Unincorporated Associations

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Part 1: The Legal Problem and Solution

What is an unincorporated association?

An unincorporated association is an association that has not been incorporated (i.e. registered as a company)

An unincorporated association has been judicially defined as: ‚Äú[T]wo or more persons bound together for one or more common purposes‚Ķeach having mutual duties and obligations, in an organisation which has rules which identify in whom control of it and its funds rests and upon what terms and which can be joined or left at will. The bond of union between the members of an unincorporated association has to be contractual.‚ÄĚ (Conservative Central Office v Burrell [1982], Lawton LJ)

  • In order for there to be an unincorporated association we need two or more persons (one person cannot associate with themselves)
  • These two people need to be bound together by contractual rules (so the association needs to have rules)
  • So we need two or more persons and a contractual agreement between them (i.e. the association‚Äôs rules)
  • The typical unincorporated association is something like a sports club (e.g. an amateur football club) or a drama club ‚Üí these are archetypal of a typical unincorporated association

So an unincorporated association is a group of people bound together by a contractual agreement but it is not a separate legal person (like a company)

  • So when someone wants to give property to be used by the members of the association, they cannot give it to the unincorporated association itself because the association has no personality in law: instead, the property must be given to some person (either a human being or a company) to hold on behalf of the unincorporated association

The legal problem

Unincorporated associations have no legal personality and so cannot own property in their own right (cf. incorporated companies ‚Üí they do have legal personality)

It is thus impossible for someone to transfer money ‚Äúto‚ÄĚ an unincorporated association

  • The law recognises that a company and people have a legal personality and so can own property transferred to it
  • BUT, unincorporated associations have no legal personality and so cannot own property in its own right
    • This of course poses a legal problem ‚Üí if an unincorporated association cannot own property then payment to such an association cannot validly be made
    • In other words, it is impossible for you to transfer money to an unincorporated association
    • There must be a legal solution to this...

The legal solution

In some cases, judges have let transfers to an unincorporated association fail (Leahy v A-G for New South Wales [1959]; Bacon v Pianta [1966])

  • So in these cases the judges have simply let transfers of property to an unincorporated association to fail on the basis that the unincorporated association has no legal personality and thus cannot hold the property transferred
  • In Leahy v A-G for New South Wales [1959] property was transferred to an order of catholic nuns. The order was held to be an unincorporated association and so the transfer of property to it was held to fail
  • In Bacon v Pianta [1966] the property was transferred to the communist party of Australia (an unincorporated association). Again the transfer of the property to the unincorporated association failed on the basis that the unincorporated association lacked legal personality and therefore cannot hold the property

More often, judges, when faced with a transfer of property to an unincorporated association, have given legal effect to the transfer via a proxy property-ownership mechanism

  • In other words, some judges have reacted by interpreting transfers to an unincorporated association as something different ‚Üí these are the 4 things listed below

There are four possibilities (there are 4 proxies that could in theory be used as a substitute for a transfer to an unincorporated association, which the law tells us cannot be valid):

  • (i) Gift to the association‚Äôs members
    • So one possibility is that judges have interpreted a transfer of property to an unincorporated association as a gift to the association‚Äôs members
  • (ii) Gift to the association‚Äôs members subject to the association‚Äôs contract
    • Another possibility is that judges have interpreted a transfer of property to an unincorporated association as a gift to the association‚Äôs members subject to the association‚Äôs contract
  • (iii) Charitable trust
    • Another possibility is that judges have interpreted a transfer of property to a unincorporated association as a charitable trust
  • (iv) Re Denley trust
    • Another possibility is that judges have interpreted a transfer of property to an unincorporated asspanociation as a Re Denley trust

(i) Gift to the association’s members

The purported transfer to the association operates instead as a gift to the association’s members in their personal capacity

  • So under this proxy a transfer to the association is treated, instead, as a transfer to the members of the association at the time at which the transfer is made i.e. a transfer to the current members of the association

This gift to the members in their personal capacity can take effect as:

  • An absolute legal transfer to the members; or
  • A transfer to the association‚Äôs treasurer on trust for the members

