The perils of being a committee member
The perils of being a committee member
A spot of serious bother has been brewing at a local sports club, which has caused some mild panic amongst its committee members. This is because, although most people understand something of the role and responsibilities of company directors, few understand the personal risks involved in being an officer of a club or a charity.
So what? you might ask. What can go wrong with a small club? And how many people could be affected?
More than 160,000 clubs
There are more than 160,000 sports clubs in the UK (excluding charities). Each club has an average of 141 adult members and an average of four committee members. Consequently, over 600,000 people are committee members of sports clubs alone in the UK.
And all these office holders face potential personal risks that could be financially crippling!
I will explain more about this risk later, but first some background on the personal liabilities of those trading in different legal entities.
When you are a sole trader, things are very simple. You are the business, and you are responsible for everything. Consequently, the business’s debts are your debts. Also, the business’s infringements of laws and regulations are your infringements. Therefore, if the business cannot pay its debts, you are personally liable for them. If you are unable to pay, you could go bankrupt.
Ultimately, you make all the decisions and you bear all the consequences.
If you trade together with other people, one of the ways to do so is in in a partnership. The partnership is a legal entity, like a company. However, things are not completely straightforward.
The partnership as such is not liable for debts or infringements, it is the partners who are personally liable. But, as an individual partner, although you might personally not have made a particular decision or incurred a particular liability, you could still be liable for the whole of the consequences.
Joint and several
This is because your liability as a partner is “joint and several”. In simple terms, this means that you are liable jointly with your partners for debts and infringements. However, if your partners cannot pay their part, or abscond, you could be individually liable for everything.
Moreover, creditors can take legal action against any individual partner they choose, leaving the losing partner having to claim restitution against the other partners.
A sobering example of joint responsibility is the case of Arthur Anderson, the worldwide accounting partnership.
All the partners of (AA) bore the full brunt of this principle when their audit partners were found to be liable for a negligent audit of Enron. Through the law of joint liability all partners had to pay the damages that arose from the negligence of the few.
Of course, AA had professional indemnity insurance, but the liability was capped and did not cover all the damages awarded. This meant that the partners had to meet millions of dollars in liabilities, sending many of them bankrupt.
The AA partnership was wound up.
The worst of all worlds
Many believe a partnership is the worst of all worlds. This is because although decision making is out of an individual’s hands, all partners to are exposed to the mistakes of one or only a few partners. There is no limited liability the protection in a partnership.
Because of the risks involved in a partnership, few joint traders wilfully chose a partnership. However, certain professions such as law and accounting are compelled to trade as one.
Riding to the rescue of those wishing to trade jointly with others came modern capitalism’s great invention, namely the limited liability company, or joint stock corporation. This introduced several concepts, which we now take for granted.
- First was enshrining in law that a company was a separate legal entity from those who had invested in it (the shareholders).
- Second was the recognition that a company could be owned by people different from those who managed it (shareholders and directors, respectively).
- Third was to limit the loss incurred by shareholders (or investors) to the total of their investment in the shares of the company.
- Fourth (which is the consequence of first concept above), was to confirm that the shareholders and directors were not, in normal circumstances, individually liable for the debts of the company.
Legislation and lenders
While directors have received protection in some instances, they have through legislation been saddled with responsibility in others. This responsibility has arisen in particular through liability for insolvent trading and the development of the principle of the duty of care.
(I will cover duty of care in more detail below.)
Also, lenders have burdened directors with personal liability for debts through the imposition of directors’ guarantees. This is particularly onerous in smaller companies where directors and shareholders are often the same people.
Directors’ Statutory Duties: The Companies Act 2006
The Companies Act in 2006 codified for the first time the duties owed by directors to:
- Their companies
- The shareholders and
- The broader community.
The Act set out several basic principles governing company directors’ behaviour and the breadth of their duty of care. These are too numerous and detailed to explain in a blog of this nature. However, important ones include the duty to:
- Act within the director’s powers
- Exercise independent judgement, and
- Exercise reasonable care, skill and diligence
Personal liability for the company’s affairs
While directors who carry out their duties properly are generally free from personal liability, there are certain circumstances where a director may now be personally liable:
- If a director is in breach of his duties, they may be personally liable for any loss the company suffers as a result.
- Company directors may be criminally liable if they provide information regarding the company’s affairs.
- Where the company is guilty of tax evasion, the directors may be personally liable for the unpaid tax.
- If directors allow the company to trade knowing that it is insolvent.
Protecting directors and others
Fortunately, there are steps company directors can take to protect themselves against liabilities and claims for breach of duty. Acting reasonably and honestly are the obvious ones. Having professional indemnity and/or third-party liability insurances is a good backstop!
So, what about clubs? Where do they fit into all this?
A club is an association of people who have a common cause or interest and who are involved in a non-profit endeavour, such as managing a village hall, or running a sports club.
