In today's increasingly corporate world, it may come as something of a surprise that there are many thousands of organisations operating in Scotland which are set up as unincorporated associations. The sizes and structures of these organisations can vary enormously, as can their purposes and objects: many of them are voluntary organisations or charities (56% of registered Scottish charities are unincorporated associations), others are member-based organisations formed as clubs and societies which further the interests of the members and are not for profit, such as sports and social clubs. Owners' or residents' associations in developments will also often fall into this category.
These associations are not, for the most part, governed by statute or regulations, but by the common law, developed largely through decided cases.
No Legal Personality
The principal issue for unincorporated associations is that they have no separate legal personality, which means, essentially, that the law does not recognise them as legal entities separate from their members. Without legal personality, an association cannot enter into contracts, employ staff or own property, or raise or defend court actions.
Many organisations of this type do require to make purchases, employ permanent or temporary staff, obtain credit or a bank overdraft, and enter into other commercial transactions to fulfill their functions. What happens in reality then is that one or more of the members order the goods, engage the staff or otherwise carry out the transaction, ostensibly on behalf of the association.
While the law is by no means clear cut, the result of this can mean that the members, or office bearers, or the management committee of the association may find themselves liable for debts or obligations of the association, and with the risk that such liability may be joint and several.
Similarly, an unincorporated association has no capacity to contract with its own members, so that in reality the entitlement of an individual member to enjoy the facilities of a club will be with all of the other members and not the club itself.
It is unclear what would be the liability of the members of an unincorporated association for damage or harm sustained by third parties, although it seems likely that either office bearers or the whole of the members could be liable depending on circumstances. So far as liability of the members of an association for injury sustained by other members is concerned, however, it is clear that there is no such accountability, on the basis that every member is a principal in the mutual undertaking of the association, so that it would be tantamount to members suing themselves.
Entities without legal personality cannot hold title to property, so that any (non-heritable) assets of an unincorporated association are, unless other arrangements are agreed, owned jointly by all the members. Title to heritable property such as land and buildings, has to be held by someone with legal personality, and the practice often arises that such property is held by one or more of the office bearers, in trust for the members of the association. This itself can pose problems, as a trust itself is also without legal personality, and the association becomes subject to the law of trusts. The individual trustees are usually office bearers such as the chair, vice chair and treasurer, who are likely to change over time, and documenting changes can sometimes prove to be challenging.
Residents' or owners' associations in residential or commercial developments are sometimes required to own property, for example to the common parts of the development such as landscaped areas, roads and other external areas. Typically this can prove to be difficult, due to the absence of legal personality on the part of the association and individuals are usually reluctant to take on what may be considered to be a potential liability or onerous duty. The law already contains a proposal (although an, as yet, unimplemented one) to create an entity with legal personality to address this problem. Part 6 of the Title Conditions (Scotland) Act 2003 proposes the introduction of a development management scheme, through the medium of which an owners' association would have legal personality. The implementation of this part of the Act requires an order from the Westminster parliament under its reserved powers.
Looking at solutions
The only alternative currently open to a non-profit making unincorporated association that wishes or requires to have the benefits of legal personality is to incorporate either:
- as a company limited by shares or by guarantee;
- as a Community Interest Company;
- as a Scottish charitable incorporated organisation;
- as a mutual society under the Industrial and Provident Societies Act 1965;
- as a friendly society under the Friendly Societies Act 1992.
In most of these cases, strict criteria have to be met to qualify to incorporate as one of these entities. Many organisations that are member-interest not-for-profit set-ups will not fit into these categories and while incorporation as a company limited by shares or guarantee would be possible, often this vehicle is unsuitable or unwieldy for members clubs and associations. Another remote option might be to establish as a public trust, but the association would need to have trust purpose that was for the public benefit, so this is not a realistic choice for many organisations.
The Scottish Law Commission has been considering this issue as part of its current programme of law reform and the broad conclusion of its Discussion Paper on Unincorporated Associations (No 140) is that assigning legal personality to unincorporated associations would be a useful and constructive step, without any obvious disadvantages.
Attribution of legal personality
If assigning legal personality to unincorporated associations is a good idea, how would it work?
Should it apply automatically to unincorporated associations, or should there be a requirement to opt in? Should there be specific qualifying standards that have to be met, or should attribution apply across the board? Or would a new type of corporate vehicle, into which the members of an association could incorporate, be suitable?
The Commission's Discussion Paper looks in turn at the pros and cons of the following options for acquisition of legal personality by unincorporated associations:
- by registration in a public register;
- by opting in without any registration requirement; and
- automatic, provided qualifying criteria are met
Opt-in by registration
This would be a voluntary arrangement and as such there is no guarantee that associations would use this route, particularly if, as is likely, the burden of increased regulation is perceived.
A central register would need to be set up, for which there would be cost consequences, and it would be necessary to ensure that there was no duplication with, for example charities who require to register with the Scottish Charity Regulator.
However, the existence of a public register of associations would make it possible for third parties to check the existence of, and other details about, an association with which it proposed to have dealings, as well as allowing an element of regulatory scrutiny to take place.
Opt-in by declaration
A far simpler option would be for the members of an association that wished to have legal personality to make a declaration to that effect in its constitution. This declaration would demonstrate its legal capacity to third parties, without the more cumbersome and costly requirements of registration.
Statute could provide for associations that met certain stated criteria, to be conferred automatically with legal personality. This model already exists in other jurisdictions, notably the United States. Statute would determine what powers and abilities associations would have, such as the ability to purchase and sell land, as well as dealing with housekeeping matters on a default basis, such as the rights and obligations of members, election and voting procedures, conduct of meetings and winding up arrangements. Ideally, this status could run alongside the existing common law arrangements, which would apply except to the extent governed by statute, and in this way avoid having to provide for an unduly complex administrative structure.
Consideration would have to be given, however, to associations of people who, whether for reasons of informality, or the temporary nature of their joint purpose, neither need nor want legal personality bestowed on them, and so any qualification criteria that must apply should be so structured as to have the effect neither of excluding small associations that might wish to benefit from legal personality, nor of including the casual arrangements of groups of people who do not seek or require any formal status.
Other options or different permutations of the options outlined above would be possible and could include the creation of a new type of corporate entity into which non-profit making organisations could convert. This too would require some process of registration (akin to the Companies Register) as well as administrative and regulatory requirements.
Responding to the consultation
Broadly speaking the proposal to provide unincorporated associations with legal personality is to be welcomed, and sufficient flexibility needs to be built into the arrangements to accommodate all types of organisations, clubs and groups whose operations will benefit from the commercial advantages this status will bring.
The creation, functions, regulation and termination of business associations is a reserved matter, which means that the Scottish Parliament would not have competence to legislate to change the law in the manner proposed. The UK Parliament would have to enact the proposals.
This is the same issue that affects the implementation of Part 6 of the Title Conditions Act, although if legal personality were to be attributed to unincorporated associations generally, then owners' associations would be able to benefit in the same way as any other non-profit making organisation. The model Development Management Scheme contemplated by the Act could presumably be introduced by way of separate regulation within the powers of the Scottish Parliament.
It is also the case in England and Wales that unincorporated associations have no legal personality, so, realistically, it is probably unlikely that the Westminster Parliament would enact provisions that will relate only to Scotland, and confer on Scottish organisations a benefit that their counterparts south of the border would not enjoy. We must expect therefore that any legislation to follow from this exercise would have to consider the position of English organisations as well.
The Commission seeks comments on their proposals by 6 March 2009.
The Discussion Paper on Unincorporated Associations is available at the following link: http://www.scotlawcom.gov.uk/downloads/dps/