Frequently Asked Questions

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CONSTITUTIONAL

LIMITED LIABILITY

Many sports clubs are non profit making members clubs, ruled by a constitution, but having no legal existence and being unable to enter into contracts unless in the name of its officers or trustees ie they are unincorporated associations.  Recent events in the world of Rugby have highlighted the main weakness of unincorporated associations which is –Personal Liability.  The insolvencies of certain high profile rugby clubs have shown that officials may (as a last resort) be sued for club debts and theoretically all members may be liable.   In one case creditors took individual members to court and they were means tested as to their ability to pay.  With the commercialisation of the game of rugby, financial inducements have grown, contract of sponsorship have been made, players contracts are being drawn up and it may be time to reconsider whether the unincorporated members sports club is the most appropriate organisation to manage the current game.

There are a number of alternatives to an unincorporated body and the main attraction is the reduction in personal liability of members by enabling a club to exist as a separate entity and enter into contracts in its on right.  The following are the main alternatives:-

1.    Limited Companies

       The great majority of businesses are run thought limited companies and there are two types.

a)          Limited by Guarantee

       Members of the company do not hold shares but guarantee, in the event of a winding up, to contribute a
       sum of money, normally £1.  Such companies are non profit making and the rules and regulations of the 
       company allow one member one vote in general meetings.  In the event of a winding up, surplus funds 
       must be transferred to similar charitable organisations and no funds are distributed to the members. 

b)          Limited by Shares

       Members of the company hold shares and can receive dividends on those shares.  The shares can be 
       transferred to other members. The principal aim of companies limited by shares is to make a profit and 
       they are taxed accordingly. The rules and regulations of the company give the shareholders voting rights in 
       relation to the number of shares they hold.  Shareholders with more than 50% of the shares therefore 
       control the company.

2.    Industrial and Provident Societies

       Most Working Men’s Clubs are registered under the Industrial and Provident Societies Acts.  The Industrial and Provident Societies Acts were
 drafted originally to govern co-operative societies whose business was intended to be conducted for the good of the community and were non
 profit making.  Members purchase one share and in general meetings the rules allow one member one vote.  In the event of a winding up, the
 funds are distributed amongst the members.

       In companies limited by shares, the company is run by directors, but guarantee companies and Industrial and Provident Societies are run by
 an elected Committee.

       Of the three types of organisation above, the ones best suited for non profit making bodies such as sports clubs seeking to limit the liability of
 members are the company limited by guarantee and the Industrial and Provident Society.

       Our experience as auditor of a large number of Working Men’s Clubs and Rugby Clubs leads us to believe that an Industrial and Provident
 Society is well suited in situations where the sports club also has a social side and runs a bar and has entertainment income etc.  In the case
 of rugby clubs, the RFU has sponsored a model set of rules for English rugby clubs wishing to register under the Industrial and Provident
 Societies Act, thus making the registration process easier.  Once a club is registered, the assets and liabilities of the old club automatically
 become those of the registered club, thus saving on legal fees, etc.

       One further point to consider, especially in the case of rugby clubs, is the possibility of making the playing section of the club a legally
 separate organisation from the social side.  The social side of the club could own the club premises and receive the bar and related income
 and expenditure etc and the playing section would receive the playing income and pay the playing expenses.  There are normally separate
 committees for the social and playing sections and therefore the separation of the club into two in this way should not be too difficult.
 Each club is different and the solution to the problem of limited liability of the members will vary according to circumstances and perhaps the
 need to consider taxation implications.  However, some thought should be given by all unincorporated associations as to the potential liabilities
 they may be exposed to and to take action accordingly.

UNINCORPORATED ASSOCIATIONS – ADVANTAGES AND DISADVANTAGES

The advantage of an unincorporated club are:-

1.    They are simple to set up, being founded by agreement between the members, no further steps such as registration are required.

2.    Privacy – an unincorporated association does not have to file accounts and other information with Companies House or with the Registrar of
 Friendly Societies.

3.    In relation to the day to day running of the club, brewers, banks and other suppliers are happy to deal with the officers.

4.    Lower compliance costs.

The disadvantages of an unincorporated club are:

1.    The club does not have limited liability, the officers and sometimes the members of the club may be held liable for the debts of the club and
 for the performance of the club’s contracts and other obligations – see section on the liability of members, officers and trustees.

