“Purposes Drift” in Not-for-Profits

When a group of people decide to form a not-for-profit entity there are many things to consider, such as whether the entity should be a charity or society, what sort of constitution will suit it, and what its purposes should be. My experience indicates that too great a degree of rigidity in defining the purposes (whether of a society or a charitable trust) will cause problems. Conversely, too great a degree of flexibility may also cause problems. There has to be a “happy medium” somewhere.

Tightly confined purposes

Having very restrictive purposes will prevent many not-for-profits evolving with experience, with changes of personnel, and by adapting to changes in society. I recall one charity formed almost than 40 years ago, where the original motivation for its formation was to provide support for single unmarried mothers. The purposes adopted were somewhat broader than that, and that charity’s actual activities have evolved over time to provide a broader range of social and counselling services for adults and children struggling to cope in different ways. Subsequent amendments to the charity’s purposes have extended them to cover charitable purposes in New Zealand whether relating to the relief of poverty, the advancement of education, the advancement of religion, or any other purpose beneficial to the community, followed by examples reflecting the original more confined objects as well as specific, broader purposes.

Flexible purposes

The converse is to adopt purposes that are very flexible and possibly rather vague, but this means a not-for-profit may lack a defined focus for its activities, and may also enable hijacking of the entity by folk wanting to pursue their own particular interests to the exclusion of other purposes that may well come within the flexible scope of the entity’s objects. If the entity has charitable purposes the very flexible expression of those purposes may cause another set of problems; not least, probably causing the Charities Commission to ask for more detail about actual or proposed charitable activities if registration under the Charities Act 2005 is sought.

Strategic plans and mission statements

Modern governance practice suggests that entities should have strategic plans and mission statements, but these must always be consistent with the constitutional provisions of a charity’s constitution. However, such strategic plans and mission statements may be useful where they concentrate the minds of those in governance and management on the core essentials of a not-for-profit’s stated, authorised activities. A well-developed strategic plan may also help answer questions from the Charities Commission about specifics as to the charitable purposes and how they will be pursued.

Enabling changes of purpose

Section 6(1)(e) of the Incorporated Societies Act 1908 requires a society’s rules to prescribe “the mode in which the rules of the society may be altered, added to, or rescinded.” The section does not explicitly say that the rules must allow for alterations (or, conversely, whether it can prohibit changes), but I believe that this is probably implicit. There is no provision in the Charitable Trusts Act 1957 equivalent to section 6(1)(e), Incorporated Societies Act, but sections 23 and 61 of the Charitable Trusts Act clearly contemplate alterations to the constitution of a charitable society or trust.

There are limited ways to vary the terms of a charitable trust – pursuant to explicit powers in the constitution or by recourse to the High Court. Because charities, like all not-for-profits, tend to evolve, in my opinion it is critical that their constitutions provide for changes of purpose by periodic amendment to the constitution. While it would be preferable to avoid the costs and delays of having to apply to the High Court, in the absence of a power in a charitable trust’s constitution to alter or vary it, charitable trusts have to apply to the High Court to alter their purposes. This may be done where there is some imperfection in the constitution, where some of the purposes are non-charitable, or where circumstances have altered. The Charitable Trusts Act 1957 contains provisions (particularly in Parts 3 and 5) to which reference can be made where such problems arise.

Finally, the person drafting a not-for-profit’s constitution needs to be aware that seeking to entrench a society’s rules involves particular difficulties which I discussed in an earlier article (in “Third-party approval to change constitutions”).

From purposes drift to being totally rudderless

As a general proposition, I believe that a not-for-profit’s constitution needs to provide for its purposes to evolve.

Sometimes, however, an entity drifts so far off-course that it becomes effectively rudderless. Unless it can be brought back on course (often by an injection of new members and with new people in goverance roles) the position may become dire, and a number of issues can arise which exacerbate the problems:

  • There may no longer be an adequate number of people in governance positions or people who can elect a committee or appoint trustees.
  • Governance power can end up in the hands of a few, and often those people lack the skills or knowledge to set about resolving the entity’s problems.

In such circumstances formal winding-up may be the only viable option.

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.