Under this proxy then, let’s imagine a transfer is made to the university dramatics society (an unincorporated association), the judge will treat this transfer NOT as one to the society in its own right (as this would be invalid), but instead as a transfer to the present members of the society absolutely or on trust

  • E.g. if ¬£10,000 is transferred to the university dramatics society and there are 10 members of that society then they will have a share worth ¬£1000 each equally in their personal capacity

(ii) Gift to the association’s members subject to the association’s contract

The purported transfer to the association operates instead as a gift to the association’s members, not in their personal capacity but in their capacity as members of the association subject to its contractual rules

  • The second proxy treats the transfer to the association as a gift to the association‚Äôs members, but subject to the association‚Äôs contract/rules
  • The 2nd proxy is similar to 1st proxy in some ways ‚Üí as with the 1st proxy the property is given to the members of the association at the time of the transfer (either absolutely or, more likely, under a trust with the treasurer as trustee)
  • BUT, unlike the first proxy, this does not enable a member to take possession of their share of the property transferred ‚Üí rather the members are prevented from taking their share home by the association‚Äôs contractual rules, which provide that the property instead by added to the association‚Äôs funds, to be spent on the association‚Äôs various purposes specified in the contractual rules

The association’s rules in turn require that any property transferred be added to the association’s funds, to be spent on the association’s various purposes

  • These association rules require that any property transferred be added to the association‚Äôs funds and to be spent on the association‚Äôs various purposes as stipulated in the contractual rules

This property-owning mechanism is known as the ‚Äúcontract-holding theory‚ÄĚ

  • Under the ‚Äėcontract-holding theory‚Äô a member of the association at the time the property is transferred who subsequently resigns from the association (i.e. leaves/quits the association) is no longer a party to the association‚Äôs contract (i.e. no longer a party to the association‚Äôs contractual rules) and therefore no longer has any rights in respect property which is held subject to this contract
  • So someone who leaves the association gives up any right in respect of property held subject to the society‚Äôs contractual rules
  • On the flip side, when a new member joins the association, they become a party to the association‚Äôs contract and thereby gain rights to the property under the association‚Äôs contractual rules

So under this proxy then, a transfer made to the university dramatics society (an unincorporated association) will be treated as a transfer to the present members of the society, but this time subject to the society’s contractual rules

  • These rules will require the property transferred (say ¬£10,000) be added to the association‚Äôs funds, to be spent on the association‚Äôs various purposes stipulated under their contractual rules

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CONTENT

(iii) Charitable trust

Under this proxy, the purported transfer to the association operates instead as a transfer to the association’s treasurer to hold on a charitable trust

The proxy is available only where the association‚Äôs purposes are ‚Äúcharitable‚ÄĚ under the definition in the Charities Act s.2

  • If each of the unincorporated association's purposes are charitable then the court is able to treat a transfer to the association as an establishment of a charitable trust with the treasure as trustee applying the property transferred to the association‚Äôs charitable purposes

E.g. let’s say property is transferred to the local Cricket Club (an unincorporated association), which aims to provide facilities for and encourage participation in cricket. Again the court would not be able to treat this transfer to the association in its own right because this would be invalid, but here the transfer could be interpreted as the establishment of a charitable trust

  • This is because each of the association‚Äôs purposes here (i.e. providing facilities and encouraging participation in sport) are charitable ‚Üí each purpose would fall under the advancement of amateur sport and would operate for the public benefit
  • So we could construe the transfer as the establishment of a charitable trust

(iv) Re Denley trust

The fourth proxy is the Re Denley trust → under this proxy the purported transfer to the unincorporated association operates instead as the establishment of a Re Denley trust for the association’s non charitable purpose(s)

  • We have seen there are 3 categories of legally valid purpose trust: a charitable purpose trust, a miscellaneous non-charitable purpose trust, and a Re Denley trust
  • Now, of course, an unincorporated association wouldn't realistically aim at the miscellaneous non-charitable purposes, such as maintaining a particular animal say
  • So the only way then a trust for an unincorporated association's non-charitable purposes can be valid is through the principle in Re Denley

The association’s members are directly and tangibly benefited by performance of its non-charitable purposes

  • Re Denley dictates that a non-charitable purpose trust is only valid if there are individuals who are directly and tangibly benefitted by the purpose‚Äôs performance, but this should be no problem in our context i.e. it should be no problem bringing a trust for an unincorporated association's non-charitable purpose within the Re Denley principle ‚Üí the members of the association are going to be directly and tangibly benefitted by the purpose‚Äôs performance
  • So this is a fourth possible proxy the court will use when faced with a transfer to an unincorporated association i.e. if the association is operating for non-charitable purposes the law might hold the transfer valid as a Re Denley trust

Part 2: Which proxy will a court use (when faced with a transfer to an unincorporated association)?