2.    It is not a body corporate and does not have a separate legal existence from its individual members, accordingly it can neither sue nor be
 sued other than through its officers and members.

3.    It cannot hold land and investments other than in the name of officers or trustees.

4.    No statutory liquidation procedures exist and an unincorporated club cannot be voluntarily wound up under the Insolvency Act 1986.

UNINCORPORATED ASSOCIATIONS – LIABILITY OF MEMBERS, OFFICERS AND TRUSTEES

An unincorporated members’ club cannot sue nor be sued, or hold property in its own name.  Accordingly, when an outsider is trying to sue an unincorporated association an important question is, who is actually liable?  It must be pointed out that instances of members and officers becoming liable for debts incurred by an unincorporated club are rare, this being due either to the fact that third parties are reluctant to sue individual members and officers, or are unsure of the legal outcome of their actions.  Where action is brought it is usually against the chairman and secretary in the first instance, the action can be extremely distressing for the club officers involved.

This is a confusing area of the law and because of the lack of case law it is difficult to be definitive on the outcome of any action brought.  The distress felt by members and officers is often compounded by this uncertainty and attempts to determine what their actual liability is.  Club members tend to have two conflicting views of the position, either they believe they are not liable for any debt, or that they have unlimited liability.  As a general rule a member’s liability is limited to the amount of the subscription because when he joins a club he does not intend to incur any liability beyond his subscriptions payable under the rules.  However, if a member or officer is found liable for a debt his liability is usually unlimited.

Taxes

Value Added Tax – Anything required to be done for VAT purposes is the joint and several liability of first, every member holding office as president, chairman, treasurer, secretary or any similar officer or in default, secondly, every member holding office as a member of a committee, and in default, thirdly, every member – VAT (General Regulations 1985, no 886, reg 10).

PAYE and National Insurance – The employer will be liable for payment of national insurance contributions and, if he pays the wages or salary, for income tax under PAYE.  The employer will often be the persons who actually engage the employee, for example, the committee, or an officer responsible for employees although the employer may be all the members.  PAYE should be operated on all wages paid to staff and officers including cash payment to players for playing and winning a game.

Corporation Tax – The treasurer of an association is responsible for doing all the acts which are necessary in relation to the corporation tax liability of an association.  If an association does not pay their tax, the Revenue can recover the outstanding sum from the treasurer but he is entitled to retain association funds in his hands to satisfy the tax and to be indemnified by the association.

Employment of Staff

A club should determine which of the members is the actual employer because considerable duties and liabilities attach to that position.  Any member who is about to become involved in the employment of staff should make sure he has the right of indemnity from other members and the assets of the club.  In view of the potential liabilities which can arise, corporate status should be considered before significant numbers of staff are taken on.

In addition to the provisions of employment law, PAYE and National Insurance the employer has other duties in relation to the health, safety and welfare of the employees.  Failure to make provision for an employee’s safety will not only result in a potential action for damages by the employee but it is also a criminal offence.

Contracts

Where it is sought to sue a club in contract, the action must be brought against the individuals who entered into or authorised the contract.  Any officer or member of committee may be sued who gave or authorised an order for goods or services, because although he acted as agent for the club, the club is not a legal entity and is unable to act as a principal or contracting party.

A member’s liability is usually limited to the amount of his subscription, unless it can be shown that the members authorised or ratified the contract, for example, the rules of the club may specifically provide that goods are to be ordered on credit in which case each member may be personally liable.  Members will also be liable if they subsequently ratify transactions which have been entered into on their behalf without authority.

Contracts, undertakings, leases and agreements containing such words as ‘joint and several’ should not be signed.  Such words would make each person accepting the obligation personally liable for the payment and performance of the contract during its whole period.  In the event of the failure of the club the liability would fall on each individual accepting the obligation putting his personal assets at risk.

