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 fitness classes).

The point of Question 30 is to ascertain whether to apply the blanket approach adopted in the Companies Act 1993, or the more limited approach in New South Wales which gives third parties the benefit of being able to assume that an entity’s constitution permits the transaction unless the third party has contrary knowledge.  That is my current preference.

Question 31: Do you agree that the Victorian model should be adopted, which gives wide powers to the court to make orders, plus the ability to decline to make an order on the grounds that the application was trivial, or the matter could have been more reasonably resolved in other ways?

At present none of the statutes assist in resolving disputes between members of a society with other members or the society itself.  Decided cases indicate different judicial approaches to the legal relationships involved, and the remedies available may depend on the way cases are pleaded.  Chapter 5 of the Issues Paper highlights the resulting confusion, and discusses ways Australian and Canadian legislatures have sought to reform the law.  The recommended Victorian approach is highly discretionary (which seems sensible), but it depends on the experience of the Court exercising the discretion.  The decline in civil litigation in the District Court would mean that few District Court Judges would have the background experience to deal with such cases, and that may influence the answer to the question.

Question 32: Do you agree that the Act should provide for disciplinary procedures to be kept separate from those designed to resolve disputes between members, with members being prevented from taking a grievance procedure until any disciplinary procedures have been concluded?

Essentially, this question suggests that internal remedies should be exhausted first before seeking external intervention, and that seems sensible to me.

Question 33: Should there be any limits on the types of cases with which a court can deal? If so, what types, and why?

In some jurisdictions the Courts cannot intervene where the organisation’s decisions deals with tenets of religious faith (and Courts have usually been very reluctant to adjudicate on such disputes.  The Commission raises the potential for extending this prohibition to cover cultural questions, and raises the possibility that issues involving Māori organisations might best be referred to the Māori Land Court.

Question 34: Should the new legislation include provision for derivative actions by society members, similar to section 165 of the Companies Act?

This type of action would enable members to challenge the governance and management decisions of executive committees and officers.  While that may be appropriate in the corporate world, I question whether that type of sledgehammer is required to crack walnuts in community organisations.

Question 35: Do you agree that a general remedial power should be given to the court to do what is “just and equitable”?

Whether to exercise remedial powers on judicial review is ultimately a question of discretion, and in many societal and trust disputes I believe a Court should be able to do what is broadly just and equitable.

Question 36: Have the current provisions about branches created any problems, and how might the provisions be altered to avoid those problems?

Question 37: Is there still a need for branch societies?

My own view is that the law does not need to provide explicitly for branch societies.  Where there needs to be some relationship between societies it is best crafted to meet the particular needs of the organisations; either by careful drafting of the inter-related rules or by contract.  The Incorporated Societies Amendment Act 1920 provisions for branches is grossly defective when problems arise, and there is no “one size fits all” approach that will cover all the different permutations that arise.

Time is running out

If you have views on the questions posed in the Law Commission Issues Paper (NZLC IP 24) time is running out.  You need to make your submissions by 30 September 2011 (by sending them 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 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.