Director's liabilities for Associations & Co-operatives

Associations are not immune from the Corporations Law, and likewise board members of such Associations and Co-operatives are equally as liable regardless of their motive for such standing. “Giving something back to the community” has brought a wave of responsibilities and liabilities often given little thought before accepting such positions.

Members on the board of charitable organisations and incorporated associations such as hospitals and sporting clubs can be liable for insolvent trading actions under Section 588G of the Corporations Law if they incur debts including ordinary daily expenses at a time when that company is insolvent or that there are reasonable grounds for suspecting that the organisation is insolvent. Likewise honorary members are likely to be treated as Company Directors under the Associations Incorporation Act.

This positive duty of a Director does not allow a Director to use lack of involvement in an organisation’s affairs as a basis for asserting that a particular transaction is entered into without his or her implied authority and thereby escape liability.

Like Directors of companies, a board member of an association is subject to the general duties of care and diligence, good faith, use of position and use of information. Accordingly, should any breach of these duties or trading whilst insolvent occur, a Director can be liable for civil penalties or repay an amount equal to the debts incurred.

The Corporations Law was substantially amended to allow incorporated associations and co-operatives the option of a Voluntary Administration regime. Prior to this they were subject to the facilities of liquidation meaning a more rigid, costly and inflexible mechanism of dealing with the problem.

Accordingly, in order to avoid potential insolvent trading actions, a Voluntary Administrator should be contacted at such a point where the organisation is nearing insolvency. However an insolvency practitioner does much more than merely winding up an organization. Their role incorporates providing solutions to complicated business problems and recommending changes to improve current business practices.

Volunteering has exposed honorary members to a whole new level of risk previously unthinkable. One cannot merely attend a few meetings or turn a blind eye to the dealings of the Association. The duties are extensive, however the potential liability is even larger.

Macks Advisory has administered liquidations and voluntary administrations of large and small incorporated associations and co-operatives. Our firm practices exclusively in the areas of insolvency and business reconstruction and members with queries are invited to contract Peter Macks on 08 8231 3323 or pmacks@macksadvisory.com.au.