You have been a member of your local tennis club for ten years. The club owns four tennis courts and a clubhouse built in the 1960’s. One Saturday afternoon, the roof of the clubhouse suddenly collapses, trapping six players and injuring others who are standing outside. Emergency services work tirelessly to free the trapped, managing to rescue them from the rubble. Whilst no lives are lost, four sustain serious injuries requiring medical attention.
The club never envisaged such an accident. Whilst insurance was in place, it is not sufficient to meet the huge costs of the rescue operation and of the injured.
The club is an unincorporated association and the injured demand that the club pay their bills. The club, whilst having the ability to cover everyday expenses (electricity, maintenance costs, etc) and with the shortfall on insurance, does not have sufficient funds to pay these bills. You are told that as a committee member, you are personally liable for the shortfall.
Groups using unincorporated structures often fail to appreciate that their association or organisation is not a separate legal entity. Few people consider the scope of their potential liability when accepting a position on a committee. It can be a costly lesson which can be avoided by considering other available structures.
The major difficulty underlying the use of unincorporated associations is that there is no separate legal entity. Any legal obligations must be undertaken by an individual on behalf of the group, leaving the signatory and/or committee members in a vulnerable position.
The consequences of being unincorporated are:
property and gifts. An unincorporated association is not a legal entity and is incapable of holding property and accepting gifts;
inability to contract and hold property. The issue of enforceability arises where unincorporated associations purport to enter into contracts. In some cases, the courts have found that committee members of the unincorporated body were intended to be personally bound by the contract whilst in other cases the courts have found that the intention was to enter into a binding legal relationship with the association itself, rendering the contract unenforceable; and
liability for torts. Committee members have been exposed to personal liability for harm caused to others by persons acting on behalf of the organisation.
There is often an inclination to join committees in order to make a contribution to the community. However, this should not be taken lightly. The following structures represent a ‘better picture’ for those who want to become involved in such groups.
An incorporated association is an association formed for a lawful purpose. To incorporate as an association, an organisation must have:
a set of rules or a constitution;
a minimum number of members (five in Victoria, but different in other states); and
a lawful common purpose.
For a small sum and with relative ease, associations may incorporate under the relevant associations incorporation legislation in any of the Australian States.
In the majority of situations a company limited by guarantee will be the most suitable structure for such organisations.
In such a company limited by guarantee, members agree to be liable for a fixed sum if the company goes into liquidation, giving them the benefit of no compulsory contributions whilst the company is a going concern. The fixed sum can be a small nominal amount such as $10. The restriction on trading activities for an unincorporated association doesn’t apply for companies limited by guarantee.
A constitution should be in place prohibiting distribution to members and paying fees to directors.
Benefits of forming such a company are:
committee members’ liability ceases on retirement from the organisation- past members are only liable for debts incurred while members and only if existing members are unable to satisfy liabilities and only to the extent of the guarantee ($10 or some nominal amount);
if the operations of the organisation grow, an ability to convert to a company limited by shares;
simple and efficient registration with ASIC;
an ability to obtain director protection liability cover quickly and at modest cost; and
the ability to enter into long term financing arrangements with financial institutions due to the company having perpetual succession.
For further information, please contact Damien Wurzel on +61 3 9608 2288 or d.wurzel@cornwalls.com.au
or Justin Evans on +61 3 9608 2217 or j.evans@cornwalls.com.au