These undertakings may also be charities (in which case they are also subject to the requirements of the Charities Act). However, although the responsibilities of trustees of a charity are similar, in this blog I will concentrate on clubs only.
As mentioned above, clubs are “unincorporated associations”. This means they have no legal identity themselves, unlike a company or partnership. As a result, they can only act through individuals, who are usually their officers or members of their management committee. The responsibilities of these officers and other management committee members may be extremely onerous, something many are unaware of.
I list some of the duties and risks to committee members below:
If you accept a position on a committee you are accepting responsibility, and you must fill those duties to the best of your ability without negligence. That is, you must:
- Not create foreseeable risk of injury and
- Take reasonable steps to deal with any foreseeable risk of injury which exists or arises.
The management committee(or board) must act prudently to protect the assets and property of the organisation and ensure that they are used to deliver the organisation’s objectives. It is the management committee’s responsibility to safeguard the interests of the club through good planning and management of its finances, activities and risks.
The management committee is ultimately accountable for the club itself. It is responsible or liable for the consequences of actions taken or not taken (acts and/or omissions) by the club, its staff or volunteers and other management committee members.
The management committee may have legal liabilities arising from:
- Contracts (for example, with suppliers, funders, staff or landlords)
- Statutory obligations (such as dictated by legislation relating to health & safety, child protection, staff conditions, etc), and
- Duty of Care (that is the responsibility to take reasonable steps to ensure that others do not suffer loss or damage through what you do, or fail to do).
Should the club, its staff, volunteers or management committee members fail to meet their obligations in any of these areas, individual committee members and/or the management committee as a whole may be held to account by any external individual or body.
Can you be held personally liable?
The answer is yes, the perils are very real!
The management committee or its members can potentially be held individually and collectively liable, if they have not acted responsibly. This will apply regardless of the legal structure, or any insurance provisions.
This duty of care may be breached through individual action (or failure to act) by management committee members, staff or volunteers.
In all cases, the management committee members remain ultimately responsible for ensuring that others do not suffer damage or loss through the organisation’s activities. They may become personally liable for debts or claims which result from actions or inactions.
Duty of care
Looking more closely at the duty of care.
A duty of care exists where:
- There is a relationship between two parties, and
- The consequences of the actions are reasonably foreseeable.
Breach of duty of care is concerned with the standard of care that ought to have been applied in the situation. Therefore, if the conduct of the individual or club falls below the standard that a reasonable person would have expected, they will be negligent in their duty.
Alarmingly, many club committee members are not fully aware of their obligations under the duty of care principal.
Collectively & Individually
Management committee members could be liable collectively and individually for failings in their duty of care towards the organisation and care of its assets and reputation. It’s a bit like a partnership: you could be liable for your fellow committee members’ actions, or lack of actions. The latter is often the problem!
A recent case
A recent court case in Scotland brings all this acutely into focus. In brief, the facts were:
- Mr D, a committee member and president of a rugby club, witnessed a contract signed by the club’s treasurer to carry out some building work on behalf of the club.
- The club paid the sum agreed, but not the agreed variations of £147, 000. The builder sued Mr D personally for the debt.
- Mr D argued that the treasurer, who signed the contract, and not him was liable.
- The court decided that all members of the committee, including Mr D, were personally liable under the contract.
- The court noted that the rules of the club specifically gave the committee the authority to act as agents on behalf of all the members of the club, and liability therefore lay with the committee members.
This case makes it abundantly clear that committee members (and in some rare situations, ordinary members) can unwittingly end up being personally liable for the acts of other members within a club.
Finally, if you are a member of a club but not a committee member, what can do if you feel that one or more of your club’s officers is behaving improperly? For instance, you might suspect one of the officers is fiddling the books.
You have two basic courses of action:
- First, report any criminal activity to the police.
- Second, take legal advice about your chances of achieving the appropriate remedy against the committee collectively, or an individual committee member. (In this second course of action you will probably need the support of other club officers.)
If you are a committee member and have just read the above, how do you feel?
- Were you aware of all your responsibilities, both personal and collectively with other committee members?
- Were you aware of your onerous duty of care?
- Have you exercised your duties with due care and diligence?
For example, have you:
- Done all you can to check the club complies with Health & Safety and Child Care regulations?
- Undertaken adequate checks of your club’s annual accounts and ensured the security of your club’s assets?
- Thought about getting the accountants in to conduct a professional review of the club’s annual accounts ?
Or, perhaps, you are just thinking of becoming a committee member? Well, maybe there is more to it than you realised?
For more on styles of trading please refer to FAQ 3.1: https://www.freeforumofideas.com/faq/what-trading-style-should-i-use-in-my-business/
For more on partners please refer to: https://www.freeforumofideas.com/faq/31-should-i-take-on-a-partner-in-my-startup/
You can get guidance on writing a small club constitution by going to: https://www.resourcecentre.org.uk/information/constitutions/