Law Commission Report – Why we have an Incorporated Societies Act

Legislative Origins

The Law Commission’s recent report on the Incorporated Societies Act 1908 reason behind the 1908 records that the then Chief Law Drafter, John Salmond, explained the 1908 Bill:

The object of the Bill, as of the repealed Act, is to provide a simple method by which societies established for any purpose other than pecuniary gain may become incorporated. In recent years the Unclassified Societies Registration Act, 1895, has been extensively made use of by societies of a much more complex and important character than those for which the Act seems to have been primarily designed, and numerous deficiencies in the law have consequently come to light. The present Bill is an attempt to make a more adequate provision for the incorporation, management, control, and dissolution of societies to which it relates.

The Commission’s Report then goes on to note “John Salmond referred to the need to essentially modernise the 1895 Act because of the range and nature of organisations seeking incorporation under it. We now believe that the 1908 Act should again be updated to take account of changed times, as well as a different appreciation of what is needed from an incorporation statute. … John Salmond produced a modern corporation statute in 1908 terms, but he did not deal with issues that have since become important in relation to incorporations, for example, the abolition of the ultra vires doctrine. Nor did he make explicit, in a way we believe a modern law drafter would, the duties that lie on those who run incorporated societies. He did not attempt to deal with how disputes were to be resolved. In seeking to reform the 1908 Act, we are not suggesting that the core of the statute is broken, but rather that a new statute needs to take account of modern realities and a renewed understanding of what an incorporation statute ought to contain. The case for reform of the Incorporated Societies Act is, therefore, not revolutionary, but incremental and evolutionary.”

Reform – 34,000 societies and half a million people may be affected?

For the year ended 30 June 2012 (the 2013 figures are not yet available) there were 23,674 societies incorporated under the Incorporated Societies Act 1908, and 21,035 charitable trusts and societies under the Charitable Trusts Act 1957, 44,709 under the two statutes (at that time there were also 12 registered building societies, 25 credit unions, 154 friendly societies and 103 industrial and provident societies).

Assuming that about half of the entities registered under the Charitable Trusts Act are societies, one might assume that there are around 34,000 societies registered under the 2 Acts. The minimum membership under the Incorporated Societies Act 1908 is 15 (ignoring the aberration associated with corporate members) and applying that across all 34,000 societies (ignoring the different minimum membership under the Charitable Trusts Act 1957 and also membership of more than one society) the number of people in the community who will be affected by reform is over half a million. If the Parliament accepts the Law Commission’s Recommendation 45, each society will file an annual return including “the number of current members as at the end of the reporting period,” and if these figures are added up we may have a more accurate idea of the number of people involved in societies throughout the country.

Incorporated Societies are for people

While we simply do not know how many members societies have, and many people belong to several societies, the importance of societies is undeniable. As the Commission’s Report records “The largely voluntary space in which incorporated societies operate is an important part of New Zealand society and of the economy.” However, “It is difficult to quantify in monetary terms the benefit of providing greater certainty to such organisations, whether starting up, in operation, or coming to an end. However, the prevalence of the incorporated society model in New Zealand society suggests that the benefits must be significant.”

Few could dispute the following propositions in the Commission’s Report:

… the essence of the incorporated society remains, … a self-governing group of individuals who have associated for a non-financial purpose, but who wish to have a legal identity that is separate from the individual members.

… the key importance of membership to the incorporated society model.

… members have a key role in terms of the final governance of the incorporated society, through the annual general meeting, and most often through the election of officers.

Incorporated societies should be self-governing. A key aspect of this is freedom from inappropriate state interference, however well-meaning. Such interference is not intended as part of this review.

With reference to that last point, the Commission, however, states:

… we do believe that there are circumstances in which there might well be appropriate public intervention. This reflects three factors: the size of some incorporated societies; the reality that many incorporated societies seek public funds; and that members of incorporated societies may have insufficient resources, or incentive, to protect the interests of the society when there has been misgovernance.

Another more practical dimension of independence is that almost all incorporated societies rely on volunteers. New statutory requirements should therefore not pose unnecessary or undue burdens on them. Compliance costs should be kept to a minimum for both societies and those that run them.

A key message we received from consultation was that reforms should not overburden incorporated societies. … We have taken this concern seriously in developing the reforms in this report. …

No profits or financial benefits to society members

Recognising the essential difference between societies and companies or friendly societies, the Law Commissions asserts “Incorporated societies should not distribute profits or financial benefits to members. Members do not have an ownership interest in a society.”

This is one of a series of articles on societies and charitable trusts (originally published in the NZ Lawyer magazine) by Mark von Dadelszen, a Hastings lawyer and author of Law of Societies, 3rd Edition, 2013. If any reader has examples of issues that have arisen or questions about societies or charitable trusts that might be a suitable subject for one of these articles please contact Mark at mark.vondadelszen@bvond.co.nz.