Reforming the Not-For-Profits Statutes – Fundamental Questions

Previous articles in this series have identified the archaic nature of the Incorporated Societies Act 1908, Charitable Trusts Act 1957 and other statutes governing not-for-profit organisations, and also the Law Commission project into the adequacy of those Acts.  The Commission published an Issues Paper (NZLC IP, 24 June 2011) on this broad and important subject on 22 June.  In doing so it recognised the importance and diverse range of the thousands of community organisations in New Zealand, and the need for a “back-to-basics” approach to reform.

While New Zealand has pioneered many legal reforms over the years, and was quick to legislate for the incorporation of some types of community organisation, this is an area of the law where we have lagged behind other jurisdictions; notably the Australian States and Canadian Provinces.  Happily, on this occasion we can benefit from their activism in law reform.

The Issues Paper is called “Reforming the Incorporated Societies Act 1908,” but it covers other legislation including the Charitable Trusts Act 1957 and legislation dealing with the agricultural and pastoral societies and industrial and provident societies.

The Law Commission has asked questions to which it wishes to receive answers and submissions before 30 September 2011 (sent to Geoff McLay, Commissioner, New Zealand Law Commission, PO Box 2590, Wellington 6011, DX SP 23534, or by email to incsocs@lawcom.govt.nz).  This and following articles will set out the questions and make some suggestions.

Question 1: Do you agree that a review of the legal structure for incorporation of non-profits, and the requirements on those running such societies, would be a useful step in strengthening the non-profit sector?

In my opinion, there can be no doubt that the answer to this should be a resounding “yes.”  I venture to suggest that there would be few lawyers who have advised on community organisations who would not agree that the current law is outmoded and uncertain, and that this causes organisations and their members practical difficulties and costs them money.

Question 2: Is the current limitation of liability sufficient?

This question addresses the limitation of liability of members of community organisations and also the potential liability of those who govern such organisations.  The background text before the question is posed raises issues about the absence of audit obligations, the extent to which those in governance might be liable for conflicts of interest and self-interested actions, and the absence of provision for the resolution of disputes.  In my view, the question has to be answered affirmatively.

Question 3: Do you agree that there should only be one statute for the incorporation of not-for-profits in New Zealand? If not, why not?

Question 5: Should Agricultural and Pastoral Societies be incorporated under the new statute?

Question 6: Can Industrial and Provident Societies that are conducted for business purposes be incorporated under the new statute?

As already mentioned we have the Incorporated Societies Act 1908, Charitable Trusts Act 1957, Agricultural and Pastoral Societies Act 1908 (to say nothing of the many special statutes enacted to assist individual A & P Societies), and the Industrial and Provident Societies Act 1908, to which one might add (at least) the Friendly Societies and Credit Unions Act 1982.  It cannot be beyond the abilities of Parliament (or the Parliamentary Counsel) to bring all relevant legislative provisions dealing with the incorporation and governance of not-for-profit entities into one statute.  That would make it so much easier to find the law and to establish some consistent principles.

Question 4: Do you think that for some purposes it might be advisable to divide societies between members’ benefit and public benefit societies? If so, in what circumstances?

Paragraph 1.35 of the Issues Paper points out that “… even if there is one statute, there may need to be different rules in that statute to take account of different requirements of different kinds of organisations. Canadian provinces like Saskatchewan, and Ontario, as well as the federal Canadian government, have divided incorporations which are for members’ benefit primarily on the one hand from those that are for public benefit or charitable purpose on the other.  It may be appropriate to have different rules in some circumstances depending on the status of a society, as we later discuss in relation to distribution of assets on the dissolution of the society.”

I believe it is clear that there are distinctions between societies that exist purely for the benefit of members (say a social club or an occupational organisation) and those that exist purely for the public benefit (such as a women’s refuge or citizens’ advice bureau).  This makes the proposition attractive, but what about sporting and cultural organisations that have charitable (“public benefit”) purposes, but also provide recreation and enjoyment for their members.  How should that blurring of the lines between members’ benefits and public benefits be dealt with.

My own inclination is to suggest that, despite the difficulties, it would be advisable to distinguish in any new legislation between members’ benefit and public benefit societies.

Leaving the law on unincorporated societies alone

Echoing a point made in the first and third of this series of articles (published in Issues 143 and 145 on 14 August and 17 September 2010) paragraph 1.36 of the Law Commission Issues Paper states, baldly, that “The law that governs unincorporated associations is uncertain and unclear.”  Despite that, the Paper does “not propose any further review of the law relating to unincorporated associations” (paragraph 1.37).  I agree with that conclusion, but if readers do not, then you have until 30 September 2011 to advise the Law Commission of your opinion.

The following four Issues of New Zealand Lawyer will contain articles on other questions posed in the Law Commission’s Issues Paper:

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.