Bankruptcy

This is an advertisment by a bunch of lawyers in Scotland but likely to be true. Their answer is to set up a cut out, which takes the fall to evade personal responsibility. Using and abusing the rules is what lawyers are about. Lots of lawyers are in Parliament to make sure that it is easy for them to cheat us. Notice that this mob has no sympathy for the people who have been cheated.

Club President May Be Bankrupted
President of club exposed to bankruptcy for club's failure to pay
Are you a management committee member, trustee or director of an unincorporated association? If so, a recent case should give pause for thought.

A rugby club contracted with a builder to carry out some construction work. The contract was signed by the club treasurer whose signature was witnessed by the president. When the club failed to pay an outstanding 147,000, the builder sued the president personally for the amount. The builder did this by serving a "statutory demand" on the president. If the demand was not paid in full within 21 days, the builder could start bankruptcy proceedings against the club president.

The president went to court, arguing that the statutory demand should be set aside because he was not personally liable for the club's debts. The court disagreed. The question of who is liable under a contract entered into by an unincorporated association depends on the rules of the association. The initial assumption would be that it was the committee entrusted with the affairs of the club that would be liable. Here, the rugby club rules expressly stated that management of the club was in the hands of the management committee. On that basis, as the treasurer had signed the contract, the court found that the treasurer must have been acting on the authority of the management committee. This made the entire committee liable under the contract - including the president. It was neither here nor there that he had only signed the contract as a witness to the treasurer's signature.

The one point of relief for the club president was that the court recognised that the builder's first port of call should be on the club's assets. The court said that the builder must allow some extra time to enable the club's assets to be realized before it can pursue bankruptcy proceedings against the president.

While this president may therefore escape personal liability (assuming the club has sufficient assets to meet the claim), not all unincorporated associations will have sufficient sums in their coffers to meet outstanding debts. This means committee members could be at risk of personal liability for their association's debts which could in turn lead to personal bankruptcy.

There is a way, however, to avoid such a drastic consequence. This is to form an incorporated body (such as a company or, in the case of charities, a Scottish Charitable Incorporated Organisation). An incorporated body is a legal "person" in its own right, distinct from its members and management. It can enter into contracts, own property, and employ people. If any liabilities are incurred, it is the incorporated body which is responsible, not the individual members and management committee members. We would recommend incorporation for all but the smallest unincorporated associations, particularly if they employ anyone, enter into contracts on a regular basis, or hold property. Although there are some costs associated with incorporation, they are not prohibitive, and members and management will have the certainty that they are protected from personal liability for the association's debts and liabilities.

Brodies is experienced in advising clubs, associations, charities, and social enterprises in identifying and setting up the most appropriate vehicle for their activities.

Key Contacts

Jackie McGuire

Brenda Scott