Law Commission Report
On 1 July 2010, the then Minister of Justice sought from the Law Commission a “first principles” review of the Incorporated Societies Act 1908, commenting that the then 102 year-old Act was “uncomfortably old.” The Commission’s Issues Paper 24, published in June 2011, provoked over 200 submissions from individuals and small societies through to some of the biggest New Zealand societies and a number of professional organisations. In early 2012, a Reference Group was established to assist the Commission (and I should disclose my membership of that Group).
First principles review
The Commission’s “first principles” review of the current legislation, and the primary principles guiding its recommendations are (page 4 of the Report):
- Societies are organisations run by their members. This means both that members have primary responsibility for holding societies to account, and that a group without members to hold it to account should consider an alternative form of incorporation.
- Societies should not distribute profits or financial benefits directly to members. This is one of the key features that sets incorporated societies apart from other forms of incorporation. People join societies to achieve a shared purpose, not to personally profit financially from the activities of the society.
- Societies are private bodies that should be self-governing and largely free from inappropriate state interference. Societies value the flexibility that the current regime gives them to adapt their operating environment to suit their purposes and their culture. That flexibility should be retained as much as possible.
The Commission’s Report 129, “A New Act for Incorporated Societies,” was tabled in Parliament on 21 August. Law Commissioner Professor Geoff McLay commented then that “Our recommendations represent the evolution of incorporated societies for the 21st Century, rather than revolution.”
The primary principles underpinning the Commission’s Report and its recommendations, and Commissioner McLay’s comments, should allay some fears that legislative change could be too revolutionary. Nevertheless, no-one should under-estimate the practical impact the recommended changes will have for societies if enacted. Assuming the Government accepts all or a majority of the Report’s recommendations every society and its advisers need to be thinking ahead:
- The not-for-profit sector and those advising not-for-profits need to become aware of the reform proposals, and of the potential impacts on them,
- When (I will not say “if”) the Government proposes an Incorporated Societies Act reform Bill, not-for-profits and their advisers need to:
- Understand the philosophies driving the proposed reforms,
- Examine the proposals to assess whether what is proposed will work for them or whether there are unforeseen problems with the suggested reforms,
- Be prepared to make submissions on the reform Bill,
- Consider what will or may need to be changed in each different society, and
- Plan ahead for the steps that will be required to comply with the likely changes.
3. Once replacement legislation is enacted, every incorporated society will need to review its constitution and many of its governance and management processes to ensure that it is brought into conformity with the new Act.
The very compelling case for 21st century reform
The Commission’s Report opens by setting out the compelling reasons for reform (page 3):
New Zealand has over 23,000 incorporated societies spanning a diverse range of interests and purposes. Approximately 45 per cent of them are cultural, sporting and recreational bodies. The remaining 55 per cent comprise a broad range of community activities, including social service providers, religious groups, development and housing bodies, educational and environmental interest groups, and business and professional groups.
These community organisations play a very important role in New Zealand society. Together they are often referred to as the not-for-profit sector or as the “third sector”, existing alongside the private (for profit) sector and the public (or state) sector. The third sector has a direct impact on New Zealand’s social and economic development through the provision of services not provided by the other sectors and the development of strong communities.
The third sector faces numerous challenges including competing for adequate resourcing and attracting competent leaders (many of whom are volunteers). An important role for the government in supporting this sector is through legislation, which provides a mechanism for incorporation (thereby giving each society a legal personality) and minimum requirements for the governance structures of those organisations. The Incorporated Societies Act 1908 currently performs that role for many of those organisations.
While the 1908 Act was innovative and world leading when it was enacted, the passage of time and developments in the New Zealand community have left it significantly deficient a number of respects. In particular, it lacks guidance about the obligations of those running societies and about how disputes within societies should be dealt with. There is a strong need to provide a more modern statute to guide this sector into the future. Such a statute will make societies more robust, will help them to govern themselves, and will provide more constructive options when things go wrong.
Scope of proposed reforms
The broad sweep of the Law Commission’s review is evident from the Commission’s Media Release of 21 August:
Given the important roles that societies play, it is important that societies are supported by clear, modern legislation that assists them and their members to attain their goals. Law Commissioner Geoff McLay said that while the present Act has generally served societies well, the passage of time has inevitably thrown up the need for improvements. As incorporated societies have evolved, so too must the legislation governing them. Modern incorporated societies can be complex, often have substantial assets and may run significant businesses. Societies need to know what the minimum standards are for running and governing societies. Committee members need to know what they can, must – and must not do. They need to know whether they may have a conflict of interest – and what to do if they do. Members need to know what information they can expect from their committee; and what happens if they are involved in a dispute with the society or another member. None of these topics are covered in the current Act.
