Liability and Legal Structures
The distinction between types of legal structure for organisations in the voluntary and community sector is significant particularly because it affects the personal responsibility of individual Management Committee members if something goes wrong.
Click here for further guidance to help you to understand your legal structure.
Organisations in the sector are split between incorporated and unincorporated organisations (click here for explanation of these legal terms). The sections below explain the impact these structures have on the personal liability of management committee members.
Management Committees of unincorporated organisations (e.g. associations) are more at risk of personal liability than incorporated organisations.
Unincorporated organisations do not have an independent legal identity/personality. Therefore, if the Management Committee enters into any contractual or other arrangements they must do so by contracting in their capacity as Management Committee members. As a result, they are "jointly and severally responsible" for the affairs of the organisation. It is therefore possible for them to be held personally responsible to settle any debts or other liabilities that may occur (e.g. fees for professional services, rent under a lease, or damages for breach of contract).
Provided that Management Committee members act honestly and reasonably they will usually be entitled to have any debts or other liabilities met out of the assets of the organisation.
However, if the organisation does not have sufficient assets, then the Management Committee members of this type of organisation may have to make good any shortfall.
For this reason, many unincorporated organisations seek to become incorporated (e.g. company limited by guarantee) as their activities and legal relationships expand.
Incorporated organisations (e.g. company limited by guarantee) are set up as a separate legal entity (i.e. recognised in law as an ‘artificial person'). An incorporated organisation can therefore enter into contracts and other legal relationships under the name of the organisation, rather than under the name of individual committee members.
Remember...keep it in perspective!
Groups and organisations have a range of legal relationships, for example, with suppliers, funders and staff. All legal relationships carry a risk of liability.
Very few Management Committee members who act honestly and in good faith suffer any financial loss as a result of their Management Committee involvement.
This provides Management Committee members with some protection in law known as ‘limited liability'. If things go wrong, it is the organisation that is generally named in a legal action rather than individual Management Committee members. Even in the event of the organisation closing down with outstanding debts, they may only have to pay a nominal amount, usually £1.
However, Management Committee members of an incorporated organisation can still be personally liable for losses where they have failed to act responsibly, for example in relation to negligence, fraud, wrongful trading, or breach of statutory duties.
Management Committee members must be aware that, no matter what legal structure the organisation has, they have a duty to ensure that the organisation complies with the law, that it is being properly run, and its funds are spent for the purposes intended.
Example Scenario - Damage claim
A volunteer for a conservation charity is seriously injured whilst operating hedge trimmers. They claim that the organisation has breached its duty of care because they failed to provide appropriate safety gear and training in the use of the equipment was inadequate. They sue the organisation for damages.
Your organisation did have policies and procedures in place to comply with health and safety guidelines, however these were not followed by the staff member concerned on this occasion and the organisation is found to be responsible. Whilst your insurance covers volunteers, your insurers point out that a clause which means that the organisation is liable for certain costs in the case.
So who pays?
1. If an unincorporated organisation...
If your organisation is "unincorporated", claims from third parties fall to both the organisation and to Management Committee members. Although the Management Committee members may be named in the legal action, they may be able to meet the claim with the organisation's assets, including the proceeds of any relevant insurance policy. As committee members, they had acted reasonably and responsibly in ensuring that the correct procedures were in place and staff were trained in applying them.
However, if the organisation has insufficient funds to meet the claim, then the Management Committee members would be jointly and severally responsible for the shortfall, meaning that any individual Management Committee member could be sued for the whole amount due. A Management Committee member who is out of pocket may then seek to spread the loss amongst his or her co-members.
2. If an incorporated organisation...
If your organisation is "incorporated", claims from third parties usually fall to the organisation, rather than Management Committee members. If the organisation does not have sufficient funds to meet the claim, the member of the public will generally lose out. Essentially, if an organisation's liabilities exceed its assets, or it is unable to pay its debts, it will be insolvent (which usually requires closure). The Management Committee should take urgent action if they think that the company is likely to become or already is insolvent to avoid risk of personal liability for the company's debts.
In all cases, it is important to seek professional advice as each situation and its contributing factors are different!