Third Party Approval to Change Constitutions

Late last year, a reader raised an issue for consideration in this series of articles, saying:

Over the years I have had cause to read many constitutional documents, perhaps more carefully than some of the officers or members of the societies concerned. Frequently there is a clause relating to changes to the objectives of the society that requires the approval of the Inland Revenue Dept to any such changes. … Such clauses have less relevance since the establishment of the Charities Commission in 2005 …

Past practice with the IRD

The correspondent is correct in referring to such clauses in constitutions (commonly, also covering the winding-up clause), but I suspect that the provisions in the IRD clauses were, in the past, more honoured in the breach than the observance. Following enactment of the Charities Act, the Department at http://www.ird.govt.nz/charitable-organisations/chart-orgs-intro/ now graciously states “Some organisations may have rules that prevent additions or alterations to the charitable objects, personal benefit and winding up clauses without first getting Inland Revenue approval. For charitable organisations that are registering with the Charities Commission, we will no longer give approval for changes to rules and recommends that any such requirement be removed from your rules. To enable this to happen, we give general consent to any amendment removing such rule.”

Entrenching a constitution

The idea of entrenching a constitution may come from an entity’s founders, parent bodies, or third parties (such as, previously, the IRD). Whether such entrenchment (requiring third party approval for change) is lawful is a partly statutory and partly philosophical question. In 2000 when I first wrote Society Law in New Zealand (now in its 2nd Edition, LexisNexis, 2009) I stated there (at 4.5.5, for reasons discussed at some length) “It is doubtful … whether a society can effectively entrench its rules and fetter the later exercise of the right of members to change the rules.”

Nothing in either the Incorporated Societies Act 1908 or the Charitable Trusts Act 1957 authorises entrenchment. Indeed, s 21(1), Incorporated Societies Act, unequivocally provides that “A society may from time to time alter its rules in manner provided by the said rules, but subject to the provisions of this Act,” while ss 23 and 61, Charitable Trusts Act 1957, clearly contemplate changes to the constitutions of charitable entities. Can those statutory provisions be over-ridden? Under s 37(5), Unit Titles Act 1972 (see now ss 105 and 105, of the 2010 Act), changes to bodies corporate rules contrary to the statutory right to change the rules have been held to be ultra vires (Body Corporate 201036 v Broadway Developments Ltd (2011) 11 NZCPR 627 (High Court).

Clarity in Canada and, now, New Zealand

The issue of entrenchment has since been considered in two Canadian cases, and now in New Zealand. The most relevant paragraphs in the judgment in Bath v Singh, High Court, Auckland, CIV-2010-404-761, 20 October 2011 (where I was counsel for the Defendants) are as follows:

[45] … While constrained by … charitable purposes, the society may still change its rules. That is consistent with the contractual nature of the relationship between the Auckland Society and its members.

[46] A similar conclusion was reached in the Canadian case of Demiris v Hellenic Community of Vancouver Demiris v Hellenic Community of Vancouver 2000 BCSC 733, [2000] BCJ No 907. In that case the by-laws of an incorporated society provided that certain by-laws were unalterable and others could be amended only if approved by a two-thirds majority and provided the written consent of the archdiocese was first obtained. The by-laws were amended by special resolution without first obtaining the written consent of the archdiocese.

[47] The Judge stated:

“[29] I am of the opinion that the contracts as constituted by the Society’s by-laws, were always subject to lawful change. The membership of the Society today is not the same as it was on incorporation, or in the 1960s or in the 1970s or in the 1980s, when earlier amendments were adopted. Even though the Society’s bylaws constitute a contract between its members, and between it and its members, the issue remains that of whether the by-laws were lawfully amended. If they were, then the petition must fail, notwithstanding that the by-laws were changed in a manner which the petitioners consider untenable. ”

[48] The Judge then went on to expressly consider the lack of written consent:

“[42] An issue raised by the petitioners is that the written consent of the archdiocese was not obtained before the 1999 vote.

[47] I am of the opinion that the members of the respondent Society were entitled to change its by-laws by acting in accordance with s 23 of the Act. The requirement that there be the written consent of the archdiocese before the vote, which an earlier amendment had sought to entrench, was void, and of no effect.
[48] It is open to a society to adopt objects which are unalterable. … However, the Act does not provide for the adoption of unalterable bylaws. To the contrary, it sets out the manner in which bylaws can be amended. The requirement that amendments be by resolution passed in a general meeting by a majority of not less than 75% of the votes of those members who being entitled to vote, do vote, is the protection to individual members and minority interests which the legislature has adopted. It is that that governs the affairs of all of societies incorporated under the Act, including those of the respondent. ”

And later [at [48](4)]:

“The by-laws of the respondent Society do constitute a contract between its members, and between its members and itself. This contract can be amended by a lawful amendment to the bylaws of the Society. ”

[49] The decision was approved in Kwantlen University College Student Association v Canadian Federation of Students [2010 BCSC 1951, 82 BLR (4th) 197, upheld on appeal in Kwantlen University College Student Association v Canadian Federation of Students 2011 BCCA 133, 16 BCLR (5th) 131.]

[65] Although the rules were amended without obtaining the consent of the New Zealand Sikh Society, the members of the Auckland Society were in a contractual relationship inter se, not with the New Zealand Sikh Society. The members of the Auckland Society were entitled to change their rules without obtaining the consent of the New Zealand Sikh Society. The condition purporting to require the approval of the New Zealand Sikh Society was void and of no effect.

Lessons for the future

In my view, if the members agree among themselves to require a certain majority to approve a rule change (such as a 75% majority vote) that will almost certainly still be acceptable. However, the High Court judgment in Bath v Singh is unequivocal, and members of societies are prima facie entitled to change their society’s rules without the approval of third parties. The ingenious draftsperson will no doubt try to get around the Bath v Singh decision or it could be over-ruled in some later case, but in the meantime my correspondent has a definitive answer to his question.

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.