Is your not-for-profit (NFP) contemplating a merger? This is part five of a five-part article series that will offer some practical guidance to your board or merger advisory committee. Subscribe to receive the remaining articles in the series.
In an NFP merger, due diligence assists boards to determine whether or not to proceed and to identify issues that may need to be prioritised and addressed as soon as practicable following any merger. More information on the due diligence process can be found in part four of our article series.
A key consideration in the due diligence process is the potential risk associated with historical liabilities.
It is important for the Board to ensure that:
- appropriate enquiries have been made to confirm that there are no known outstanding liabilities;
- the risk of potential liabilities and claims have been properly assessed;
- adequate consideration has been given to insurance cover (including run-off insurance); and
- there are sufficient assets to satisfy any future potential claims.
In most cases, the chosen merger type will involve some sort of transfer of assets and liabilities to a recipient entity (the acquiring NFP or the new merged NFP). After the merger, the NFP that has transferred its assets and liabilities will then often be deregistered. Generally, the only liabilities transferred as part of this process will be those that the acquiring NFP or new merged NFP has expressly agreed to assume. This usually means that liabilities that are unknown or are not expressly transferred will stay with the deregistered entity.
Two potential exceptions to this general principle are clawback and historical child abuse liability.
Exception 1: Reinstatement of registration and clawback
Deregistration under the Corporation Act 2001 (Cth) is only appropriate if an entity has no outstanding liabilities.1 If a deregistered entity is found to have outstanding liabilities, an aggrieved person (including a creditor2) may make an application to the court for re-instatement of registration of the entity, typically on the basis that it is “just” to do so from the time of deregistration.3 This is the case irrespective of whether the outstanding liability was known at the time of deregistration.
After reinstatement of registration, the formerly deregistered entity may be placed in liquidation. This means that insolvent or “uncommercial transactions” of the formerly deregistered entity (which may include a transfer of assets in a merger) could be voidable.4 Remedies can include an order for assets held by the acquiring NFP or a new merged NFP to be transferred back to the formerly deregistered entity. Depending on the circumstances, the period within which transactions can be voided (looking backwards from the winding up of the entity5) can be six months, two years or even longer.
The implication for the acquiring NFP or newly merged NFP is that assets received in a merger may be able to be “clawed back” by an aggrieved person if the transferring entity is liquidated and the asset transfer is characterised as an “uncommercial transaction”.
Exception 2: Historical child abuse liability
In relation to liabilities that relate to historical child abuse, an acquiring NFP or a new merged NFP may be held directly liable for a claim against a deregistered entity (if the transferring entity was previously incorporated) or a dissolved unincorporated entity in some circumstances as legislation has been passed in all jurisdictions to ensure that claims relating to child abuse are no longer statute barred. The position differs in each jurisdiction in Australia and is summarised below:
- in New South Wales and Tasmania – an organisation “and any successor of that organisation” are “taken to be the same organisation” for the purposes of civil liability for child abuse6;
- in Western Australia, Queensland and South Australia – a child abuse claim may be brought against an institution or its officeholders if the institution is “substantially the same”7 as a former unincorporated institution that exercised care, supervision or authority over children and a child abuse claim could have been brought against an office holder in that unincorporated institution. If there is no institution that is “substantially the same”, there are additional provisions that allow for “tracing” from the unincorporated institution through multiple mergers and restructures over time;
- in the Northern Territory, a “successor institution” assumes the liability of a former institution for a historical child abuse claim if it is “substantially the same” as the former institution8; and
- in Victoria and the Australian Capital Territory, there is no express provision for successor organisations. There is provision for an unincorporated institution to nominate an alternate defendant, but only with the nominee’s consent.9
If a potential historical child abuse liability is identified, it may be prudent to seek legal advice specific to the relevant jurisdiction, the merger parties and the merger type so that any risk to the acquiring NFP or any new merged NFP (and the directors) can be properly assessed. This will help inform the board’s decision making process including:
- whether it is appropriate to proceed with the merger;
- the appropriate merger type; and
- if the merger proceeds, identifying appropriate risk mitigation steps to limit exposure.
How we can help
Moores Charity and Not-for-profit team can help if your organisation is contemplating a merger. We can also provide advice tailored to your circumstances (including the relevant jurisdiction, the nature of the liability and your proposed merger process) if possible historical liabilities are identified during the due diligence phase.
Contact us
Please contact us for more detailed and tailored help.
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Disclaimer: This article provides general information only and is not intended to constitute legal advice. You should seek legal advice regarding the application of the law to you or your organisation.