Board Members Walking a Tightrope to Protect Sports

The world of sport is clearly going to change in the coming months.

News that state, national, and International sporting associations have the begging bowl out and are seeking finances from anyone who will listen to ensure their short term survival is a grave concern.

FIFA announced yesterday that they are handing out monies to all member nations as part its crisis fund management. The Football Federation of Australia received $780,000. Hopefully FIFA is requesting that each Member has to account for the expenditure and give a detailed report as to where this money is being spent; it should not go on wages. If not the Members in each country should be asking that question.

It has been interesting to follow the reaction of the Executive Boards that oversee many of these organisations.

As we have seen Rugby Australia’s Board has made a catalogue of errors in the past couple of years that have resulted in the sport reporting at the end of last month a provisional operating deficit of AUD$9.4 million in 2019. Projected losses if there is no Rugby played in 2020 due to the Covid -19 Pandemic are AUD$120million.

Most sporting fans know that one of the reasons that Rugby Australia finds itself in this position is because of the case the waged against former Wallabies player Israel Folau, which resulted in an undisclosed out of court settlement.

This was a similar situation to the Board of the Western Force Super Rugby team that decided to take on Rugby Australia when they were kicked out of Super Rugby. As this was a decision made by the board, that resulted in financial losses to Rugby WA who owned the Super Rugby licence, they opted not to plead bankruptcy, as the Board members would have been liable for the costs, as the losses were due to a decision made by them. Rugby Australia’s board faces the same problem.

However their issue is going to become a little blurred as due to the Covid-19 Pandemic the Government has eased the laws on insolvency.

This promises to be a minefield for many sports within each state, nationally and Internationally as in most Western countries it is illegal to trade while insolvent. A company is regarded as insolvent if it cannot meet its debts as and when they fall due. If a company is insolvent and a director allows the company to incur a new debt, then the director can be personally liable for the new debts incurred.

There are many sports that are sadly staring down the barrel of bankruptcy, and clearly were before the Pandemic hit, should they declare themselves bankrupt as stated, some responsibility could fall back on the Directors.

In most cases when a company goes into liquidation, the liquidator can make a claim against the directors personally for any debts incurred by the company at a time that it was insolvent.

There are a few organisations who have inserted a clause into their statutes indemnifying Board Members in respect of claims made against them as a result of their position or the execution of their duties. Legal opinion claims that this clause in a statute would have little or no legal standing.

A far better option is a Board taking out directors and officers’ liability insurance to provide protection for board members sued individually for acts of negligence by the board. It would be wise for any existing Board members to check whether their sport has this in place.

There is also the option of Professional indemnity insurance which covers individuals against claims for breach of “professional duty” arising out of any negligent act, error or omission committed or alleged to have been committed by a Board Member. Another option is Fidelity insurance which provides cover for your organisation against the misappropriation of funds by employees or committee members.

One of the problems facing many sporting Board Members at this current time is that resignation now will not protect them. A director cannot prevent a claim by resigning before a liquidator is appointed. A claim extends to past directors for any insolvent trading debts incurred while they were a director.

When we come out of the other side of the Covid-19 Pandemic, this could be a good thing as we may see a higher calibre of Board Member in some sports. People who are there for the sport rather than their ego, resume or the benefits.

Now some of our sporting bodies will undoubtedly claim that the reason they find themselves in the position they are now in is solely due to the Cover 19 Pandemic. That may well be the case in most instants.

That is why the Australian Government introduced on March 25th the temporary safe harbour regime. This applies for six months until September 25, 2020, and provides an exemption from the risk of personal liability for insolvent trading, provided certain conditions are met.

As you would expect there are strict stipulations attached to the safe harbour regime and it is incumbent on the Board to prove that they meet those conditions. The Government has made it very clear however that “the evidential burden will fall upon directors to show that debts were incurred ‘in the course of business’ and within the relevant timeframe.” So any attempts to move debts prior to March 25th into this period would be unwise.

The aim of the Temporary Safe Harbour option is to enable a company to recover quickly and be in a position to pay its debts in the next six months. There must also only be a need to incur debts in the next six months which are clearly within the scope of the company’s ordinary course of business. 

That may make some feel that the Directors who have failed in their duties to ensure the financial sustainability of the sport are being let off the hook. That is not the case, the Government in Australia has stated clearly that the regime does not exempt directors from their director’s duties.

These were highlighted as follows:

1. Exercise their powers and discharge their duties with the degree of skill and diligence that a reasonable person would exercise if they were a director of a corporation in the company’s circumstances, and held the same role and responsibilities as the director (section 180 and fiduciary duty);
2. Exercise their powers and discharge their duties in good faith in the best interests of the company and for a proper purpose (section 181 and fiduciary duty);
3. Not improperly use their position to gain an advantage for themselves or someone else or cause detriment to the corporation (section 182 and fiduciary duty);
4. Not improperly use information obtained because they are (or have been) a director to gain an advantage for themselves or someone else or cause detriment to the corporation (section 183 and fiduciary duty); and
5. Prevent conflicts of interest arising between their private interest and the company’s interest, and act only in the best interests of the company (fiduciary duty).

The case law is very clear that where a company is insolvent, or even approaching insolvency, the obligation to act in the best interests of the company remains, that the law requires directors to consider the best interests of the creditors. The High Court expressly held that, in the context of an insolvent company, “any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them.”

If the stakeholders and members of the various sports truly care about the future of their sport then now is the time to be paying attention to the decisions being made. To be asking questions and demanding as is your right, answers as to the direction the Board is leading the organisation. As an organisation communication and utter transparency is vital.

The future of many sports as they exist currently hang in the balance, the calibre of the Board members past and present will undoubtedly determine where your sport sits in six months time.