For anyone passionate about founding a charity or not-for-profit (NFP), the focus is almost always on beginnings—on growth, impact, and building a sustainable future. Few people start an organization while thinking about its end. However, the reality is that a number of Australian charities eventually wind up their operations for various reasons.
Planning for this eventuality isn’t pessimistic, but rather a fundamental part of responsible governance. A critical, and often overlooked, component of this planning is the winding-up or dissolution clause within a charity’s constitution.
This legal provision dictates what happens to any surplus assets once all debts are settled. As a recent NSW Supreme Court decision highlights, the specific wording of this clause can be the difference between a charity’s legacy being honored or becoming the subject of a costly legal dispute. If ensuring the final destination of your organization’s funds is important, your governing documents must accurately reflect that intention.
The Winding-Up Clause: Your Charity’s Final Instruction Manual
At its core, a winding-up clause is a charity’s final directive. It’s a legally binding instruction that ensures the organization’s remaining assets continue to serve a charitable purpose even after the organization itself ceases to exist. A foundational principle for Australian charities is that assets cannot be distributed to members or owners upon dissolution. Instead, they must be transferred to another charitable entity with similar objectives.
This is where the drafting of the clause becomes paramount. A well-constructed clause should clearly define the eligibility criteria for the recipient organization. This can include requirements such as:
- Having a similar charitable purpose or mission.
- Being a registered charity with the Australian Charities and Not-for-profits Commission (ACNC).
- Holding a specific tax status, such as Deductible Gift Recipient (DGR) endorsement.
- Adhering to similar rules regarding payments to directors or distributions to members.
Without this clarity, the decision of where to direct assets can fall to the courts, leading to outcomes that may not align with the founders’ original vision.
A Case Study for Australian Charities: The Maitland Benevolent Society Decision
The importance of a precise winding-up clause was recently demonstrated in the case of In the matter of Maitland Benevolent Society Limited (in liquidation).
Maitland was an NFP that operated the Benhome Residential Aged Care Facility. Following compliance issues that posed a “severe risk to the health, safety and wellbeing of residents,” an administrator was appointed. The board ultimately decided to sell the facility to a larger, better-resourced provider, the Royal Freemasons’ Benevolent Institution (Royal Freemasons), to ensure its continued operation.
The sale was made with the understanding that Maitland would be wound up and its surplus funds would be transferred to the Royal Freemasons to be used for improvements at Benhome.
However, a complication arose. Maitland’s members, concerned about potential future liabilities from the Aged Care Royal Commission, abstained from formally voting to approve the distribution of the surplus. This inaction triggered a clause in their constitution requiring the liquidator to apply to the Supreme Court for directions on how to distribute the funds. At this point, another entity, the United Protestant Association, also made a claim for a share of the surplus.
The court’s decision came down to a strict interpretation of Clause 105 in Maitland’s constitution. This clause specified that any recipient must, among other things, have a constitution that “prohibits it from paying fees to its directors”. The court found that the United Protestant Association’s constitution allowed for director fees in certain circumstances, which disqualified it. The Royal Freemasons’ constitution, however, met all the stringent criteria outlined in Maitland’s clause. As a result, the Court ordered the entire surplus to be distributed to the Royal Freemasons, honoring both the letter of the constitution and the original intent of the sale.
Key Lessons for Your Charity’s Constitution
The Maitland case provides several critical lessons for all NFP boards and founders:
- Specificity is Your Shield: Vague language can create ambiguity. The Maitland constitution’s highly specific prohibition on director fees was the deciding factor. 26 Your clause should be as detailed as necessary to ensure only appropriate organizations can receive your assets.
- Align the Clause with Your Mission: The court considered which claimant’s objects were most closely aligned with Maitland’s. Your winding-up clause is the final act of your mission. Ensure it directs your legacy toward an organization that will genuinely continue your work or uphold similar values.
- Think Ahead and Be Practical: Consider whether to name a specific charity or define a class of eligible charities. Naming one organization is risky—it may no longer exist when you wind up. Defining a class (e.g., “a DGR-endorsed charity dedicated to animal welfare in NSW”) provides more flexibility while still ensuring alignment.
- Review, Revise, and Repeat: A constitution should be a living document, not a relic. It’s recommended that all NFPs regularly re-check the winding-up clauses in their constitutions. Laws change, your mission may evolve, and the charitable landscape shifts. Regular reviews ensure your final instructions remain relevant and effective.
Secure Your Legacy with Expert Guidance
Planning for every contingency, including the winding up of your organization, is a hallmark of strong governance. The Maitland case is a clear reminder that the wording of your constitution has profound, real-world consequences. A well-drafted winding-up clause protects your charity’s assets, ensures its mission endures, and prevents unnecessary and expensive legal complications.
Don’t leave your charity’s legacy to chance. If you are unsure about your constitution’s winding-up clause or need assistance drafting or reviewing your governing documents, the expert team at Birchgrove Legal can provide the clarity and guidance you need. Contact us today to ensure your organization is prepared for the future, from its vibrant beginning to its planned end.
