Are Members Liable for an Incorporated Association’s Debts?

Limited liability is the reason most groups incorporate. For an association it is stated in one sentence, with three qualifications that matter.

Why members are protected

Section 13 of the Associations Incorporation Act 2023 makes the association a legal entity separate from its members. Its debts are its own, to be paid from its own property. The member’s exposure is limited to the subscription he or she has agreed to pay under the rules, which is a debt to the association, not to its creditors. If the association becomes insolvent, the liquidator appointed under section 142 realises the association’s assets; the liquidator has no claim on the members.

Liability the rules may impose

Section 61(2) provides that “the rules of an incorporated association may provide for liability for its members”. A mutual society, a cooperative-style buying group or a guarantee-based professional body may choose to make members contribute a fixed amount on winding up, or to meet calls. If they do, the Act protects creditors who lent on that basis: section 21(3) requires public notice of any alteration of the rules that affects members’ liability to contribute to debts or winding-up costs, and section 21(4) makes the alteration ineffective until the notice has been given and the change registered. Most associations’ rules impose no liability, and members of those associations owe creditors nothing.

Where a member is liable anyway

• As a shadow committee member. Section 61(3): the limitation “does not affect any liability a person may have as a shadow committee member”. A member who in fact directs the committee carries the committee member’s liabilities. See shadow committee members.
• As a committee member. A member who sits on the committee is liable as a committee member for breaches of duty and for the Act’s offences, subject to the volunteer shield in section 38(4).
• As a signatory. Under section 19(2), a member who signs a document creating an obligation without correctly stating the association’s name is personally liable if the association defaults.
• As a guarantor. Nothing in the Act prevents a bank or landlord from requiring a member to guarantee the association’s debt personally; the guarantee is a separate contract.
• For pre-incorporation contracts. A member who signed a contract for the proposed association is liable on the implied warranty in section 93 if the association never ratifies it.
• For fraud. Section 164 makes it an offence for a member to fraudulently take or apply the association’s property, and section 166 for any person knowingly party to fraudulent trading.

Members acting collectively

Section 48 provides that where an action is approved by special resolution or written resolution of the members, “no member of an incorporated association is liable as a committee member or as a shadow committee member in respect of that action”. Voting for a borrowing or a major transaction at a properly called meeting does not expose the member; the decision is the association’s.

The contrast with an unincorporated association

An unincorporated club has no legal existence apart from its members. Contracts made on its behalf bind the committee members who authorised them, and in some circumstances every member who consented; property is held by trustees; and a member injured at a club event may find the only people to sue are fellow members. That is the position of every association until its certificate of incorporation issues, and it is the reason section 15 vests property in the new association and section 92 lets it ratify earlier contracts. The definition of “committee” for an unincorporated association in section 3 recognises that such bodies are run by whoever in fact manages them.

What creditors can reach

A creditor of an incorporated association can sue the association, obtain judgment against it, execute against its property, apply to wind it up under the Companies Act provisions imported by section 142, and, if the association is removed from the register, apply to restore it under section 116 in order to pursue its assets. Under section 114 the liability of any person for acts before removal continues. What the creditor cannot do is pursue the members personally for the shortfall, unless one of the exceptions above applies.