Other Liabilities

Property – Trustees are normally the proper defendant in relation to the clubs’ premises.  Trustees of an unincorporated club do not have the same powers, duties or obligations as the trustee of a charity.  Trustees of an unincorporated club are usually empowered to invest the clubs’ funds and in them is also vested the property and assets of the club in trust for the members.  For any liability incurred in the course of their duties the trustees have a lien on the property but unless the rules provide they are not entitled to an indemnity from the club’s members.  An individual member is not under any legal or equitable obligation to indemnify the trustees.

Individual members or a group of members may become liable for the loss arising from the state of the club’s premises if the court finds they were under a separate duty of care to outsiders.  For example it was held that the committee of a football club were held personally liable when a stand collapsed and injured a spectator.  An individual member with specific responsibilities may also be held liable to an outsider if he was negligent in the performance of his duties.

Libel and Slander – An unincorporated members’ club cannot be sued, and redress has to be sought individually and personally against the officer, member or employee concerned.  The members will only be liable for a defamatory statement if they have expressly or implicitly authorised its publication.

Expulsion of Members – A common area of conflict for members’ clubs concerns the wrongful termination of membership or expulsion of a member.  An injunction for reinstatement and action for damages or defamation will usually be made against the committee.  In rare cases individual members have become liable through a class or representative action.

On Winding Up

Surplus Assets – Where after paying all debts there are surplus assets the rules of the club usually direct that the surplus is paid equally to members.

Deficits – No statutory liquidation procedures exist and an unincorporated club cannot be voluntarily wound up under the Insolvency Act 1986.  As the club is not a separate legal entity it cannot become insolvent and as the person liable for debts incurred varies according to the action brought, it is difficult to come to an organised voluntary arrangement with creditors.  It appears that the best scenario is that the club’s assets are used to pay debts as far as possible and the club is allowed to quietly fade out of existence with the outstanding creditors not bringing legal action against officers and members.  Brewers and other trade suppliers normally accept the business risk of dealing with members clubs and do not take action against individuals.  Where creditors do pursue it becomes a free for all.  Those who pressure the most receive some payment and in practice the normal rules of preference are ignored.  If a club is solvent but foresees problems in the future it is advisable to incorporate now.  When and if problems do arise the incorporated club can then take advantage of the voluntary and compulsory Insolvency Act 1986 provisions for liquidating a company.

Two related themes recur when the liability of members, officers and trustees are considered, firstly the constitution of the club and secondly insurance.  The standard of drafting of rules for unincorporated clubs is variable and frequently poor.  To save legal fees rules are often cobbled together by members without full knowledge of all the legal ramifications, occasionally a club will have no written rules.  In consideration of the law in relation to third part liability a club should ensure it has rules to cover such issues as indemnity, powers of the committee as employer, rules on the expulsion and termination of membership.  It should not have a clause accepting liability for the members for goods ordered on credit.  The rules of a club is a contract between the members, if there is not a clause on how the rules may be changed a new constitution or rulebook may be unenforceable against members who voted against it.

Where possible a club should insure against the risks faced by officers, members and trustees.  Third party and employers’ liability insurance may be compulsory, but as the insurance policy will be issued to the committee or individual officers it is important to ensure that any member incurring liability to an outsider can claim on the policy, it should contain a member to member indemnity.  It is also necessary to ensure that the policy contains a special provision that all members of the public, unfortunately many policies do not have such a clause and claims made by a member against other members of the club are excluded.

In the long term the most effective and cheapest form of additional insurance may be the incorporation of the club as a company limited by guarantee or as an industrial and provident society.  The club would then become a body corporate with the ability to sue and be sued in its own name.

COMPANIES LIMITED BY GUARANTEE

A company limited by guarantee is the usual legal structure adopted by a club where a governing or umbrella body has not sponsored rules under the industrial and provident society legislation.  These companies are generally formed for charitable, social or other non trading purposes.  They are widely used by schools and colleges, professional and trade associations, clubs supported by annual subscriptions and management companies for blocks of flats in which all the tenants are members.

On incorporation a memorandum and articles of association must be filed at Companies House in a form set out by company law.  The memorandum must contain a clause stating that each member guarantees to contribute to the assets of the company in the event of it being wound up, normally £1.  The members do not hold shares, do not contribute capital and the rules of the company allow one member one vote in general meetings.  In practice the articles of association vary widely to take account of the diversity of organisations that operate as companies limited by guarantee.