Contractual obligation vs. voluntary transfer

The courts’ approach differs depending on whether a transfer is: (i) made by way of performance of a contractual obligation; or (ii) voluntary

  • So there are two different types of transfer to an unincorporated association: a contractual transfer and a voluntary transfer ‚Üí and the judges approach to the question of proxy depends on the transfer before them (i.e. whether transfer is contractual or voluntary)

Contractual transfers include money transferred in exchange for a raffle ticket; association membership; entry to an association fundraiser etc.

  • So when an unincorporated association sells something to the transferor (such as a raffle ticket or membership of the association), the transferor is contractually obliged to transfer money to the association at the price of what they have bought
  • So if you transfer ¬£1 to an unincorporated association in return for a raffle ticket, you are transferring this money by way of performing your contractual obligation

Voluntary transfers to unincorporated associations comprise collection box donations; inter vivos gifts; legacies

Contractual obligation

Where money is transferred by way of performance of a contractual obligation, it is invariably treated as a gift to the association’s members subject to the association’s contract (i.e. it will be the second proxy the court will follow i.e. contract-holding theory)

Why is this?

  • The third and fourth proxies are simply not available when money is transferred pursuant to a contract this is because when a transfer is made under contract to an association the contract will demand the money be paid over absolutely (i.e. when property is transferred under contract it does not permit the property to be settled on a purpose trust)
  • The first two proxies each involve an absolute transfer of property, but of the two the contract-holding theory is clearly the more appropriate as it is the closer match to the transferor‚Äôs intentions
    • E.g. If I buy a raffle ticket sold to me by the local Cricket Club I would sure intend that money to be added to the association‚Äôs funds rather than divided between the members for them to spend as they wish
    • So the first two proxies both appear available, but the second is clearly preferable as it is a closer match to the intention of the transferor who is transferring under a contract

Voluntary transfer

When money is transferred voluntarily (e.g. my residuary estate to the local Social Club) all four proxies are in principle available ‚Üí although this should be caveated by saying that if the local Social Club is not operating for exclusively charitable purposes then, of course, proxy three is unavailable

A judge will select the proxy which best reflects the transferor’s intention

  • E.g. if the testator who leaves their residuary estate to the local Social Club was a long-standing member of the club, with a great personal affection to the other members, a judge may well conclude the best proxy is the first proxy (i.e. gift to members in personal capacity)

Preference for contract-holding theory

The case-law reveals a strong judicial preference for the contract-holding theory as a proxy for voluntary transfer.

There are a number of reasons for this:

  • (i) Best match for transferor intent
    • In the absence of any real evidence as to the intention underlying a transfer to an unincorporated association, the contract holding theory seems to be the proxy which best reflects the intention which we can suppose the transferor held in making the transfer
    • Recall that under the contract-holding theory property transferred is held by the members of the association subject to the association‚Äôs rules
    • The association‚Äôs members can then vary or terminate the contract between them and so apply the transferred money in new ways as time goes on ‚Üí conversely, under either purpose trust analysis the property transferred is tied to the purposes (whether they are charitable or non-charitable) at the time of the transfer
    • So the idea then is that an individual who voluntarily gives money to an unincorporated association wants their money to be applied to the various purposes of the association as they develop and vary over time ‚Üí they don't want their money to simply be applied for the association‚Äôs current purposes
  • (ii) Ease of accounting
    • It makes for easier accounting to take all income on this basis
  • (iii) Rejection of the ‚ÄúRe Denley purpose trust‚ÄĚ
    • Some judges (especially those wedded to the beneficiary principle) do not accept the authority of Re Denley e.g. Lord Millett in Twinsectra v Yardley
    • In other words, some academics/judges do not accept a purpose trust can be valid simply because there are individuals intangibly interested in its performance ‚Üí these people believe that outside the exceptions posed by charitable trusts and some non-charitable miscellaneous ones it is impossible to create a purpose trust i.e. they do not believe in Re Denley and consider it bad law and therefore do not consider this to be a valid proxy
    • NB there are cases in which the courts have used the Re Denley proxy: see Re West Sussex Constabulary Trusts [1971]
  • (iv) Relative simplicity on dissolution (see Part 3 below)
    • This is explored more in part 3, but in brief money held on the contract-holding theory is easier to deal with in the event of a dissolution (i.e. when the association comes to an end) than is money held on purpose trust
    • In broad brush terms money under the contract-holding theory is divided equally between members, whereas with a purpose trust money is returned to the transferor on resulting trust (which has practical difficulties)

