Assessing Your Club’s Solvency and Reducing Future Risk

As featured in the August September 2021 Edition of Clubs Queensland’s Club Insight magazine.

Is your club struggling to make ends meet? It is often difficult to know whether your club is in serious trouble or just temporarily short on cash. In the event that these signs prove to be more than just a financial hiccup and you have concerns about solvency, it is important to know there are avenues available to either remedy the situation or limit the fallout. Mullins Partner, Matthew Bradford, outlines some practical steps for making an assessment about the solvency of your club and your obligations as an officeholder under the Corporations Act 2001 and the Associations Incorporation Act 1981 (the Acts).

Look at the Big Picture

Often you will need to dig deeper than your club’s financial records and accounts to determine whether your club is in serious trouble. Think – will the club’s anticipated current and future cash flow be sufficient to pay current and future debts? Or alternatively, does the club have the ability to sell assets or borrow monies to cover future debts when they fall due? If you answered no to either of these scenarios, it may be time to seek advice to mitigate further losses and investigate avenues for rebuilding your club’s financial foundation.

Seek Pre-Insolvency Advice

Taking action at the first sign of trouble may be the difference between your club surviving or not. To prevent insolvency or the club continuing to trade while insolvent, we recommend engaging an independent expert to provide tailored advice suited to your unique situation.

A qualified accountant or external pre-insolvency or turnaround expert will be best placed to provide advice regarding restructuring, provide potential solutions to business problems and recommend changes to improve current business practices. 

Know Your Obligations Under the Acts

Whether you are a director or committee member, it is important to be aware of your obligations under the Acts and whether you can be held personally liable for the club’s debts.

For clubs carried on by companies limited by guarantee, there is a clear duty squarely upon the directors to ensure that the club does not trade while it is insolvent. Accordingly, if you fail to perform these duties then you may be liable for debts incurred whilst the club is insolvent. Your liability as a director in these circumstances is not limited to debts owing to creditors, but also unpaid PAYG tax or superannuation entitlements.

For clubs that are run by incorporated associations, the liability of individual committee members has historically been less clear. Committee members, like company directors, are subject to general duties such as acting in good faith and for a proper purpose, exercising reasonable care and not misusing information or position. Accordingly, if committee members do not act in the best interests of the club and allow a club to trade while insolvent then they may be at risk of some personal liability. 

Proposed amendments to the Associations Incorporation Act 1981 (that were supposed take effect from 30 June 2021 but have been delayed) will impose some clear duties on committee members, including a duty to prevent insolvent trading. There will be a defence available if the committee member can prove that the debt was incurred without their authority or consent, that they did not take part in the management of the club when the debt was incurred (e.g. due to illness or other good reason) or had reasonable grounds to expect that the club was solvent when the debt was incurred.

Assume an Active Role

If you are considering relying on excuses about your lack of involvement in the club as a defence to trading while insolvent, think again. Due to the positive duties placed on them, ignorance is not bliss for directors or committee members who cannot just turn a blind eye to the financial status of their club. By assuming an active role in your club’s affairs through asking questions, engaging in meetings and considering issues, you may help protect yourself from potential exposure where you can demonstrate you had a reasonable basis for believing that the club was solvent.

Whatever the cause of your financial worries, your club should heed the warnings and investigate further. If you have any queries in relation to any of these matters, please contact Matthew Bradford on (07) 3224 0353.

“The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.”
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