The advantage of companies limited by guarantee is that they overcome the disadvantages of unincorporated associations.  The club has corporate status, limited liability and can sue and be sued in its own name.  Other advantages include:-

1.    Statutory provisions exist for winding up the company under the Insolvency Act 1986.

2.    No trustees are required.

3.    These companies are established under company law and the rules and regulations governing them are widely understood by professional
 advisors.

4.    A company is inexpensive to form and can be available for use within days.

5.    One member one vote, it is not possible for one member to accumulate a large shareholding.  The share register itself is easy to maintain.

The disadvantages are:-

1.    Lack of privacy, accounts and other information will be filed at Companies House and made available to the public.

2.    Capital from members cannot be raised by the issue of shares.

3.    Members of the managing committee will be directors of the company and hence under liabilities and duties as company directors.

4.    Company law is alien to most committeemen.  While most professional advisors prefer a company limited by guarantee, committeemen and
 members prefer the operational procedures of an industrial and provident society.

5.    With no model rules available for clubs there can be inconsistencies in the drafting of the articles of association.  Inappropriate clauses may
 be included, for example, the rules of most companies limited by guarantee require notices and annual accounts to be posted to a members’
 home address.

6.    Cost in establishing the company if club premises and other assets are involved.  Legal fees and stamp duty may have to be paid on the
 transfer of the club’s assets to the new company.

INDUSTRIAL AND PROVIDENT SOCIETIES

Registration as in industrial and provident society with the Chief Registrar of Friendly Societies is only available to an association which is formed for the carrying on of an industry, trade or business and is either a bona fide co-operative society or is intended to be conducted for the benefit of the community.  Associations which have registered include co-operative societies, workingmen’s clubs, housing associations, and RFU rugby clubs.    

The effect of incorporation of a society is contained in section 3 of the Industrial and Provident Societies Act 1965:-

          A registered society shall by virtue of its registration be a body corporate by its registered name, 
          by which it may sue and be sued, with perpetual succession and a common seal and with limited 
          liability; and that registration shall vest in the society all property for the time being vested in any 
          person in trust for the society, and all legal proceedings pending by or against the trustees of the 
          society may be brought or continued against the society in its registered name.

The club continues in being and members will remain members of the club.  The present structure of the club will for most practical purposes remain fundamentally the same.  Other advantages of an industrial and provident society include:-

1.    Certain privileges under the Licensing Act 1964, eg they are taken to comply with the requirements of the 
       Act in relation to elective committee.

2.    A floating charge can be given over the club’s assets making it easier to raise finance.

3.    The transfer of assets is automatic, no legal conveyance is required and no stamp duty is payable.

4.    Simplified and inexpensive procedures for settling disputes.

5.    The rules resemble club rules.  Because they are reviewed by the Registrar of Friendly Societies and sponsored by a governing body they are
 comprehensive and consistent.  A separate rulebook for bylaws should not usually be required.

6.    Statutory procedures exist for both member’s voluntary and compulsory dissolution and winding up.  Simplified procedures exist for the winding
 up of solvent societies and in addition an industrial and provident societies can be treated as a company for the purpose of Insolvency Law
 (Section 55 Industrial and Provident Societies Act 1965:  Re Norse Self Build Association Limited).

7.    Compared to other clubs they enjoy favourable corporation tax treatment, eg, like bank interest may be paid gross to third parties; interest
 paid can be used as an allowable deduction against taxable income from any source regardless of the purpose of the loan; losses can be
 offset against future taxable income earned from any source.

8.    The Registrar of Friendly Societies is used to dealing with members’ clubs.

Disadvantages of Industrial and Provident Societies are:-

1.    If model rules have not been sponsored they can be difficult and expensive to set up.  The model rules have to provide for certain specified
 matters and are reviewed by the Chief Registrar prior to acceptance.

2.    Reduction in privacy, an annual return and accounts have to be filed with the Registrar, and a statutory audit may be required.