Ostensible purpose trust valid as contract-holding gift

Where property is transferred for a stipulated purpose ‚Äď e.g. to the local Social Club to paint their clubroom ‚Äď recourse to proxy seems unnecessary

  • So we would imagine then when property is transferred not simply to an unincorporated association, but to an association in order to fulfil a particular purpose that there is no problem with giving legal effect to the transferor‚Äôs intent as expressed
  • The proxies bite when we have a simple transfer to a unincorporated associatio without further instruction, but when we have instead a transfer to a unincorporated association for a particular purpose we would imagine the law would just give effect to the transferor‚Äôs wish by establishing a trust under which the property must be used for the purpose specified ‚Üí and of course some judges would be prepared to do that, such as the judge in the case of Re West Sussex Constabulary Trusts [1971]
  • Yet ostensible Re Denley purpose trusts are frequently reinterpreted as outright transfers ‚Äď e.g. to the local Social Club ‚Äď ‚Ä¶so a proxy is required after all!

    • In other words, not all judges accept the authority of Re Denley ‚Üí not all judges think it is possible to establish a purpose trust for a non-charitable purpose (with the exception of the miscellaneous non-charitable purpose trusts)
    • Some judges when dealing with something that looks like a Re Denley purpose trust (as here) would hold the trust invalid
    • But more often, these anti-Re Denley judges, when faced with something trying to be a Re Denley purpose trust will instead reinterpret the ostensible purpose trust as an absolute transfer, treating the purpose as the motive for which the transfer was made
    • E.g. some judges when faced with a transfer of money to the local Social Club to paint the clubroom would treat that as an absolute transfer to the local Social Club, and consider the reference to painting the clubroom as an indication of the motive underlying the outright transfer ‚Üí so the transfer then, of course, becomes one to the UA without further instruction ‚Üí and this of course takes us back to the legal problem which confronted us at the beginning meaning a proxy must be employed after all

    The proxy selected is invariably the contract-holding theory

Part 3: The application of unincorporated association funds

Application during the association’s existence

The ‚Äúbasic principle‚ÄĚ stipulates that association funds are to be applied in accordance with the terms on which they are held:

  • Contract-holding theory: Money applied in accordance with the association‚Äôs rules
    • Recall under this theory that a transfer under this theory is a transfer to the association‚Äôs members subject to the contract which exists between them (i.e. subject to the association‚Äôs rules) ‚Üí so the money must be applied in accordance with the association‚Äôs rules, which will specify the various purposes for which the money can be sent
    • Note, however, the association‚Äôs rules can be changed by its members so as to allow the funds to be spent on new purposes
  • Charitable/Re Denley trust: Money applied to charitable/non-charitable purpose(s)
    • So, under charitable/Re Denley trusts money is applied to the relevant charitable/non-charitable purpose(s) at the date of the transfer (they are therefore unchangeable)

When does dissolution occur?

