Handling NFP Member Disputes: A Guide for Incorporated Associations

Introduction

Internal disputes are an unfortunate reality for any incorporated association and can arise between a member and the committee or among members themselves. When left unresolved, these conflicts can seriously disrupt an association’s operations and threaten its governance, making it crucial to handle each case effectively.

Resolving a member dispute requires a clear understanding of the procedures outlined in the association’s constitution and the Associations Incorporation Act 2009 (NSW), with court action being a final resort. This guide provides essential information for your committee on how to handle each stage of a dispute, from internal processes to potential court cases, and highlights why strategic legal support is essential for Australian not-for-profits when legal questions arise.

The Constitution as the Contract Identifying the Legal Basis for a Dispute

Legally Binding Framework

The constitution of an incorporated association serves as a legally binding contract between the association and its members. This document forms the primary legal basis for any internal dispute, as it outlines the rights and obligations that govern the relationship between all parties involved.

Under the Associations Incorporation Act 2009 (NSW), an association’s constitution must address specific matters to ensure proper governance and provide a clear framework for resolving disputes. These required components create a self-governing structure that dictates how the organisation must operate and handle conflict.

Key Constitutional Requirements

Key matters that the constitution must cover include:

Constitutional Requirement	Description
Membership qualifications	The requirements, if any, for a person to become a member of the association.
Fees and subscriptions	Any entrance fees or ongoing subscriptions that members are required to pay.
Disciplining of members	The formal procedure for taking disciplinary action against a member, which must include a process for appeals.
Internal disputes	The specific mechanism for resolving disputes that arise between members or between a member and the incorporated association itself.
The committee	Details about the committee’s composition, functions, election process, and terms of office for its members.
General meetings	The procedures for calling, holding, and conducting general meetings, including rules for notifying members and establishing a quorum.
Winding up	The process for formally closing down the incorporated association.

The clauses that detail member discipline and the procedure for resolving an internal dispute are especially critical when a conflict arises. These sections provide the official roadmap the committee must follow to handle a case of disagreement or misconduct.

If a dispute involves complex legal questions regarding the constitution, seeking advice from lawyers experienced with NFP organisations is a crucial step to ensure the matter is managed correctly.

Common Triggers for an Internal Dispute 

An internal dispute can arise within an incorporated association for many reasons, often when a member acts contrary to the constitution or in a manner that is prejudicial to the organisation’s interests. These conflicts can involve disagreements between members, or between one or more members and the association itself.

Disputes in incorporated associations frequently stem from disagreements over core governance and procedural matters. When not handled correctly, these issues can escalate and disrupt the association’s functions.

Common examples of triggers for an internal dispute include:

Trigger Area	Description of Potential Conflict
Membership	Conflicts can arise over the qualifications for membership or the process used to approve or deny applications.
Meeting Procedures	Disagreements about how meetings are conducted, such as whether proper notice was given or if voting procedures were followed correctly.
Validity of Appointments	A dispute may occur when members challenge the legitimacy of an election or the appointment of a person to the committee.
Removal of Committee Members	The process of removing a committee member can be contentious and lead to a formal dispute if not handled in accordance with the association’s rules.

More serious conflicts can emerge from deep-seated divisions within the organisation. In some cases, unresolved disagreements lead to factional schisms, where rival groups may hold themselves out as the true management committee, thereby paralysing the association’s operations.

Allegations of financial mismanagement, often stemming from a lack of strategic financial oversight, are another significant cause of internal disputes. For instance, a case involving the misappropriation of an association’s funds by a committee member can destroy trust and create severe conflict that may ultimately require court intervention to resolve.

The Internal Dispute Gap: Why the ACNC Will Not Get Involved

Internal disputes within an incorporated association are disagreements between individuals or groups concerning the organisation’s activities, decisions, or policies. When left unaddressed, these conflicts can threaten a charity’s governance and operational effectiveness, making it crucial for the committee and its members to know how to handle the case.

Many members assume that a regulatory body like the Australian Charities and Not-for-profits Commission (ACNC) will mediate or resolve an internal dispute. However, the ACNC will not directly intervene in these matters for several reasons:

• Its role is not to run charities
• It does not become involved in internal differences of opinion

The ACNC will only become involved in a charity’s dispute if there is a serious risk to public trust and confidence. For example, this may occur if the dispute has the potential to result in a breach of the incorporated association’s obligations to the ACNC.

This policy creates a gap where the responsibility to resolve a dispute falls squarely on the association itself. If a member dispute raises legal questions or could lead to court action, seeking professional guidance is essential. It is highly recommended that your incorporated association seeks legal advice from experienced NFP lawyers to understand its options and obligations.

Resolving a Member Dispute: A Strategic Guide for Your Committee

Following Your Association’s Dispute Resolution & Disciplinary Procedures

Before considering court action, your committee must attempt to resolve the dispute using the procedures outlined in your association’s constitution. The Associations Incorporation Act 2009 (NSW) mandates that every incorporated association must have a mechanism for resolving disputes between:

• Members and other members
• Members and the association

Taking a case to court should always be the last resort after all other conflict resolution efforts have failed.

If your association’s constitution does not specify a dispute resolution process, the procedure detailed in the model constitution automatically applies. This process requires that:

• The internal dispute is first referred to a Community Justice Centre (CJC) for mediation
• Should mediation fail to resolve the issue within three months, the matter must then be referred to arbitration

An association can also try a more informal approach first, such as discussing the issue directly with the member involved. However, once formal steps are taken, it is critical to follow the established procedures.

