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Monthly tip for community associations – December

Board members have a  duty to prevent insolvent trading. This duty can be split into two parts:

  •  To prevent insolvency, and
  •  To act diligently and properly if insolvency does occur.

Insolvency is determined by reference to a ‘cash flow test’ and not whether or not an organisation’s assets exceed its liabilities. Under this test, an organisation is insolvent when it is ‘unable to pay its debts as and when they become due and payable’.

The legislation governing incorporated associations in each state and territory provides monetary penalties of up to $40.000 (this differs in each jurisdiction) for breaches of committee members’ duties, and in some cases, imprisonment of up to four years (this differs in each jurisdiction).

In cases of insolvent trading, committee members may commit an offence by allowing the organisation to incur debts whilst insolvent. Committee members may then be personally liable  to pay any debts incurred by the organisation or to compensate for any loss which has been suffered.

This information was gathered from Justice Connect Not-for-profit Law. These tips are from our Community Sector Development Program.

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