3.    The Chief Registrar has the power to appoint an inspector to examine the affairs of a society.

4.    Industrial and Provident Societies are not suitable for registered charities.

FEATURES OF AN INDUSTRIAL AND PROVIDENT SOCIETY

Matters to be provided for in the society’s rules – schedule 1 of the Industrial and Provident Societies Act 1965 lists the following matters which should be provided for in the society’s rules:-

1.    The name of the society.

2.    The object of the society.

3.    The registered office of the society to which all communications and notices of the society may be addressed.

4.    Terms of admission of the members, including any society or company investing funds in the society under the provisions of the said Act.

5.    The mode of holding meetings, the scale and right of voting, and the mode of making, altering or rescinding rules.

6.    The appointment and removal of a committee of management and of managers or other officers and their respective powers and remuneration.

7.    The maximum amount of interest in the shares of the society which may be held by any member otherwise and by virtue of the Industrial and
 Provident Societies Act 1965.

8.    Whether the society may contract loans or receive money on deposits subject to the provisions of the said Act from members or others; and,
 if so, under what conditions, under what security and to what limits of amount.

9.    Whether the shares or any of them shall be transferable, the form of transfer and registration on the shares, and the consent of the
 committee thereto; whether the shares of any of them shall be withdrawable, and the mode of withdrawal, and the payment of the balance
 due thereon on withdrawing from the society.

10.  The audit of Accounts by one or more auditors appointed by the society in accordance with the requirements of the Friendly and Industrial
 and Provident Societies Act 1968.

11.  Whether, and if so, how members may withdraw from the society, and provision for the claims of the representatives of deceased members or
 the trustees of the property of bankrupt members.

12.  The mode of application of profits.

13.  The custody and use of the society’s seal.

14.  Whether, and if so, by what authority, and in what manner, any part of the society’s funds may be invested.

Statutory obligations – On or after registration the following conditions must be fulfilled:-

1.    Notice of any change in the registered office must be sent to the Registrar.

2.    The registered name of the club must be painted or affixed outside its registered office and every other place in which business is carried on.

3.    A club must have its registered name mentioned in all notices, advertisements, letters, cheques, etc.

4.    Proper books of account must be kept as required by the Industrial and Provident Societies Act.

5.    An annual return must be made to the Registrar together with a copy of the Accounts and if appropriate the report of the auditor.

6.    A register of members must be kept.

7.    A copy of the Accounts must always be hung up in a conspicuous position at the club’s registered office.

Membership and Shares – Each member must hold at least one share in the club which may be as low as 5p.   No person may hold more than £10,000 in shares, although it is recommended that the rules state that each member hold one share only which should not be transferable and on which no dividend or interest should be paid.  There is no limit on the nominal capital of an industrial and provident society, and it is possible provided the rules allow to raise capital through an issue of shares to members.

Meetings and Voting – The rules of the club must deal with the mode of holding meetings, and the scale and rights of voting.  At General Meetings the rules usually provide for one member one vote.

Umbrella of Governing Body – The legislation is ideally suited for groups of societies or clubs who are associated to an umbrella governing body, such groups would share common objectives and include for example the co-operative movement and the Club and Institute Union, see appendix II.  The member clubs own the shares of the governing body.  The governing body would sponsor standard model rules appropriate to the activities of the group.

Disputes – Under section 60 of the Industrial and Provident Societies Act there are cost effective and efficient procedures for dealing with internal disputes.  Disputes between members and the club or any of its officers must be decided in the manner directed by the rules of the club.  A decision so given is binding and conclusive on all parties without appeal to any court unless, for example, it has not been determined in accordance with the rules, or has been reached contrary to natural justice or in bad faith.  An application for enforcement of a decision made under the club’s rules for dealing with disputes may be made to the county court.

PROMOTING BODIES FOR MODEL RULES OF AN INDUSTRIAL AND PROVIDENT SOCIETY

Abbeyfield Society
Association of British Credit Unions Limited
Association of Conservative Clubs
CDS Co-operative Housing Society Limited
Community Transport Association
Co-op Home Services (Home Counties) Limited
Co-operative Union Limited
Federation of Agricultural Co-operatives (UK) Limited
Industrial Common Ownership Movement
National Federation of Community Organisations
National Housing Federation
National Society of Allotments and Leisure Gardeners Limited
Priority Estates
Radical Routes
Royal British Legion
Royal Naval Association
Rugby Football Union
Scottish Agricultural Organisation Society Limited
Scottish Federation of Housing Associations Limited
Shared Interest Society Limited
Village Retail Services Association Limited
Welsh Agricultural Organisation Society Limited
Welsh Rugby Union
WI Country Markets Limited
Working men’s Club and Institute Union Limited

