Are you a member of a social club? You could be liable for its debt
As a member of an unincorporated social club, you might assume that your responsibility only lies in paying your subscription fee. However, as the club is not a separate legal entity, its members – you – are accountable for any claims or debts accumulated, and you do not have the protection of limited liability as you would if the club was incorporated (i.e. a limited company). What’s worse is that this debt doesn’t necessarily need to be split between all members. Members are jointly and severally liable which means that a creditor can pursue one or all of the members as they see fit. Provided that it is paid, creditors really aren’t too particular about who it comes from. Sound troubling? Let me explain…
What is an unincorporated social club?
Your club may have unknowingly adopted unincorporated association status (that is, it isn’t incorporated and doesn’t exist as its own legal entity) if it has not taken steps towards establishing itself as a limited company. Why would it? You aren’t acquiring and selling goods to the public, after all, so surely, it’s irrelevant to you? You are not a ‘company’ in the traditional sense. However, you are likely to be renting space and paying for services to allow your members to congregate in comfort. Remember, where contracts are signed, debt can be incurred.
What are the advantages?
It isn’t all doom and gloom, though; unincorporated association has its advantages. There is little administration involved as there is no need to file annual returns, the rules of the club are flexible and can be changed at any time by the members (the constitution isn’t fixed indefinitely), and if your club is sports-centred, you may be eligible to become a Community Amateur Sports Club (CASC) and benefit from the associated tax relief and Gift Aid policies.
What are the disadvantages?
The disadvantages, however, often greatly outweigh these positives. Joint and several liability is a legal term for the responsibility the members have for the club’s debt. Companies and individuals cannot sue the club for money owed because, as previously explained, the club is not its own legal entity. Instead, they would pursue you as individuals. Moreover, if it is likely that most members are unable to pay, the money can be acquired through just a few or even just one member if their finances are sufficient.
Although members being held jointly and severally liable for their club debt is rare due to third parties being reluctant to sue individuals for the debt of many, such instances have occurred. Kay Kettle was the treasurer of a social club in Berkshire, which in 2002 borrowed £15,000 from Young’s Brewery for a refurbishment project. The club closed in 2005 with £3,000 left outstanding on the loan. As Kay was a homeowner and a signatory to the loan agreement, a charging order was put on her house so that the brewery could reclaim the £3,000 once she sold her home. “It’s made me extremely wary,” said Kay, “I’ll never join a club again.”
Limited by guarantee
For the sake of a minimal guarantee (often just £1) and some annual paperwork, this often-unforeseen economic distress can be avoided entirely. Registering as a company limited by guarantee may be the best route forward for social and sports clubs. Unlike a company limited by shares, the club remains a not-for-profit organisation in the hands of its members – not a hierarchical business model dominated by the largest shareholders. The limited-by-guarantee route involves each member guaranteeing an insubstantial amount of money in the instance of the club becoming insolvent (unable to pay its debts). The constitution becomes its Articles of Association and the club can enter into contracts and own land. It shifts into its own legal entity independent of its members, i.e. your liability is drastically diminished to your minimal guarantee. You can even still apply to become a CASC if your club is sports-focused.
How can an IVA help if it’s too late to incorporate?
You may already be a club member who has been called upon because of the joint and several liability you incurred for a debt you hadn’t expected, and your finances may be in disarray as a result. You’re probably wondering how you’re going to meet this extra demand when your income is already stretched to capacity, which is where Personal Debt Solutions can step in to offer help. We may be able to provide you with an Individual Voluntary Arrangement (IVA) whereby you and your creditors reach an affordable monthly pay-back agreement over the course of five years. We take the pressure off by taking one portion of your earnings and splitting it between your creditors, thus easing the strain of monthly outgoings and liabilities and stop your creditors from chasing you. Each individual case varies, so do get in touch with our consultants for free, tailored advice.
The message is clear: unincorporated associations are simple and hassle-free until they run into problems – usually when it’s too late for members to absolve themselves of the responsibility. To avoid unforeseen debt falling into your lap, change the status of your club and incorporate it sooner rather than later.