The Perils of a Society Branching Out

Issues

Section 4.7.1 of my book, Law of Societies, discusses the Federated Farmers’ litigation (see particularly Federated Farmers of New Zealand Inc v Federated Farmers of New Zealand (Northland Province) Inc decisions at [1998] DCR 1044 and CA 144/04, 23 June 2005, Court of Appeal) .  I noted that “… the Incorporated Societies legislation establishes only a very rudimentary, even crude, framework for the incorporation and operation of branches.  The Incorporated Societies Amendment Act 1920 provides for the incorporation of a branch of a parent society where the branch has at least 15 members.  The consent of the parent body and of the majority of members of the branch is required before the branch can be incorporated.  The provisions for the application for registration and for the registration itself are similar to those for the original incorporation of a society.  Once incorporated, a branch enjoys the benefits of incorporation, while the members of each branch are members of, and remain subject to the constitution, of the parent body.  Essentially, the structure tends in practice to be dominated by the parent body and, regrettably, this feature is frequently the source of tension and dispute.”

There is no provision at all under the Charitable Trusts Act 1957 for incorporation of branch societies, but a federal structure can be established by contract (see Law of Societies at 4.7.5).

Branch autonomy?

The relationship between branch societies and parent bodies frequently gives rise to tensions between the exercise of “parental” powers and the wish of the branches to exercise autonomous powers.  Section 4.7 of Law of Societies addresses problems associated with branches incorporated under the Incorporated Societies Amendment Act 1920 or separately incorporated under the Incorporated Societies Act 1908.

In this article I will discuss some problems associated with societies which provide within their constitutions for “branches” to operate, but fail to address some practical implications of branch activities.

Independent branch activities and societal governance

Where a society has a central governance body and independent branches or interest groups, the constitution should clearly define what such branches or groups may or may not do – for instance, in dealing with the public and media, in receiving and banking donations or income, in paying expenses, in committing the society to actual or potential costs, and in dealing with members within the branch or group.

Unincorporated branches or interest groups operating independently

The respective governance roles and responsibilities of a “parent” society’s committee and of a society’s unincorporated branches or interest groups may be set out in the “parent” society’s constitution.  If not, and subject to what is in a society’s constitution, as a matter of society law, in my opinion, the assets and liabilities of an unincorporated branch or interest group associated with a “parent” society are almost certainly the assets and liabilities of the “parent” society (my views have firmed up since I wrote the text for Law of Societies at 4.7.7(3)).   If I am correct, I believe that my conclusion has clear consequences:

  •  society should be exercising (or be entitled to exercise) over the activities of the branch or interest group is likely to be uncertain unless these issues have been carefully addressed in the constitution,
  • Creditors may seek recovery from the “parent” society for the debts of the branch or interest group on the basis that they are “parent” society activities, but they may also seek recovery from members of the branch or interest group personally,
  • All branch or interest group accounts should be integrated into the “parent” society’s accounts, with the branch or interest group assets, liabilities, and annual income and expenditure reflected in the “parent” society’s annual accounts,
  • The governing committee of the “parent” society and its auditor have a clear responsibility to ensure that such accounts are properly integrated into the “parent” society’s accounts, and must deal with any consequential GST, taxation and regulatory implications, and
  • If these issues are not adequately addressed the “parent” society and members of its committee may face hard questions from the Inland Revenue Department (and, if registered under the Charities Act 2005, from the Charities Commission), and potential personal liability.

Implications

Where a society has an associated unincorporated branch or interest group (particularly where this is provided for in its constitution) the implications set out above, which may not be exhaustive, need careful consideration.  Advisers need to understand the dynamics of such relationships as there is no magic “one size fits all” solution to relationships between a society and its branches or interest groups.

Any historical issues will need to be addressed and regularised, preferably with accounting advice as there are likely to be both GST and income tax implications.  Competent accounting and legal advice should be obtained, and in my experience it is far better for a not-for-profit entity that has failed to deal properly with GST and tax issues to approach the Inland Revenue Department (rather than vice versa), as this is likely to result in lower penalty and interest burdens than if the issue is ignored until the Department undertakes an investigation.

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.