NSW Incorporated Association to CLG: Legal Roadmap for NFPs

Introduction

Board members of a NSW incorporated association may reassess their legal structure, a process often involving expert advice on NFP restructuring, when the organisation experiences changes in size, operational scope, or turnover. For a not-for-profit (NFP) entity planning to operate nationally or one that is approaching NSW Fair Trading turnover limits, transitioning to a company limited by guarantee (CLG) can provide a more suitable framework.

This article provides a roadmap for the process of an incorporated association transferring to a company limited by guarantee. It covers the necessary steps, from navigating the legislative requirements under the Associations Incorporation Act 2009 (NSW) (‘Associations Act’) and the Corporations Act 2001 (Cth) (‘Corporations Act’) to securing approvals from members and regulators like NSW Fair Trading and ASIC.

Interactive Tool: Check Your Readiness to Transfer to a Company Limited by Guarantee

Why Choose a Company Limited by Guarantee

Changes in Organisation Size & Operating Locations

An incorporated association may reassess its legal structure when it experiences significant growth or operational shifts. Consequently, these changes often prompt board members to consider a transition to a company limited by guarantee (CLG).

Key triggers for this re-evaluation include modifications in an organisation’s:

• size and scale of operations;
• membership numbers;
• total asset value; and
• geographic location of activities.

The CLG structure is particularly suitable for an organisation that plans to operate nationally or across more than one Australian state or territory. 

Furthermore, it is a fitting legal entity for larger not-for-profits, even those that conduct activities within a single state. 

For instance, the NSW Office of Fair Trading has suggested that a CLG may be more appropriate for an incorporated association with income or assets that exceed certain thresholds.

NSW Fair Trading Turnover Limits & ACNC Charity Registration

The decision to transition from an incorporated association to a company limited by guarantee can be driven by the legal requirements of NSW Fair Trading. 

These obligations often relate to an organisation’s annual turnover and assets, which can make the existing structure less suitable as the entity grows. For charities, the CLG structure has become a more attractive option due to changes in regulation. 

Previously, CLGs were regulated by the Australian Securities and Investments Commission (ASIC); however, today, a company limited by guarantee that is a registered charity is primarily regulated by the Australian Charities and Not-for-profits Commission (ACNC).

The ACNC is a dedicated regulator for charities that makes the transition to a company limited by guarantee a more appealing pathway for many not-for-profit organisations. This appeal is largely because:

• the ACNC is committed to reducing red tape;
• it takes an educative approach to its regulatory functions; and
• registering with the ACNC aligns with the nature of a not-for-profit, which can increase the transparency of its operations.

Legal Framework: Transfer of Incorporation for NSW Incorporated Associations

Relevant State & Federal Legislation

An incorporated association can transition its legal structure to a company limited by guarantee (CLG) through a process governed by state and federal legislation. 

The transfer allows the organisation to move from being registered under state law to federal law, which is often better suited for entities operating nationally. The primary legislation governing this process includes:

• The Associations Act at the state level; and
• The Corporations Act as the federal framework.

Under Division 3 of Part 7 of the Associations Act, an association is authorised to apply for a transfer of registration. This process involves applying to the Australian Securities and Investments Commission (ASIC) to register as a company limited by guarantee under Part 5B.1 of the Corporations Act.

A key aspect of this transition is the continuity of the legal entity. According to Section 9 of the Associations Act, an association that arises from the registration of a registrable corporation is a continuation of the same legal entity. 

Consequently, this ensures that all assets, rights, and liabilities of the incorporated association are seamlessly transferred to the new company limited by guarantee.

Application Requirements for a Transfer of Registration Declaration

To initiate the transfer, the incorporated association must submit an application for a transfer of registration declaration. Section 9 of the Associations Incorporation Regulation 2022 (NSW) (‘Associations Regulation’) outlines the specific information and documents that must be included with this application. 

In essence, these requirements ensure that the transition is transparent and protects the interests of members and creditors.

The application must include the following key items:

• Statement on Profit Distribution: A written statement confirming whether the new entity’s rules prohibit the distribution of profits to its members. This aligns with the not-for-profit nature of many organisations undertaking this change.
• Declaration on Creditor Prejudice: A formal declaration stating that the association’s creditors are not likely to be materially prejudiced by the transfer of incorporation. This provides an assurance that the restructure will not negatively impact the entity’s financial obligations.
• Declaration on Legal Personality: A written declaration confirming that the relevant federal law provides for the continuation of the association’s legal personality after the transfer is complete.
• Outstanding Documents: The application must also include any documents that the incorporated association failed to lodge over the last three financial years, as required under Section 45 or 49 of the Associations Act.

Drafting a New Constitution & Structuring the Board for the New Entity

Compliant Constitution for a Company Limited by Guarantee

When an incorporated association transitions to a company limited by guarantee (CLG), it must repeal its current constitution. Consequently, a new constitution designed specifically for a CLG must be adopted to ensure the new legal entity complies with the Corporations Act. This process involves developing a new governing document that is fit for the new structure.

The new constitution modernises the organisation’s governance framework, with key changes often including:

• Updating membership classes and preserving the voting rights of specific member groups.
• Introducing staggered terms for directors to promote stability and continuity on the board.
• Modernising meeting rules to allow for virtual or hybrid attendance options, enhancing flexibility for members and directors.

Ultimately, this step is a formal requirement of the transfer of incorporation. Therefore, it must be approved by members before applying to the relevant regulators.

The Board of Directors & the Mandatory Company Secretary Role

The move from an incorporated association to a company limited by guarantee introduces new composition requirements for the governing body. Under the Corporations Act, a CLG must adhere to specific structural rules, as follows:

• Board of directors: The board must have at least three directors, with at least two ordinarily residing in Australia.
• Company secretary: The entity must appoint at least one company secretary, who must ordinarily reside in Australia if they are the sole secretary.

