Should Unincorporated Associations Consider Incorporation?

unincorporated associations

There are currently close to 200,000 unincorporated non-profit associations in NSW. They are not regulated by any particular legislation and they are not regarded as legal entities.

What follows is an overview of unincorporated associations in NSW, including the possible advantages formal incorporation can bring for unregistered, informal and unincorporated organisations.

Unincorporated Associations do not have Legal Status

Unincorporated associations are defined in law as a group or collection of people, who agree to act together with a common object, aim or purpose, which is not based on profit making or monetary gain to members of the organisation.

Most often these “collections of people” are united by a defined shared intent, such as the promotion of a particular culture, religion, social, sporting, educational, scientific, literary, artistic or other similar community activity.

The unincorporated organisation may raise funds for its own activities, events or functions, it may raise funds for charitable causes, it may engage in commercial or business-type activities, it may hold property or other considerable assets. There is, however, a general presumption that the members themselves should not benefit financially or receive pecuniary gain from the organisation’s activities.

Unincorporated associations, apart from their general not-for-profit nature, share some common characteristics:

At any point of time the unincorporated association:

  1. will comprise of a definite membership, which are free to join or leave the organisation;
  2. the members are generally bound by a binding set of rules or constitution; and
  3. the association’s constitution will provide for appointment or election of a committee or committees to manage the association’s affairs, as well as for meetings of the general membership.

In many instances, members of unincorporated organisations do not substantially consider nor do they fully understand the potential pitfalls and the possible consequences of non-incorporation, especially with respect to their committee members. These pitfalls could be avoided through formal incorporation, either as an Incorporated Association or as Company limited by guarantee.

Difficulties with Unincorporated Associations

As unincorporated associations are not regarded as legal entities, members should consider the particular range of difficulties associated with their informal status, including:

  • The unincorporated association cannot hold assets in its own name or enter into contracts or employ people in its own name.
  • It may have difficulties opening bank accounts or obtaining insurance.
  • Funding bodies such as the Government and most Foundations usually require an organisation to be incorporated, before accepting application for grants.
  • If real property and other assets are “owned” by the unincorporated association, or rather, held on behalf of its members, there may be confusion as to who owns those assets.
  • Gifts and donations made to the non-legal entity also present a problem. Gifts may fail, unless the gift is specified as being for present or future members beneficially.
  • If the organisation faces a legal claim based on contractual relations or tortious liability it is possible the committee members may be sued and face liability personally.
  • Unexpected issues with respect to Dissolution of the unincorporated association may arise, especially if considerable assets or debts are involved. Consideration should be made of the possible situation where few members remain to decide on the provisions of dissolution of the association.

The above mentioned are only some of the difficulties an unincorporated association may be confronted with.

Unincorporated Associations and Trustees

Usually asset-holding problem is overcome by the appointment of individual Trustees or Agents. The association’s property is held by Trustees for the benefit of the unincorporated association.

The Trustees’ duties and obligations are governed by the Trustees Act 1925 (NSW). It is the trustees, who may enter into contracts such as leases or employment agreements on behalf of the unincorporated association.

Unincorporated Associations and Legal Proceedings

What happens if the unincorporated association finds itself subject to legal proceedings? Case law generally points to the association’s committee members, who have been entrusted to manage the association’s affairs by general membership, as being liable. Although in most cases the committee may seek indemnity out of the organisation’s funds, the obvious question arises: what if there are not sufficient funds held to meet the claim on behalf of the organisation?

In Contract

Generally any litigation stemming from a purported contractual relationship with the unincorporated body presents the problem of identification of the party to be sued.

A case to illustrate is Peckham v Moore [1975] 1 NSW 353. Peckham had contracted with the unincorporated Canterbury Rugby League Football Club to play for them for 3 years. During the course of his contracted employment Peckham was injured and subsequently he claimed compensation from the club, as his employer.

Peckham’s first action against the club failed for the abovementioned reason that the club was not recognised by the court as a legal entity. His second action was brought against individual members of the club’s committee and was successful. However, on appeal the issue of personal liability was further examined due to the fact that each year the composition of the football club’s committee had changed. Thus, unless new contracts were made with the individuals of each new committee during the term of employment, it was the original committee members who would be liable. Further, Hutley JA found that the club’s committee could seek indemnity out of the association’s funds.

It should be noted on the point of right of indemnity; the law remains unclear. Peckham v Moore is distinguished by other decisions and in some cases members of the current committee have been found to be liable.

In Tort

What is the position regarding tortious claims against an unincorporated association?

NSW determinations have shown that, although unincorporated association members are not automatically imposed with a duty of care per se, the committee may be liable, for example, in negligence, as occupiers of premises.

Certainly, if the association is involved with or itself conducts activities or events involving members of the public or where use of association premises is used by members or leased to third parties, it is most important that the unincorporated association’s committee members ensure adequate public liability insurance is in place.

Legal Effect of Incorporation

Incorporation of an Association limits the liability of its members. It provides the association with a separate legal entity and it reduces numerous legal risks faced by unincorporated bodies.

On incorporation, all debts of the unincorporated association are transferred to the incorporated association. Similarly, assets, previously held by Trustees, are vested in the Association on incorporation.

All members who could have sued or could have been sued on behalf of the organisation, are legally replaced by the Association on incorporation.

It should be stressed that an unincorporated group may not incorporate if it is planned that the association will be providing profit or monetary gain to its members, pursuant to Section 40 of the Association Incorporation Act 2009 (NSW).

Benefits of Incorporation

Incorporation of unincorporated associations should be considered for a number of practical reasons. It promotes good governance, transparency and discourages bad practice by those who manage and are in control of the organisation.

Incorporation also opens up opportunities for those organisations, which may be looking to apply for funding and grants from various Governmental and Foundational institutions.

Generally, the requirements for incorporation include:

  • that the unincorporated association is comprised of at least 5 individuals;
  • that it’s members are prepared to furnish Financial Reports and to hold Annual General meetings;
  • that the members believe the Association will be able to fulfil the financial obligations and procedural steps for formation;
  • that the members believe the Association can abide by the statutory requirements of running the organisation; and
  • if the members are prepared to undertake compulsory public liability insurance.

If the members agree to these requirements, incorporation could well be the better option for their association.

For many unincorporated community groups, the most suitable method of incorporation may be either:

  • As an association under the Associations Incorporations Act 2009 (NSW); or
  • As a Company limited by guarantee under the Corporations Act 2001 (Cth).

It should be noted that there are other options, which may or may not suit the needs of the association.

In addition, an unincorporated association currently pursuing, or intending to conduct not-for-profit charitable work, may register as a charity with the Australian Charities and Not-for-profit Commission (ACNC). The benefits for such organisations of registration with ACNC are considerable, including various tax concessions.

Our Services

Corporate Lawyers Sydney at Pavuk Legal can provide you with legal advice regarding Unincorporated Associations, including the procedure of incorporation, the difficulties faced when dealing with unincorporated associations and transferring assets from assets from an unincorporated association to an incorporated association.

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