To meet these gaps the Commission is recommending that a new Act should provide needed guidance to societies and members by:
- setting out a set of basic duties for committee members and any other officers of societies. For example, they will be expected to act in good faith, in the best interests of the society and to only use powers for a proper purpose;
- providing a procedure for dealing with financial conflicts of interest, so that a committee member must, as soon as is practical, disclose any financial interest they have in a matter under consideration or affecting the society; and step aside from decisions on that matter;
- requiring every society to include disputes procedures in their constitution. Societies can develop their own procedures, so long as they satisfy the minimum standards for natural justice, which will be defined in the new Act;
- providing for a model constitution in regulations made under the Act, which a society may adopt instead of drafting its own constitution.
Scope of proposed reforms
A summary of the issues in the Law Commission’s Report is extensive, and covers pages 4-11 of the Report (a long “summary”):
- Legal structures,
- “no pecuniary gain” to become “no monetary gain,”
- Minimum membership requirements,
- Branch societies,
- Liability and indemnity,
- Ultra vires (unlawful actions),
- Duties of officers and conflicts of interest,
- Financial reporting,
- Complaints and grievances,
- Civil enforcement,
- Criminal sanctions,
- Registrar’s powers of enforcement,
- Dissolution and liquidation,
- Compromises with creditors and voluntary administration,
- Distribution of assets on liquidation, and
- What this means for current societies.
I have some major regrets about the Report. The Agricultural and Pastoral Societies Act 1908 and the Industrial and Provident Societies Act 1908 are of the same out-dated vintage as the Incorporated Societies Act 1908, and suffer from similar (some would say more serious) failings. Likewise the special statutes relating to particular A & P Societies, and the Friendly Societies and Credit Unions Act 1982, require review to make them more responsive to modern requirements. These issues are discussed in paragraphs 2.24-2.32 of the Report, but unfortunately fell outside the Law Commission’s brief from the Minister of Justice.
Some specific proposed reforms
The Law Commission’s 21 August Media Release provides some specifics for societies, the Government and Parliament to consider:
Alongside the broader recommendations, the Law Commission makes a number of more specific recommendations to clarify, modernise and improve the legislation, for example:
- The statute should make it clear that members can have no ownership interest in the society or its assets, and cannot receive any share in profits that the society may make;
- The minimum number of members of a society should be reduced from 15 to 10 members, but societies should be required to maintain that number or risk being de-registered;
- The provisions in the Incorporated Societies Amendment Act 1920 allowing parent societies to incorporate a number of branches should be repealed – but existing branches should retain key features derived from that Amendment Act, unless they and their parent society decide to change that;
- Societies should be required to have a statutory officer and a committee of at least three members, but otherwise how the committee operates can be largely determined by the society;
- Societies should be required to prepare and file at least simple annual financial reports;
- The statute should provide mechanisms under which a member may apply to the court to enforce the constitution or for leave to enforce the statutory duties of officers;
- Any criminal offences should be generally limited to dishonest conduct, and consistent with that approach there should be a new offence of using a position of responsibility within a society to obtain an advantage or cause loss to another person.
- The Registrar of Incorporated Societies should continue to play a light-handed role in the sector, but he or she should have clear but limited powers of investigation and intervention for the very rare circumstances where it is in the public interest for the Registrar to step in.
- Societies should be prohibited from distributing assets to members when a society winds up. Any surplus assets should be distributed to another incorporated society, another not-for-profit entity or charitable trust. Any society that currently provides in its constitution for distributing assets to members should have a transition period within which it must make arrangements to comply with the new requirements, or change to a different corporate form (for instance, a company).
Of significance, in addition, Recommendation 2 in the Report is noteworthy; “Charitable societies should no longer be able to incorporate under the Charitable Trusts Act 1957. Those that are currently incorporated under that statute should transition to become societies incorporated under the new incorporated societies statute.”
I am unashamedly biased; the current statute is in desperate need of a legislative overhaul, and the sooner the better, as societies and their members are ill-served by the present 105 year old legislation. In general terms, I support the Law Commission’s reform proposals. While the details can (and will, and should) be debated, the Commission’s approach is principled and moderate.
Over the next few months future articles will background in more detail the Law Commission’s proposals for reform which will affect every single existing and future society in New Zealand incorporated under the Incorporated Societies Act and the Charitable Trusts Act.