While the company secretary role can be held by a director, it is not a requirement. Furthermore, the creation of this role and the formal appointment of directors help to clarify the fiduciary responsibilities for the new legal entity.

Special Member Resolutions for the Transfer of Incorporation

Convening a Special General Meeting to Issue the Explanatory Memorandum

To authorise the transfer of an incorporated association to a company limited by guarantee, a Special General Meeting (SGM) must be held. 

This meeting allows members to formally consider and vote on the proposed structural changes. Before the SGM, the organisation must issue an explanatory memorandum to all members.

The purpose of this memorandum is to ensure members can make an informed decision. It typically provides comprehensive details about the proposed transition, including:

• an explanation of each resolution to be voted on;
• the rationale behind the proposed conversion to a company limited by guarantee;
• a summary of the potential benefits and risks associated with the new legal entity; and
• an outline of any alternatives to the transfer that the board has considered.

Securing the Required Member Approval Votes for the Restructure

The transfer of incorporation must be authorised by a special resolution of the members. Under Section 39 of the Associations Act, a special resolution requires the support of at least 75 per cent of the votes cast by members who are entitled to vote on the matter.

Members can cast their votes at the SGM. In addition, the association’s constitution may also allow for proxy voting, which permits members who cannot attend the meeting in person to appoint another person to vote on their behalf. 

Ultimately, this ensures that all eligible members have an opportunity to participate in the decision-making process for this significant change to the organisation’s structure.

The Implementation Roadmap for Securing NSW Fair Trading & ASIC Approvals

Lodgement of Form A10 with NSW Fair Trading for a Transfer Declaration

After the members of an incorporated association pass a special resolution to approve the transfer, the next administrative step is to seek approval from NSW Fair Trading. 

This step is a procedural requirement to formally notify the state regulator of the intended change from an incorporated association to a company limited by guarantee. To achieve this, the organisation must adhere to the following requirements:

• Lodging Form A10: The organisation must lodge a Form A10, titled “Application for approval to transfer registration”, to obtain a transfer declaration.
• Submission timeframe: This application must be submitted to NSW Fair Trading within 28 days of the Special General Meeting where the resolution was passed.

Registration Process with ASIC & the ACNC

Once the transfer declaration is secured from NSW Fair Trading, the final stage of the process involves registering the new legal entity with federal regulators. This process includes the following key steps:

• ACNC registration: For a not-for-profit (NFP) entity, a further step is to register with the Australian Charities and Not-for-profits Commission (ACNC). This registration formally aligns the new company limited by guarantee with its NFP status, and it also increases the organisation’s transparency through ongoing reporting obligations to the ACNC.
• ASIC registration: The organisation must apply to the Australian Securities and Investments Commission (ASIC) to register as a company limited by guarantee under the Corporations Act. This registration provides the new company limited by guarantee with national recognition, which is a key benefit for organisations operating across Australia.

Ongoing Compliance Obligations for the New Company Limited by Guarantee

Managing Ongoing Financial Reporting & Record Keeping Requirements

Once an incorporated association becomes a company limited by guarantee (CLG), it must adhere to new financial reporting and record-keeping obligations under the Corporations Act. 

The new legal entity is required to maintain written financial records that accurately explain its transactions, financial position, and performance. Furthermore, these records must be kept for seven years.

In addition, a company limited by guarantee must maintain a compulsory members’ register. This register must include each member’s name, address, and the date they became a member.

The specific reporting obligations for a non-charitable company limited by guarantee depend on its annual revenue, as follows:

• Small CLG: An entity with annual revenue under $250,000 is not required to prepare financial or directors’ reports unless directed by the Australian Securities and Investments Commission (ASIC) or members with at least 5% of votes.
• CLG with revenue under $1 million: This entity must prepare a financial report, which can be reviewed instead of audited, and a directors’ report.
• CLG with revenue of $1 million or more: This entity must prepare a financial report that is audited, as well as a directors’ report.

Adhering to Director’s Duties & Governance Standards

Directors of the new company limited by guarantee are subject to legal duties outlined in the Corporations Act. These standards of conduct are designed to ensure directors manage the organisation’s affairs responsibly. 

For a CLG that is also a registered charity, directors must also comply with a range of legal duties, including the ACNC governance and compliance standards.

The primary duties for directors of a company limited by guarantee include:

• Acting with care and diligence: Directors must carry out their roles with the same level of care and diligence that a reasonable person in a similar position would exercise.
• Acting in good faith: All powers and duties must be exercised in good faith, in the best interests of the company, and for a proper purpose.
• Not improperly using their position: A director must not use their position to gain an advantage for themselves or someone else, or to cause harm to the company.
• Not improperly using information: Information obtained through the director’s position must not be used to gain a personal advantage or to cause detriment to the company.
• Disclosing and managing conflicts of interest: Directors are required to disclose any material personal interests that relate to the company’s affairs to the other directors.
• Preventing insolvent trading: Directors have a duty to ensure the company does not continue to trade if it is insolvent, and seeking legal advice is key to preventing insolvent trading and its serious consequences.

Conclusion

Transferring a NSW incorporated association to a company limited by guarantee is a structured process involving member resolutions, a new constitution, and approvals from NSW Fair Trading and ASIC. Following this legal roadmap ensures the NFP entity can successfully transition its incorporation to a legal entity better suited for growth and national operations.

Successfully navigating the transition from an incorporated association to a company limited by guarantee requires careful legal guidance. Contact our expert not-for-profit lawyers at LawBridge today for tailored advice to ensure your NFP entity’s restructure is managed correctly and efficiently.

Frequently Asked Questions