure you and any employees, contractors and volunteers understand their legal obligations.
• If your charity involves vulnerable people and/or children, we also urge you to have a Child Protection / Vulnerable Persons Policy and Police Vetting Policy.
• If you amend existing policies or draft new ones, ensure that these are well-communicated to all relevant people.

 

Step 4 – Review your practices

• Does the charity have robust processes in place to manage conflicts of interest? If not, we recommend creating and following a policy and introducing an Interests Register.
• How do you induct new trustees/officers onto the Board? What documents do you provide to support their understanding of what’s involved and key decisions from the past? A Board Induction Pack is ideal.
• Do you review your meetings? This can help put a focus on constructive relationships and efficiency.
• Are your financial processes robust? Are you confident that all payments are made according to your delegations? Is more than one trustee/officer required to approve payments?
• Do your contractors and employees have proper contracts in place? Is there are clear understanding of who owns intellectual property?
• Once you have considered the above, identify what could use some improvement and get to work. Then document what you reviewed, and what action you took as a result of the review.

 

Our key takeaways

Charities that invest in reviewing their governance practices will benefit by ensuring documents and practices are up-to-date, helping to keep people and the charity safe and effective.

Avoid a last minute scramble by scheduling the process throughout the three-year timeframe.

 

More information

We help charities to thrive. That’s why we provide a wide range of free resources to support them. Visit our Charities Information Hub for advice and guides.

We welcome questions too and offer free, no obligation 20 minute conversations – just get in touch.

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Please note that this article is not a substitute for legal advice and you should contact your lawyer about your specific situation. Please feel free to contact us by completing the enquiry form or call us on 03 348 8480.

We often get asked what it means to be a “reasonable” director under section 137 of the Companies Act 1993 (the “Act”). That section imposes a duty of care on all directors, requiring them to exercise “the care, diligence, and skill that a reasonable director would in the same circumstances”.

Section 137 of the Act sets a clear expectation for directors to act with care, diligence, and skill. By following the standard of a “reasonable director” and carefully considering the context of each decision, directors can help protect their companies, creditors, and themselves from potential liability.

Duty of Care under Section 137

The duty of care holds directors to an objective standard. This means that the courts will assess their conduct against that of a competent and diligent director, regardless of their personal experience or knowledge. This is a contrast to section 131 which has a subjective standard (based on what that director believed). A director must make decisions using the same level of care and attention that a reasonably competent director would in the same context. This standard ensures that all directors—whether newly appointed or experienced—are held accountable to the same expectations of responsibility.

However, this duty isn’t applied uniformly across all cases. The courts will also consider several factors specific to the director’s role and the company’s situation. These factors influence the level of care that is deemed reasonable, making the standard context-dependent. The factors include:

1. Nature of the Company: A large, publicly listed company will have different governance expectations compared to a small, family-owned business.
2. Nature of the Decision: Critical financial or strategic decisions will require more diligence than routine administrative matters. For example, entering a high-risk financial arrangement demands more scrutiny than minor operational decisions.
3. Director’s Position: Executive directors, involved in daily management, will be held to a higher standard compared to non-executive directors who may have more of an oversight role. Executive directors are expected to have a more detailed understanding of the company’s operations and finances.

The courts apply the “reasonable director” test by evaluating whether the director acted in a manner that a reasonably competent director would have in the same position and under similar circumstances. For example, an executive director should be more aware of day-to-day business risks and financial health, especially when making decisions about continuing to trade in the face of potential insolvency.

Breaches of the Reasonable Director Standard

Directors who fail to meet the standard set out in section 137 risk being found in breach of their duties. Common scenarios where directors fall short of this standard include:

1. Trading While Insolvent: One of the most frequent breaches involves continuing to trade when the company is unable to meet its debts as they fall due. Directors are expected to halt trading when insolvency is evident or imminent. Failing to do so can result in significant financial harm to creditors.
   • Case Example: In the Mainzeal case, directors were found liable for allowing the company to continue trading while insolvent, even though they relied on assurances of financial support from external sources. The court held that the directors failed to protect the interests of creditors, and their reliance on vague promises of support was unreasonable​.[1]
2. Improper Transactions: Directors can be held responsible for engaging in or allowing improper transactions that harm the company or its stakeholders. This includes entering contracts or financial arrangements without proper due diligence, exposing the company to undue risk.
3. Failure to Manage Financial Risks: Directors must monitor the company’s financial health and take action to address risks such as insolvency or declining revenues. Ignoring warnings can result in breaches of the duty of care.

Directors who breach section 137 may face personal liability for any losses incurred by the company or its creditors. Depending on the severity of the breach, directors could also be disqualified from serving on boards in the future. In extreme cases, where fraud or reckless conduct is involved, criminal charges may be brought against the director.

Guidance for Directors

To ensure compliance with section 137 and avoid personal liability, directors should consider the following guidelines:

1. Understand Your Role: Be clear on your specific duties within the company. Are you responsible for daily operations (executive director), or do you have an oversight role (non-executive director)?
2. Exercise Due Diligence: Make sure you have all the relevant information before making decisions. This includes understanding the company’s financial health and assessing the risks associated with major decisions.
3. Consider the Context: The actions required of a director may vary depending on the size of the company and the nature of the decisions being made. Larger companies with complex operations may require greater scrutiny and involvement from directors.
4. Seek Expert Advice: If you are unsure about a decision—especially one involving high financial risk—seek professional advice from lawyers, accountants, or other specialists. A reasonable director knows when to consult experts.
5. Document Decisions: Keeping records of your decision-making process, including the information you relied on, can be helpful if your actions are later questioned in court.

We have also written a guide on Mainzeal and its implications here.

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This article is for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please contact a qualified legal professional. Reproduction is permitted with prior approval and credit to the source.

[1] Richard Ciliang Yan v Mainzeal Property and Construction Limited (in liq) [2023] 1 NZLR 296; [2023] NZSC 113.