Reforming the Not-For-Profits Statutes – Legal Powers and Resolving Disputes

The Law Commission Issues Paper (NZLC IP 24, June 2011) questions on the legal powers in, and the dispute resolution provisions of, not-for-profit entities’ constitutions raise issues well beyond anything contemplated by the Incorporated Societies Act or the Charitable Trusts Act.  They are, however, extremely important questions because they touch on issues with which lawyers advising societies and trusts commonly have to grapple.  The lack of legislative clarity or guidance is frustrating when constitutions are often inadequate. Question 29: Should the new Act grant incorporated societies the powers and privileges of a natural person, in the same way as is done in the Companies Act? Question 30: Do you agree that the new statute should limit the ultra vires doctrine, and if so, how? Which model is preferred, the Companies Act one, or the New South Wales’ one? Chapter 4 of the Issues Paper reviews the inherent problems in applying the ultra vires (excess of powers) law that had its origins in pre-1993 company law, and Question 29 seeks a response to those problems. The Companies Act model may suit commercial entities, but is not so obviously appropriate for not-for-profits, so my first reaction to Question 29 was an emphatic “no.”  On reflection, I’m not so sure that my initial response is right.  My experience of some organisations (especially charities) is that their purposes and mission tend to develop over time, whereas a sports club associated with a particular sport may be less likely to extend its operations (but a club established for a particular sport might want to extend its operations to establish and run a gym or...

Reforming the Not-For-Profits Statutes – Governance Questions

My last article closed with the assertation that of all the questions posed in the Law Commission Issues Paper June, those covered in this article (relating to constitutional issues) were probably of most regular practical significance for many societies and those that advise them.   The questions discussed in this article are almost as significant. Question 18:Do you agree that the new Act should provide a ‘code’ of duties that committee members must observe in their decisions? Question 19:If so, what duties ought to be included in the code? Question 20:In what respects might the Companies Act obligations need to be altered if included in a new Incorporated Societies Act? The problem of committees becoming laws unto themselves, acting dictatorially, and becoming a clique remote from many members is common, but that does not highlight a failure of the legislation.  Rather it is a consequence of factors such as member apathy, lack of understanding of good governance practice, and failures of accountability and transparency. It is not possible to legislate for good behaviour, but some form of code might be useful if it is combined with some improved dispute resolution procedure (discussed below and in my next article).  A company director’s obligations are set out in sections 131-137, Companies Act, and include requirements to act in good faith and in the best interests of the company, to use powers for a proper purpose, not act in contravention of the Companies Act or the company’s constitution, not run the company recklessly or at substantial risk to creditors, and to exercise reasonable care, diligence, and skill taking into account the nature of...