Reforming Incorporated Society and Charitable Trust Law

Is there a problem with the legislation?

Practitioners regularly advising on society and charitable trust issues will be aware of the inadequacy of the legislative framework for the governance and management of incorporated societies and charitable trusts.  The Incorporated Societies Act 1908 is over a century old, and the Charitable Trusts Act 1957 was enacted more than five decades ago.  Much has changed in that time, but little has been done to keep these statutes up-to-date, leading me to assert in the second article in this series “With the statutes providing for the incorporation of societies and charities being, respectively, over a century or over half a century old, there should be Parliamentary attention given to enacting minimum standards of governance required of voluntary sector entities.”

The Companies Act 1908 was replaced with the 1933, 1955, and 1993, and all of those statutes were themselves extensively amended many times, and there is much legislation applying to companies that is found in other statutes.  In contrast, there have been just six Incorporated Societies Amendment Acts (1920, 1922, 1953, 1993, 2005 and 2010), and only three Charitable Trusts Amendment Acts (1993, 2007 and 2010).  My last article highlighted the modest changes made last year, as well as mentioning that more could be done.

Reform in prospect

I am no great fan of constant changes to legislation, but the legislation governing the voluntary sector in society is seriously out-of-date.  That may not seem important for tiddlywinks clubs, but the reality is that, collectively, recreational, social welfare and educational entities control many millions of dollars worth of assets (some owned by local and central government) and receive millions in government funding, while many are the means by which many important government services are provided or provide richness to our cultural and social lives.

The problems appear to have received some Government recognition as the Minister of Justice has asked the Law Commission to review the Incorporated Societies Act 1908.  The Commission’s website notes:

“The Incorporated Societies Act 1908 is uncomfortably old and has been little amended since its enactment. Yet the rich tapestry of community organisations that use this legal form is extensive in New Zealand.  Practising lawyers are often called upon for advice concerning incorporated societies.  They are asked for advice on whether to set one up, how to set one up, how to register it and what to include in the documents.  Difficult questions frequently arise around the governance and administration of such organisations and the resolution of their internal disputes.  Many of the reported cases revolve around such disputes.  This review will take a first principles look at the Act.”

I would hope that the review will look beyond just the Incorporated Societies Act.

The legislation in context

In the first of this series of articles (“As Common As Dirt”) I noted that at 30 June 2009 there were 22,681 societies incorporated under the Incorporated Societies Act and18,794 charitable trusts and societies incorporated under the Charitable Trusts Act (illustrating the need for review of that statute).  The number of charitable entities registered with the Charities Commission in January exceeded 25,600 (many of which will be registered under either the Incorporated Societies Act or the Charitable Trusts Act).  In that first article I speculated that, including unincorporated societies and clubs, there is about one community organisation for every 50 people in the country, making such entities “an important part of the fabric of our communities, facilitating much of our social, cultural, sporting, and religious life.”

My article “Audits or Review of Accounts” suggested that (expensive) audits are not particularly effective in identifying fraud or other losses, and that is not helped by having inadequate legislation covering societies and charities.  The fiscal implications for various Government departments funding community organisations that are poorly governed and managed are, I suspect, significant.  One modest example may serve to illustrate the reason for my concern.  A Hastings woman was convicted in 2008 for stealing $20,000 from a community organisation.  The following year she misappropriated $6,894 from the Ministry of Education, and last year was convicted on charges of using a document for pecuniary advantage and forgery, arising from her administration of a playgroup.  At sentencing the woman’s lawyer blamed the offending on “bad practices and bad management.”

Reforms I would like to see

Neither of the 1908 or 1957 Acts contemplated meetings being held by telephone conference (let alone video conferencing), conducting ballots by email or website voting, electronic banking, or even the relative ease of being able to get to meetings by car or air travel.  The world has moved on, but the legislation hasn’t.

Some wise person once said “any fool can criticise, but few fools could do better,” which leads me to consider what changes might be desirable.  What follows is my “top of the head” list of things to consider in any new legislation dealing with the rules, governance and management of societies and charities:

  1. Any new legislation should address minimums required in constitutions to ensure adequate standards of governance and management of entities. Section 6, Incorporated Societies Act, includes a minimal list of essential provisions in rules (the Charitable Trusts Act has no equivalent) – the name of the society, including “Incorporated” as the last word in the name, the society’s objects, how people become and cease to be members, how rules may be altered, added to, or rescinded, how to call, hold and vote at general meetings, how officers are appointed, the control and use of the common seal, the control and investment of funds, any powers to borrow, and what happens to society property on liquidation. Some Australian States have legislated standard sets of rules, and that might be considered (but, while it might make the task of the Registrar easier on registration, arguably no “standard” set of rules will suit all societies and having a standard template would make it more difficult to draft an integrated, coherent set of rules best suited to each society). Whatever approach is adopted, what is clear to me is that our present legislation is woefully inadequate.
  2. Minimum requirements for the keeping of records should be prescribed, so an auditor, the Registrar, Charities Commission or interested members can verify how, when and why decisions were made and expenditure was authorised. Where a constitutional document authorises the making of bylaws, regulations or policies provisions should be made for those to be available for inspection at any time or place the constitution can be inspected. The extent to which those records should be available for public inspection, and whether or not membership details and minutes of meetings should be available for inspection, and by whom, also requires consideration.
  3. Minimum standards of practice in dealing with complaints and discipline and meeting the principles of natural justice should be considered.
  4. How financial information is recorded and how financial transactions are conducted also requires careful thought. With many transactions now being carried out through internet banking the legislation needs to facilitate this, while also ensuring adequate controls and accountability. Given the rising costs of auditing and the limited success audits have in detecting misappropriation of funds, consideration might usefully be given to providing legislative recognition to something less onerous or expensive than a formal audit.
  5. The implications of technology in decision-making should also be considered – facilitating making rule changes and policy decisions by postal and electronic ballot, telephone and video conferencing, passing of resolutions by email poll, and the like.

This list is but a start, and I suspect the reform process will not be either rapid or easy.

Finally, I believe the implications of any proposed changes should extend beyond just the Incorporated Societies and Charitable Trusts Acts.  Statutes such as the Agricultural and Pastoral Societies Act 1908, Building Societies Act 1965, Friendly Societies and Credit Unions Act 1982, Racing Act 2003, and Acts dealing with various occupations are also likely to benefit from similar reforms.

 

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.