The “Pecuniary Gain” Conundrum in Society Law

Statutory provisions

Section 20(1), Incorporated Societies Act 1908, provides that “No society shall do any act of such a nature that if the doing thereof were one of the objects for which the society was established the members of the society would be deemed to be associated for pecuniary gain within the meaning of sections 4 and 5 hereof.”  Those sections relevantly read as follows (emphasis added):

4.  Incorporated societies—

(1)  Any society consisting of not less than 15 persons associated for any lawful purpose but not for pecuniary gain may, on application being made to the Registrar in accordance with this Act, become incorporated as a society under this Act.

5.  Pecuniary gain—

Persons shall not be deemed to be associated for pecuniary gain merely by reason of any of the following circumstances, namely:
(a)  That the society itself makes a pecuniary gain, unless that gain or some part thereof is divided among or received by the members or some of them:
(b)  That the members of the society are entitled to divide between them the property of the society on its dissolution:
(c)  That the society is established for the protection or regulation of some trade, business, industry, or calling in which the members are engaged or interested, if the society itself does not engage or take part in any such trade, business, industry, or calling, or any part or branch thereof:
(d)  That any member of the society derives pecuniary gain from the society by way of salary as the servant or officer of the society:
(e)  That any member of the society derives from the society any pecuniary gain to which he would be equally entitled if he were not a member of the society:
(f)  That the members of the society compete with each other for trophies or prizes other than money prizes.

Section 30 adds to the confusion:

When any corporate body is a member of a society incorporated under this Act, any pecuniary gain received by any member of that corporate body shall be deemed for the purposes of this Act to be pecuniary gain received by a member of the society, and in respect of any such pecuniary gain every member of that corporate body shall be deemed to be a member of the society.

Case law

Section 5 rather unhelpfully tells you what engaging in activities for pecuniary gain is not, leaving it to the Courts to define what it is.  Section 20 was briefly referred to in Walker v Mt Victoria Residents Association Inc, CA225/88 (Court of Appeal), but as far as I am aware has only once been discussed in detail.  That was in Re Napier City Council [2011] NZAR 147, a declaratory judgment considering whether section 20 prohibited two societies from owning controlling shares in companies operating licensed premises for pecuniary gain.  It was clear in the case of both societies that on winding up none of the assets could be distributed to members.  The decision succinctly concluded:

[23] I am satisfied that as long as there is an association of not less than 15 persons associated for a lawful purpose then it is permissible for such a society to make a pecuniary gain in any way whatsoever unless that gain or some part is divided among or received by the members or some of them.

[24] Here I can see no objection to the RSA or the Fishing Club receiving pecuniary gain, by way of dividends, from a company which it wholly owns and which is set up for pecuniary gain.

Outstanding questions

The Napier City Council decision was clearly predicated on two factors neither of which may be determinative in cases where those factors do not apply:

  • Being “an association of not less than 15 persons.”  While 15 members is a prerequisite for registration under sections 4(1) and 7(1)(a), and may provide a ground for liquidation by the High Court under section 25(b) (“If the members of the society are reduced in number to less than 15”), there is nothing in the Act actually requiring a society to maintain a minimum of 15 members.  It must be noted that section 31 provides that a corporate body to be equivalent to 3 members for the purposes of sections 4 and 25.
  • That on winding up none of the assets could be distributed to members.  That such a provision was in the constitutions of the two clubs in the Napier City Council case made the judicial task easier, as it met the provisions of section 5 (“Persons shall not be deemed to be associated for pecuniary gain merely by reason of any of the following circumstances, namely: (a) That the society itself makes a pecuniary gain, unless that gain or some part thereof is divided among or received by the members or some of them.”  Section 5(a) was also relied upon in Ashburton Veterinary Club Inc v Hopkins [1960] NZLR 564 at 570 (cited in the Napier City Council decision).  However, section 5 then proceeds to say that, equally, there is no presumption of association for pecuniary gain merely because(b) … the members of the society are entitled to divide between them the property of the society on its dissolution.” 

The High Court decision in Presbyterian Church of New Zealand Beneficiary Fund v CIR [1994] 3 NZLR 363 established that the primary charitable purpose of a retirement fund was not undermined by benefits to members of the fund, which was “not carried on for the private pecuniary benefit of any individual.”  That decision is consistent with Automobile Association (Wellington) Inc v Daysh [1955] NZLR 520 (CA), where an association incorporated under the Incorporated Societies Act was held not to be engaged in carrying on an unauthorised business activity to make profits (at 532–533, noting that section 20 appears not to have been cited).

What is the law?

While the Ashburton Veterinary Club Inc and Napier City Council decisions appear to me to be correctly decided, neither addressed the interplay between section 5(a) and the other paragraphs of that section, and, particularly, section 5(b).  The effect of section 20 must be regarded as being unclear, and may not be clarified by the Courts before a new statute replaces the Incorporated Societies Act.

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.