An unincorporated association can be/is dissolved in the following ways:

  • In accordance with the association‚Äôs rules; or
    • So the rules might specify, for example, that the association will be dissolved if 2/3 of its members agree to a dissolution
    • If there is no provision as to dissolution in the rules then the members can dissolve by unanimous agreement under the common law
  • When the number of members falls below two; or
    • The second way in which a unincorporated association comes to an end is when the number of its members falls below two (i.e. when it only has one member remaining)
    • This of course makes common sense: one cannot associate with oneself
  • When the association has become moribund
    • The third way in which an unincorporated association dissolves is if it has become moribund (i.e. it is in a dying state or nearing death)
    • Under this final heading, an association dissolves when it has ceased to function ‚Üí it might cease to function due to external events (e.g. an allotment association when the allotments have been purchased by the government) or due to inactivity
    • See the case of Re GKN Bolts & Nuts Ltd etc. Work Sports and Social Club [1982]

Application on dissolution

When an Unincorporated Association is dissolved, it may have surplus funds: what happens to these funds?

The ‚Äúbasic principle‚ÄĚ applies equally on dissolution: surplus funds are dealt with in accordance with the terms on which they were held pre-dissolution

CONTRACT HOLDING ON DISSOLUTION:

The Standard Position

Surplus funds are applied in accordance with the association’s contractual rules

  • So it might be then that the association‚Äôs rules dictate how the money should be divided on a dissolution

If the rules contain an express term determining how surplus is to be divided on dissolution, this term is binding on the association members

  • If there is an express term in the contractual rules saying how surplus funds are to be divided on dissolution, this term is binding ‚Üí so in such a case the surplus will be divided in the way specified

Absent an express term the law implies a term, ordinarily for equal division between members at dissolution (Re Bucks Constabulary Fund (No 2) [1979])

Dissolution when the number of members falls below two

When the number of association members falls below two, the association’s contract is discharged

  • So under the standard position that we just looked at, there is a presupposition that the association dissolution does not bring its contractual rules to an end ‚Üí so it is for that reason then that any express terms in the contract will govern how funds are to be directed in the event of a dissolution
  • It is clear though that this presupposition is not appropriate when dissolution has occurred because the number of members has fallen below two
    • In this case then the association‚Äôs contract must terminate for the simple reason that it is impossible for a contract to exist if there is only one party to it
  • So, in this case then, the fate of any surplus assets must be determined without reference to the association‚Äôs contractual rules

As a matter of logic, any surplus then rests where the contract-holding theory’s underlying principles leave it (Hanchett-Stamford v A-G [2008])

  • Recall that under the contract-holding theory funds are owned by the association‚Äôs members subject to the contract that exists between them
    • When the contract is discharged because the number of members falls to one all that is left is the member‚Äôs underlying ownership ‚Üí So logically then the surplus must belong entirely to last surviving member
  • See the case of Hanchett-Stamford v A-G [2008]

PURPOSE TRUST ON DISSOLUTION:

The Basic Principle

Surplus funds are applied in accordance with the law of trusts

So on the association’s dissolution, any trust for its purposes will fail:

  • Charitable trust - funds automatically applied cy-pr√®s
    • So, if the trust for the association‚Äôs purposes is a charitable trust the funds will automatically be applied cy-pres
  • Re Denley trust - funds revert to the transferor on resulting trust
    • On the other hand, if the trust for the association‚Äôs purposes is a Re Denley trust any surplus funds will revert to the transferor on a resulting trust ‚Üí so any surplus money will be transferred back to the person who originally transferred property in the first place (i.e. the person who originally set up the Re Denley trust)

Disclaiming the beneficial interest

In principle, the beneficial interest under the resulting trust which arises on failure of a Re Denley trust can be disclaimed, leaving the property which reverts ownerless (bona vacantia)

  • So if the beneficial interest under the resulting trust arising from failure of a Re Denley trust is disclaimed (i.e. refused to be acknowledged) then the property which reverts is ownerless (i.e. bona vacantia)
  • Money which is ownerless ultimately goes to the crown

A transferor disclaims their beneficial interest if they intend that their money not be returned in any circumstance (Re West Sussex Constabulary Trusts [1971])

  • So a transferor will be held to have disclaimed their beneficial interest under a resulting trust if when giving their property/money to the association that they intend their money not be returned to them in any circumstance
  • E.g. when you put your money in a collection box you are never intending that money to be returned to you

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