Trading with a charity

Who Owns the Not-For-Profit’s Assets?

You would think that it is easy to identify the owner of a train?

But the trains and other rolling stock located on the Canberra Railway Museum site at Kingston have proven ownership can be very tricky.

Currently, the future of a Rail Heritage not for profit business in the ACT hangs in the balance, following the appointment of a Liquidator and Trustee of the entities responsible for it to date.

This disappointing outcome affects hundreds of members and rail enthusiasts and illustrates a scenario that everyone who is an Office Bearer or Volunteer, or plays any part in the administration of a non-profit Organisation can learn from.

The Proceedings

Recent proceedings in the ACT Supreme Court – SC 519/2016 – Sommerville & Or v The Australian Railway Historical Society (ACT Division) Incorporated & Or (Unreported) – ended with the making of Consent Orders for 2 external appointments:

1. as Liquidator of the incorporated association/ (the Railway Society”); and

2. as Trustee of the assets of the Canberra Railway Museum Trust.

The Court appointed one of Canberra’s most experienced liquidators as Liquidator and Trustee. The Court also made an order that Members and former Members of the Society must be consulted on specified issues relating to the assets.

The Court directed the Liquidator to have regard to the very passionate uber rail enthusiasts who had been Members of the Society.

The Background

Not only is the case of interest to the Canberra community, the former Members and Volunteers, and all who have a passion for Rail Heritage, but it highlights many practical and legal lessons of which all non-profit Organisations and Charities should be aware.

At the heart of the job facing the Liquidator is the identification and confirmation of ownership of a motley collection of trains and other rolling stock ranging from carriages over 100 years old and in various states of disrepair, to steam and diesel locomotives, to carriages once part of The Southern Aurora, to an ancient Crane.

The key issue for the liquidator to determine is who owns the mega train set. Is it the Trust that was formed in 1981, or does the Society which traded the business into insolvency have an interest in the trains?

The ownership of debt in this case is also a challenge. The Society was both the Trustee of the significant assets, and the operating entity in its own right.

This is always a disaster.

Trust assets should always be licenced to a separate legal entity to generate income for a not for profit Society that runs any commercial activity.

Unfortunately, the debt level skyrocketed during 2016,  shocking ACT train lovers into the reality that Rail Heritage may vanish from the scene in Canberra forever.

The Fundamental Question

Is a Trust asset available to satisfy the debts of the Society? The Liquidator seems to think so, as he has organised an auction sale of a large number of Rail Heritage items.

Volunteer workers provided most of the human effort needed to maintain a fleet of historical rolling stock, operate tourist activities and maintain the Museum site at Kingston, which is leased from the ACT Government by the Society.

Intermingling of funds from various sources, and the indiscriminate spending of Society money, some of it on Trust assets, coupled with inadequate record-keeping and poor Corporate Governance, has presented many challenges for the Liquidator to unravel and for the former Members to understand.

The Liquidator wears two hats at the same time and each of his roles has its own separate, competing, priorities.

A further complication arises because the duties of the employees of the Society were spread across the maintenance of the Trust assets and the operations of the Society in its own right, and they also ran the commercial arm, with few records being kept of the proportions of their time spent in each role.

Every single charitable association in the country should ensure its assets are well protected via an appropriate asset protection structure.

The final challenge is to determine whether there will be anything left to form the basis of the resurgence of Rail Heritage in Canberra.

The Significance of the Case for Others

The case is a reminder to other Organisations of the importance of separating and documenting the ownership of assets,

It is essential that every not for profit business clarifies the powers, responsibilities and functions within the Organisation as a whole.

As Liquidators, we will always insist on separate legal entities. One entity owns assets, the other trades.

This basic asset protection strategy is cheaper than insurance and more effective when businesses get into financial difficulty.

It is critical that clear contractual terms of any agreements in relation to the use and maintenance, and the income earning role, of the assets of the entities, along with liability for expenses, be documented.

The case is also a reminder that meticulous record-keeping, tedious as it may be, has its rewards, and is a vital responsibility of all business entities, none more so than those in which Volunteers spend countless hours caring for significant historical items, with the benefit of Tax-deductible Gifts and Government Grants. 

The hard lesson is the sad reality that the benefit of the contribution of those resources has been negated in the case of the Canberra Railway Museum.

Conclusion

Office bearers in non-profit Organisations and Charities are well-advised to be vigilant in supervising all aspects of the operations of the Organisation and to ensure that personnel with appropriate skills and experience are engaged to maintain records, particularly accounting records, and to enable the organisation to perform its reporting obligations. 

Every not for profit in the country should check its asset protection strategy. If management is not sure whether they have the best asset protection structure, give us a call before you go off the rails or you find yourself in the middle of train wreck.

 



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