If the dispute involves complex legal questions, it is highly recommended that your committee seeks advice from experienced NFP lawyers to ensure the matter is managed correctly.

The Legal Process for Expelling a Member in Your Incorporated Association

When a member’s conduct warrants disciplinary action, such as expulsion, the committee must strictly follow the procedure set out in its constitution. If your incorporated association uses the model constitution, disciplinary action can be taken if a member has:

• Refused to comply with the constitution, or
• Wilfully acted in a manner prejudicial to the interests of the association

The process for disciplining a member under the model constitution involves several key steps:

Step	Description of Action
1. Committee Resolution	The committee must first pass a resolution to determine the appropriate disciplinary measure, such as suspending or expelling the member.
2. Notification	The secretary must notify the member of the decision, the reasons for it, and their right to appeal within seven days of the committee’s resolution.
3. Appeal and General Meeting	If the member chooses to appeal, the committee is required to convene a general meeting within 28 days.
4. Member Vote	At the general meeting, all members present have the opportunity to vote to either confirm or revoke the committee’s decision.

Throughout this process, the association must afford the member natural justice, also known as procedural fairness. This means the member must be:

• Notified of the grounds for the action
• Given a fair opportunity to be heard
• Have the decision made by an unbiased party

Failing to provide natural justice could result in the disciplinary action being overturned if the case proceeds to court.

Taking Court Action Legal Remedies & Procedures in the NSW Supreme Court

Seeking Court Orders & Winding Up the Association

When an internal dispute becomes so severe that it cannot be resolved through internal procedures, taking the case to the NSW Supreme Court may be the final option. In extreme circumstances, a member, a creditor, or the incorporated association itself can apply to the Court for an order to wind up the association, which involves a specific process for asset distribution when ending a charity.

Under the Associations Incorporation Act 2009 (NSW), the Supreme Court may issue a winding-up order if the association has:

• Conducted its affairs to provide financial gain to its members
• Engaged in activities that are inconsistent with its stated objects
• Acted in the interests of the committee or certain members rather than its objects
• Behaved in a manner that is unfair or unjust to its members
• The court believes it is just and equitable for the association to be wound up

This drastic measure is reserved for serious cases of mismanagement or unfairness. Given the complexity of such proceedings, it is vital for an incorporated association to seek guidance from NFP lawyers to understand its legal position and handle the case correctly.

The Role of Receivership in Resolving an Internal Dispute

As an alternative to winding up, the NSW Supreme Court can appoint a receiver to manage an association’s affairs and help resolve a dispute. This approach aims to preserve the organisation and its property while addressing critical management issues, making it a better outcome for members in many situations.

The court may appoint a receiver when it appears just or convenient to do so, particularly to ensure the association’s business can be properly conducted. A receiver can be granted specific powers by the court to handle the internal dispute effectively. These powers may include the authority to:

• Administer and supervise a contentious election process
• Call and hold a general meeting of the association
• Gather feedback from the membership regarding governance issues
• Approve or reject new membership nominations
• Act as chairperson at a general meeting or appoint someone to do so
• Determine which members are eligible to vote in a meeting or election

Case Spotlight: Legal Lessons from the Lao Buddhist Society Dispute

The case of Sengthong v Lao Buddhist Society of NSW Incorporated provides a clear example of how the NSW Supreme Court can intervene to resolve a severe internal dispute within an incorporated association. This case demonstrates the court’s preference for preserving an organisation’s community purpose over dissolving it, even amidst serious conflict.

Origins of the Dispute

The dispute originated from a contentious election in 2006, which resulted in two rival factions each claiming to be the legitimate “Management Committee.” This schism effectively paralysed the association’s governance structure.

The situation was further complicated by an earlier incident where the society’s president had misappropriated approximately $196,000, adding financial concerns to the already complex governance issues.

Legal Intervention

When the long-standing internal dispute remained unresolved, the Secretary of the NSW Department of Fair Trading threatened to cancel the association’s registration. This prompted legal action, with some members applying to the Supreme Court to have the Lao Buddhist Society wound up under the Associations Incorporation Act 2009 (NSW).

The Court, however, found that winding up the incorporated association was not the appropriate solution. It determined that such an action would:

• Disrupt important religious and community activities
• Displace monastic residents
• Deprive the members of the benefits of their temple

Resolution Approach

Instead of dissolving the organisation, the Court appointed a receiver to handle the dispute. The receiver was given specific powers to resolve the conflict, including:

• Determining membership eligibility
• Conducting a court-supervised election for a new management committee

This case illustrates that when faced with a complex member dispute, the court may prioritise remedies that preserve the association and its assets, highlighting the importance of seeking advice from experienced NFP lawyers to handle the case correctly.

Conclusion

Effectively handling a member dispute in an incorporated association requires strict adherence to the procedures in your constitution, from internal resolution to potential court intervention. Following these steps and ensuring procedural fairness is crucial to resolving the case while protecting the association’s interests.

If your NFP incorporated association is facing a complex member dispute that requires legal guidance, contact the experienced NFP lawyers at LawBridge today. Our team provides trusted expertise to help you handle the case correctly and protect your organisation’s interests.

Frequently Asked Questions