For many boards1, the decision to close a not-for-profit (NFP) or charity is not made lightly. Whether the organisation has fulfilled its purpose, become unsustainable, or is merging into another entity, there are important legal and practical steps to take.
Below are some of the key discrete issues to consider when bringing a NFP or charity to an end.
Deregistration, winding up or dissolution?
The detail of the process to close an entity down will depend on its legal structure, which may be an incorporated body (such as a company limited by guarantee or incorporated association) or an unincorporated entity (such as a trust of unincorporated association).
There are two main ways to formally close an incorporated entity: deregistration (sometimes called cancellation of incorporation) or winding up.
- Deregistration is generally cheaper and faster. A deregistered entity may, in some circumstances, be reregistered – something that isn’t possible once an organisation has been wound up. There are often threshold limits that apply to deregistration. For example, in Victoria, an incorporated association is only eligible to deregister if it has assets worth less than $50,000.
- Winding up is a more formal process that involves appointing a liquidator and, in some cases, a court application. It is usually required if the entity has higher-value assets, more complex affairs or is insolvent.
The choice of deregistration or winding up can have significant implications. Boards should seek advice early to determine the most appropriate path.
An unincorporated entity such as a trust or unincorporated association may be dissolved. For a trust this involves a deed of dissolution. For an unincorporated association the process will depend on the governing document.
Whose decision is it to close?
Closing an entity is a major decision. In most cases (save trusts), it is not a decision that can be made by the board alone.
- Companies limited by guarantee – members typically need to pass a special resolution to deregister or wind up.
- Incorporated associations – the requirements vary across each jurisdiction. For example, in Victoria, unanimous member consent is required. In Queensland, a special resolution of the members is required.
- Trusts – the trustee(s) may dissolve the trust by trustee resolution and deed of dissolution.
Ensuring reporting is up to date
Before a NFP or charity can be closed, it is important to make sure that all reporting obligations are up to date. Regulators such as the Australian Securities and Investments Commission (ASIC), state regulators for incorporated associations or the Australian Charities and Not-for-profits Commission (ACNC) (depending on the structure) will not process an application to deregister or wind up if annual returns, financial reports or other compliance filings are outstanding. Bringing reporting up to date also helps to provide a clear financial picture for members and ensures that assets are properly accounted for before they are distributed.
Employees
Specific advice will be required if your NFP or charity has employees. Generally, employment must be finalised in line with the Fair Work Act 2009 (Cth) and any relevant awards or enterprise agreements. This includes engaging in genuine consultation about a major change, giving the required notice, paying out any outstanding entitlements (including in relation to wages, superannuation, and leave). Subject to the size of your workforce, the length of service of each employee, and whether employees are engaged on a permanent or casual basis, you may also need to provide employees with redundancy pay.
Insurance
Even after an entity has been closed, directors and officers can still face claims relating to decisions made while the NFP or charity was operating. Run-off Directors’ & Officers’ insurance provides ongoing protection for board members and officeholders against those risks. It is worth checking how long the cover should be maintained and whether the existing policy automatically provides run-off cover, or if a separate policy needs to be arranged.
Distribution of surplus assets
A NFP or charity may have surplus assets (after the payment of any debts and liabilities, including – subject to the terms of the grant – the return of unspent grant monies). The NFP or charity will need to identify an appropriate recipient(s) to receive its assets.
Generally, the distribution of assets will be provided for in the winding up clause of the entity’s governing document. The winding up clause usually states who has the power to determine who receives assets – this is often the members or (if the members cannot agree) a Court. Even if member approval is not required, it may be prudent for the board (particularly the board of a charity) to consult with the members as part of its responsibility to be accountable to members.
When identifying an appropriate recipient, the following considerations should be taken into account:
- The winding up clause may:
- specify eligibility criteria for recipients (for example, that they must be NFP or a charity with a similar purpose); or
- provide that assets must be distributed to a specific recipient (even if this is the case, the board should confirm that the specific recipient still meets any eligibility criteria, e.g. it is still endorsed as a deductible gift recipient (DGR) if this is an eligibility criterion).
- DGR constraints – generally DGR assets should be kept separate from an entity’s other assets (usually in a gift or public fund). This includes funds or property that have been received by an entity through tax-deductible donations or contributions while it was endorsed as a DGR. These assets must only be distributed to another entity that is endorsed as a DGR with a similar charitable purpose.
- It may be possible to impose constraints on a recipient of a NFP or charity’s assets by negotiation or agreement with the recipient. For example, a recipient entity may agree to use assets for a limited purpose, a particular program or a specific geographic area. This may assist the NFP or charity to ensure the ongoing promotion of its purpose after it ceases to exist.
Documenting the decision
The closure of a NFP or charity must be properly documented. This may include:
- passing resolutions at board level;
- passing resolutions at properly convened meetings of the members; and
- for trusts – executing a deed of dissolution.
It may be appropriate to identify the recipient of the assets in the board resolution and include confirmation that the board is satisfied that any eligibility criteria have been met (e.g. that the purposes are sufficiently similar).
Notifying regulators
Once the decision is made, there are a number of regulators that may need to be notified, including:
- the state regulator or ASIC, depending on the structure;
- the ACNC; or
- the Australian Taxation Office, particularly where the entity has DGR endorsement or tax concessions.
Each regulator has its own forms, processes and timing requirements.
How we can help
Closing a NFP or charity involves more than simply shutting the doors. The rules are complex – and differ between states, structures, and tax statuses. From member approvals through to the distribution of assets and regulator notifications, each step requires careful attention – Moores can assist your organisation to complete all steps in the closure process in a compliant manner.
Contact us
Please contact us for more detailed and tailored help.
Subscribe to our email updates and receive our articles directly in your inbox.
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.