OTHER LEGAL STRUCTURES

A Company Limited by Guarantee and an Unincorporated Association – The use of two vehicles may be a viable alternative to incorporating the whole club.  For example, in the case of rugby clubs the playing section may be incorporated as a company limited by guarantee while the social side, suspicious of change can remain as an unincorporated association.  The social side could own the club premises and manage the bar and trading income, while the playing section would receive the sponsorship and playing income and pay the playing expenses.  There are normally separate committees for the social and playing sections and the separation of the club into two in this way should not be too difficult.

A Company Limited by Shares – The principal users of companies limited by shares are businesses whose aim is to make a profit.  Members of the company hold shares and can receive dividends on these shares, the shares can be transferred to other members and a dominant member with more than 50% of the shares can control the company.  Companies are divided into private and public companies.  A public company (plc) has certain features including a minimal share capital of £50,000 and their shares are usually but not always freely traded.  These companies are considered unsuitable for a club although a number of smaller clubs have ill advisedly incorporated as a company limited by shares.  Such companies are unsuitable not only because of the aims under which they have been set up, but also because their memorandum and articles require considerable redrafting.  In addition company law procedures concerning, for example, such matters as the issue of shares are far too formal.

A Registered Charity – Receives favourable taxation treatment and mandatory rates relief.  Because of the advantages of charities a number of sport clubs have tried to gain charitable status.  A test case application brought by North Tawton Rugby Club was rejected by the Charity Commission.  The Commission stated that, the law strictly limited the extent to which sports clubs could be charitable and it had no alternative but to reject the application.  Some clubs rent premises from a charity through a licence to occupy and indirectly receive the benefits of the rates relief obtained by the charity landlord.

Registered charities are frequently incorporated as a company limited by guarantee.  An Industrial and Provident Society would be an unsuitable vehicle for registered charity status because under the Charities Act 1993 Industrial and Provident Societies can only be ‘exempt’ charities.

Friendly Societies  - This legislation is no longer available to sports and social clubs and tends to be used mainly by financial institutions.  A number of workingmen’s and sports clubs are, for historic reasons friendly societies mainly due to the fact that the legislation retained the status and position of trustees.  As it is often the opposition of trustees that prevents incorporation removal of this legislation has resulted in a decline in the number of clubs becoming incorporated.

RE-REGISTRATION FROM A FRIENDLY SOCIETY TO AN INDUSTRIAL AND PROVIDENT SOCIETY 

Working men’s clubs are registered under either the Industrial and Provident Societies Act 1965 or the Friendly Society Act of 1974.  Some clubs, particularly sport and rugby clubs are often unregistered.  As most institutions registered under the Friendly Societies Act are either insurance or building societies, the requirements of the Act are onerous.  Accordingly provision has been made for clubs to de-register and re-register under the Industrial and Provident Societies Act.  The advantages of re-registering are:-

·        The club is given ‘Limited corporate status; the club will no longer need to have trustees.

·        The requirement of the Industrial and Provident Society Act in such matters as accounting records and systems of business control is more
    suited to working men’s clubs.

·        Relief is given for bank or other loan interest when calculating the club’s corporation tax liability.  A club registered under the Friendly
    Society Act is not able to claim loan interest relief.

·        Under the Industrial and Provident Societies Act there is no fee for appointing trustees, or where appropriate the Friendly Societies £70
    annual fee will no longer be payable.

There may be adverse consequences of re-registration for example, there may be an impact on rates relief.

There are five stages to follow to re-register:

1.    Members consent to the proposal.

2.    Drawing up of rules under the Industrial and Provident Society Act 1965.

3.    Completion of the application form.

4.    Registration of the application.

5.    Transfer of all property and documents held by the former trustees.

Where a club is unregistered it will not be recognised as a separate legal entity and would not be able to benefit from the advantage of registration.  For example, a registered club is able to sue and be sued in it’s own name.  Where a club is unregistered any liabilities incurred are the responsibility of all the members in equal shares.