Winding up a society or charitable trust

Big brother is interested

It should come as no surprise that the State has an interest in the winding up of societies and charitable trusts, as noted in Hunt v Border Fancy Canary Club of NZ (Inc) (2000) 8 NZCLC 262,140, para [30]:

The Incorporated Societies Act 1908 [and the Charitable Trusts Act 1957] governs the conduct of non-profit associations. The purpose of the Act is to establish a state-controlled system of registering and controlling non-profit making associations and providing for the dissolution and winding up of those associations. . . . The power to wind up [a society] rests with the majority of members at a general meeting or the High Court.

Alternative ways of winding up a society or charitable trust

There are three main different ways an entity may be dissolved or wound up:

  • Registrar’s dissolution,
  • Members voluntarily liquidation, and
  • High Court liquidation.

Registrar’s dissolution

The Registrar’s attention is drawn to a society incorporated under the Incorporated Societies Act if it fails to file its annual financial statements.  In such a case, or where after enquiry or for other reasons the Registrar concludes that an Incorporated Societies Act society or an entity registered under the Charitable Trusts Act is no longer in existence, the Registrar may dissolve the society by notice in the Gazette, the effect being to strike the entity off the Register (see s 28, Incorporated Societies Act, or s 26(1), Charitable Trusts Act).

There is a right of appeal under s 34B to the High Court after Registrar’s dissolution, but where the dissolution is under the Charitable Trusts Act the only remedy to seek judicial review by the High Court.  However, after an entity has been dissolved if the Registrar is satisfied that the declaration of dissolution was made in error and should be revoked the Registrar may reinstate the entity.

On a Registrar’s dissolution, a society is not merely removed from the register, but “dissolved” in the words of s 28, Incorporated Societies Act.  The Charitable Trusts Act provisions are slightly different, although to similar effect.  The legal status of the deregistered entity is somewhat uncertain (see Society Law in New Zealand, 2nd Edition, 2009, 12.2.4).

A Registrar’s dissolution can be a useful informal way of winding up a society or trust without the need to appoint a liquidator.

Members’ voluntarily liquidation

Members may resolve to wind up a society in a general meeting (subject to confirmation by a second general meeting), under s 24(1), Incorporated Societies Act, and s 24(1), Charitable Trusts Act 1957.

Following confirmation of the resolution to wind up, members of a society registered under the Incorporated Societies must appoint a liquidator.  For entities registered under the Charitable Trusts Act, Parts 16 and 17 of the Companies Act 1993 apply with necessary modifications, and a liquidator is appointed under s 241(2), Companies Act.

High Court liquidation

An Incorporated Societies Act society may be liquidated under s 25 if the society suspends operations for a year, its membership falls below 15, it is unable to pay its debts, it carries on any operation by which any member makes any pecuniary gain, or if the High Court considers it just and equitable that the society should be placed in liquidation.  An application may be made to the High Court by a member or creditor of the society, or by the Registrar (s 26).

In the case of an entity registered under the Charitable Trusts Act, an application may be made to the High Court for winding up on the ground is that it is “just and equitable.”  Application may be made by the Attorney-General, the board or society, a member, a creditor, the Registrar, or any other person who is authorised to do so under s 25(2)(f).  The High Court also has inherent jurisdiction, if it is just in the circumstances, to wind up an unincorporated society either on failure of its substratum or on application of some of its members.

Receivership and compromises with creditors

There is no provision for the appointment of receivers of a society or charitable trust under the Incorporated Societies or Charitable Trusts Acts, but the High Court may exercise its inherent power to appoint a receiver where there is no other practical alternative (see Te Runanganui o Ngati Kahungunu Inc v Scott [1995] 1 NZLR 250).

Under s 23A, Incorporated Societies Act, a creditor, member, or liquidator can ask the High Court to call a meeting of creditors, a class of creditors, or members to sanction a compromise, but there is no equivalent provision under the Charitable Trusts Act.

The liquidation process

The liquidation process for entities registered under the Incorporated Societies and Charitable Trusts Acts is governed by Parts 16 and 17 of the Companies Act 1993.

Any surplus assets of an Incorporated Societies Act society, after paying debts and liabilities and liquidation costs, are distributed as directed by the rules (s 27(1)) possibly by division among members (s 5(b)), but if that is not possible the Registrar may direct how the net assets should be disposed of (s 27(1))).  If the surplus assets are subject to any trust, where the liquidator was appointed by the Court disposal will be as directed by the High Court, but if the liquidator was appointed by a resolution of the members and on dissolution by the Registrar surplus assets are disposed of as the Registrar directs (and the Registrar’s decision can be appealed to the High Court under s 27(2)).

Where an entity is incorporated under the Charitable Trusts Act, it can distribute its assets under either its trust deed or rules prior to liquidation or Registrar’s dissolution, but if the entity exists for charitable purposes its constitutional winding-up provisions will provide for distribution to a charity or for a charitable purpose.

Officers’ potential liability on liquidation

Society committee members and charitable trustees may be personally liable following liquidation if the entity they have governed has suffered losses caused either by the failure to keep adequate accounting records or by misapplication or retention of an entity’s money or property, or they have been guilty of negligence, default, or breach of duty or trust in relation to the entity. Recovery may be ordered at the instigation of a liquidator, member or creditor.

 

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.