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VIC Unincorporated Organisation Making A Loan?

Discussion in 'Commercial Law Forum' started by cazzap, 18 September 2014.

  1. cazzap

    cazzap Member

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    I would love advice regarding the following situation: a kindergarten was asked to relinquish its incorporated status some years ago to join a cluster management group (who are also unincorporated and overseen by a Board on behalf of incorporated associations). Four years ago the cluster managers were approached by the former director of the kindergarten - their own employee - who requested a loan to cover improvements to the kindergarten. The loan was approved and committee members requested to sign a loan agreement contract stating that half the repayment would come from fundraising money and half from grants (which was never an option as grants are not awarded retrospectively).

    The cluster management group and kinder will be parting ways from next year and there is still about half the loan needing to be repaid. If it's noteworthy, the kinder has recently successfully applied to become incorporated.

    My question is, from a legal standpoint, can an organisation loan money to another part of its own organisation and expect repayment? I would really appreciate any advice you can offer.
     
  2. Sarah J

    Sarah J Well-Known Member

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    Hi cazzap,

    I cannot think of any reasons preventing an organisation (unincorproated) to loan to another body. Is there a legal issue here? Is the other organisation defaulting on repayments?

    Is the lending organisation changing its name/structure/ownership? If so, the former organisation may need to re-assign the debt, with the signature of the debtor, to the newly formed organisation.
     
  3. cazzap

    cazzap Member

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    Thank you very much for the reply. The lending organisation in question controls the kindergarten and owns the assets. Any grant applications made by the kindergarten, for example, needs to be made in their name. They control the kindergarten's financial/budgetary arrangements, receive the funding from relevant government organisations for places at the kinder, employee the kinder's staff. I just wondered whether legally an organisation can loan to an entity that it controls? The loan was to the tune of $20,000 so not insubstantial. They are seeking to draw up a schedule of repayment for the remainder of the loan to be paid once the kindergarten starts operating as a stand-alone entity following their withdrawal at the start of next year.
     
  4. Sarah J

    Sarah J Well-Known Member

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    An organisation (organisation 1) can loan to another organisation (organisation 2) within the same group if this is in the interests of the company to do so. There is no law or rule preventing one from loaning to the other. The only thing that they (or rather, the directors) should be weary of is their duties to organisation 1. A director, board of directors or management charged with oversight of the organisation must act in the best interests of the organisation. This means, in the best interests of its shareholders/members. If making this loan will raise the reputation of or confidence in organisation 2 that will subsequently flow on to the reputation of and confidence in the whole group and therefore, organisation 1 benefits, then this is perfectly fine. However, if organisation 1 is struggling to stay afloat and making this loan would cause them to be on the verge of defaulting, then no, this would be in breach of the duty mentioned above. Further to this, approval of the loan must be made in accordance with proper procedural methods (as listed in the organisation constitution/articles) and must be made with the full and frank disclosure of any conflicts of interest and other significant matters.
     
  5. Sarah J

    Sarah J Well-Known Member

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    Further, any person who has an interest in the transaction, or any relation with organisation 2 (for example, they are also the director or their spouse is the director of organisation 2) should not be voting in the decision unless they have the full consent of the other people voting and it is allowed by the organisation constitution/articles.
     
  6. cazzap

    cazzap Member

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    Thank you very much for all the information - it's much appreciated.
     
    Sarah J likes this.

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