Unfortunately, even the most well-managed charities and associations may face the inevitability of bringing things to an end. Managers who find themselves in this situation should be aware of the new legal obligations they face.
Previously in Queensland, the courts have held that members of management committees ("Members") of incorporated associations ("Associations") cannot be liable for insolvent trading.1
From 30 June 2021 (the expected commencement date), this will change as Members will be liable for damages and penalties for insolvent trading.
There are now also new options available to Members and Associations such as voluntary administration (not previously available) which can be used to avoid liability for insolvent trading.
In our earlier article, we highlighted some of the changes passed by the Queensland Parliament in relation to the legislation governing associations in 'The Associations Incorporation and Other Legislation Amendment Act 2019 ("Act")'. This article takes a closer look at the implications of these amendments if an Association is facing financial difficulties.
From 30 June 2021, Members will face similar duties to those of company directors which includes hefty penalties and damages for insolvent trading.
The use of the phrase "insolvent trading" is a bit confusing as:
- The offence is actually for incurring a liability when the Association is already insolvent;
- or the Association becomes insolvent as a result of incurring that liability;
- This means the Association doesn't have to be "trading" for a Member to become liable under these provisions.
The Queensland government has stated that the reason for these provisions is to bring the duties of Members into line with directors of companies.
While these additional duties originally come from the Corporations Act, the provisions are not exactly the same.
Most significantly, the defences available under the safe harbour provisions in the Corporations Act which allow directors to seek appropriate professional advice and consider the options for the company to avoid being liable for insolvent trading are not available for Members.
The defences that are available for Members are:
- The debt was incurred without their express or implied authority or consent; or
- At the time the debt was incurred, because of illness or for some other good reason, they did not take part in the management of the Association; or
- At the time of the debt was incurred, they had reasonable grounds to expect, and did expect, that the Association was solvent even if it incurred that debt and any other debts that it incurred at that time.
In considering the "reasonable grounds" it will be reasonable (unless the contrary is shown) for a Member to rely on another Member, an officer, employee or professional adviser to the Association who prepared information and advice.
However, the Member must show that they relied upon this information in good faith and made an independent assessment of the information and advice.
These defences are similar, but not the same, as defences available to directors. It remains to be seen if the courts will decide if these defences are effectively the same as those set out in the Corporations Act.
It should be noted that these defences have been hard to establish in the court and the onus of proof will be on the Member to establish one of these defences.
Voluntary Administration and Liquidation
Other amendments under the Bill provide new options to Members if their Association is in financial difficulty.
Firstly, an Association can now enter into voluntary administration or voluntary liquidation using the procedure for companies set out in the Corporations Act. This is in contrast to the previous method of having to apply to the Supreme Court for the appointment of a liquidator.
These procedures commenced on 22 June 2020 and are available to Associations now.
The ability to use the voluntary administration procedure allows Members to carry out the appropriate restructuring of the Association which may enable the Association to continue rather than just liquidating the Association.
It is more important than ever that Members remain on top of the Association's state of financial affairs given they will be personally responsible for insolvent trading claims from 30 June 2021.
Given the risks of insolvent trading, Members should make sure they obtain early independent advice on the financial position of their Association and their legal options.
The ability to put the Association into voluntary administration, if done early enough, will allow the Members to avoid having to face an insolvent trading claim. This will be particularly important given Members will not be able to use the safe harbour provisions that are available to directors of companies.
Given voluntary administration is available now for Associations and insolvent trading will not apply until June 2021, Members should use the time they have to get the affairs of their Associations in order before this personal liability for insolvent trading commences.
1Robson & Ors v Commissioner of Taxation  QSC 76 which held that the insolvency recovery provisions are not incorporated into the Act and therefore do not apply
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.