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1st November 2012

Become a committee member? Go bankrupt!

Do you know that if you are a committee member of a club you may be personally liable for its debts? This is true if the club is an unincorporated association.

So what is an unincorporated association and who is liable for its actions?

An unincorporated association is formed where individuals come together and enter into a contractual agreement for a common purpose. This is an extremely common choice for many voluntary organisations. The structure of such an incorporation normally consists of office bearers i.e. chairperson, secretary and treasurer, and also members.

It is common for office bearers and members not to understand the extent of their liability. By way of an explanation, unincorporated associations, unlike companies formed under the Companies Act, do not have their own legal existence. The unincorporated association cannot enter into a contract, own property, sue or be sued etc and therefore, cannot itself be liable under contracts entered into for it by office bearers or members. Any contract entered into must also be entered into by individual office bearers and this can lead to office bearers having personal liability for the contracts or any actions of the association.

Many unincorporated associations are relatively large in scale, have employees, enter into contracts, rent premises etc and although this may not in itself appear to be an issue as long as things are going well, the issues arise when things are not going so well and then the question is who is liable for any costs associated with the obligations entered into? It will certainly not be the unincorporated body since it is not a legal entity.

The full extent of the liability of office bearers and members is, however, far from certain. In one case for example, the treasurer of a club signed a contract to have works carried out to the club's premises. His signature was witnessed by a member of the club. The contract with the builder provided for payment of a fixed sum, plus any other sums that may become payable under the contract. The treasurer of the club paid the fixed sum on completion of the works, however, the builder then issued a statutory demand on the member of the club who had witnessed the treasurer's signature for agreed variations. The statutory Demand was for approximately £147,000. The member argued that it was the treasurer who had signed the contract and therefore he was not liable. The court found that the member was liable, along with the other members of the club, for the £147,000 because the rules of the club gave the office bearers the authority to act as agents on behalf of the clubs members and as a result the liability fell to the members of the club. The Office Bearers and members may have the right to be covered by the assets of the organisation but if the assets are insufficient then they have a problem.

Reform of the law on the liability of unincorporated associations is currently being discussed but may be some time away, if ever and in the meantime, it is extremely important that office bearers and members are made aware of their liabilities and that the liability does not just extend to the office bearers or members that formed the unincorporated association but also to the current office bearers and members. If the members of the association are concerned about the risks then what are the alternatives? A company limited by guarantee or if the entity is a charity, to a Scottish Charitable Incorporated Body. These structures are considered separate legal entitles and both have the advantage of limited liability. In other words the assets of the office bearers or members would not be on the line.


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