Law Commission Report – Legal Dealings of Incorporated Societies

Updating the Legislative Provisions Act Corporate Capacity of Incorporated Societies

The introductory two sentences of the Law Commission’s chapter on this issue succinctly states its position “Gaining a separate legal personality is at the heart of why societies incorporate. In this chapter we recommend changes to the Incorporated Societies Act 1908 to bring it into line with modern models of incorporation.”

Limitation of Liability

The Commission recommends that, as in section 13 of the 1908 Act, “The statute should provide that a member is not liable for an obligation of the society by reason only of being a member. The provision should be aligned to that in s 97 of the Companies Act 1993, with the necessary changes.” It recommends a new provision, that “The statute should expressly allow societies to indemnify members and employees who act in good faith in pursuance of a society’s activities, and allow societies to take insurance, if they so wish, for the purposes of that indemnity.”

Corporate Capacity

At present, incorporated societies only have such legal capacity as is conferred by statute and their constitutions. Drawing on the New Zealand Companies Act provisions and British Columbian legislation the Commission recommends that incorporated societies should have all the powers a of a natural (human) person with some further clarification:

The statute should provide that a society has full capacity to carry on or undertake any business or activity, do any act or enter any transaction. The provision should be aligned to that in s 16 of the Companies Act 1993, but it should also state, for avoidance of doubt, that a society has the following powers (unless expressly negated in the society’s constitution):

    • to buy, sell, exchange, develop and mortgage property;
    • to borrow money and give security for it;
    • to issue negotiable instruments;
    • to receive and make gifts;
    • to enter contracts and leases;
    • to employ persons; and
    • to belong to other societies or associations, whether or not incorporated, with similar purposes or purposes beneficial to the society.

Ultra Vires

The ultra vires doctrine means that a corporation is bound by a constitution (of a company before 1986, or of an incorporated society), and that such corporations cannot act in a manner contrary to their constitutions. The Commission in its Issues Paper commented that:

The ultra vires doctrine could result in injustice to those who had honestly dealt with a corporation, while being unaware of the restrictions imposed upon the corporation by either its purpose or its rules. It was also possible for those who dealt with the corporation to use the doctrine against the corporation itself. This could occur by refusing to comply with what would otherwise have been a contractual obligation owed to the corporation but which it turns out the corporation could not itself have entered into in terms of its rules.

While its Report recommends that the doctrine be abolished for incorporated societies, the Commission considers that society members should have the right to restrict what their society can appropriately do and that this should be recognised in the statute, and that members should be able to apply to restrain their society from breaching its constitution (with some protection for third parties dealing with a society). Its recommendations are:

The statute should provide that no act of a society and no transfer of property to or by a society is invalid merely because the society did not have the capacity, the right, or the power to do the act or to transfer or take a transfer of the property.

The statute should protect third parties who are unaware of any incapacity when they deal with a society.

Security for Costs in Litigation

At present, section 17, Incorporated Societies Act 1908, provides that:

Where a society is the plaintiff in any action or other legal proceeding, and there appears by any credible testimony to be reason to believe that if the defendant is successful in his defence the assets of the society will be insufficient to pay his costs, any Court or Judge having jurisdiction in the matter may require sufficient security to be given for those costs, and may stay all proceedings until that security is given.

The Commission’s Report recommends that any new statute should not include a provision relating to security for costs as those issues can and are best dealt with within the procedural rules of relevant courts.

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.