Name and Purposes of a Typical Not-for-Profit

Chosen name of a not-for-profit

For societies incorporated under the Incorporated Societies Act 1908, the full word “Incorporated” must be the last word in the name (section 6(1)(a)). For charitable societies and trusts incorporated under the Charitable Trusts Act 1957 there is no such requirement. However, whether legally required or not, indicating the fact of incorporation in a registered charity’s name helps protect members of a charitable society or trust from potential personal liability by establishing the not-for-profit’s corporate status and serves to confirm that the entity is a credible organisation with a proper constitution and a degree of permanence.

It is an offence to use the word “Incorporated” or any abbreviation of it in association with unincorporated entities (section 3, Incorporated Societies Amendment Act 1953).

Objects or purposes of a not-for-profit

The objects or purposes of a society registered under the Incorporated Societies Act must be clearly stated in its rules (section 6(1)(b)), and similar requirements apply to a society or trust registered under the Charitable Trusts Act (section 11(1)(b)). This is important as issues as to the lawfulness of a society’s or charitable trust’s actions may come into question, and, associated with that, often the stewardship and potential personal liability of its committee or trustees. The fiduciary obligations of those governing a charity will be assessed in part by their advancement of its charitable purposes (important in litigation or in the course of monitoring or investigation by the Charities Board).

A not-for-profit’s objects or purposes must be lawful. Section 4(1), Incorporated Societies Act, expressly states that incorporated societies may only be “associated for any lawful purpose,” while any trust or society incorporated under the Charitable Trusts Act must, by definition, be lawful because a charity cannot “promote an illegal purpose” (see Re Collier (dec’d) [1998] 1 NZLR 81 at 91).

In addition, a charitable society or trust registered under the Charitable Trusts Act can exist only for charitable purposes; i.e. for the relief of poverty, the advancement of education, the advancement of religion, or other purposes of benefit to the wider community (the so-called Pemsel categories of charity, enshrined in section 5(1), Charities Act 2005).

Pecuniary gain and not-for-profits

It is a fundamental tenet of the Incorporated Societies Act, confirmed by sections 4(1) and section 20(1), that the members of an incorporated cannot enjoy any “pecuniary gain” from their membership of that society. Section 5, rather unhelpfully clarifies what “pecuniary gain” is not, and the section has been judicially considered in Hastings Volunteer Fire Brigade (Inc) v Brausce (1915) 17 GLR 653, Ashburton Veterinary Club Inc v Hopkins [1960] NZLR 564 at 570, and New Zealand Jockeys’ Association v Young [1922] NZLR 1011 (very peripherally). Section 20 was briefly referred to in Walker v Mt Victoria Residents Association Inc [1991] 2 NZLR 520, at 523, line 36, and in more detail in Re Napier City Council [2011] NZAR 147, and see also Automobile Association (Wellington) Inc v Daysh [1955] NZLR 520 (CA). The phrase “pecuniary gain” clearly refers to any gain resulting from the entity’s activities that has some monetary value (see Presbyterian Church of New Zealand Beneficiary Fund v Commissioner of Inland Revenue [1994] 3 NZLR 363 at 376).

A similar principle applies to charitable entities, and it is fundamental that a charity cannot exist for the private benefit of members, with any benefit to members having to be incidental to the primary benefit of the public. It is clear from Royal Choral Society v Commissioners of Inland Revenue [1943] 2 All ER 101 at 104–105 (CA), quoted in Canterbury Orchestra Trust v Smitham [1978] 1 NZLR 787 (CA) at 807, that the fact that people derive pleasure from providing education or being educated does not prevent the activity being accepted as charitable, that the element of pleasure is not the object but may be a necessary by-product of the charitable activity, and that the “education of artistic taste is one of the most important things in the development of a civilised human being.”

However, to be registered under the Charitable Trusts Act a board or society must establish (under sections 7 (1) or 8(1), respectively) that it exists “exclusively or principally for charitable purposes” (see also section 5, Charities Act).

Under section 20, Incorporated Societies Act, distributions to a society’s members are an offence, and amounts received by members are recoverable by the society. Distribution to members of a charitable entity would almost certainly result in the entity losing its charitable status for Inland Revenue Department purposes and would make it vulnerable to deregistration by the Charities Board (see Charities Act, sections 31-36) and potential dissolution by the Registrar or the High Court (Charitable Trusts Act, sections 25 and 26).

Despite the restrictions discussed above, a not-for-profit may itself make a “pecuniary gain” as an incidental purpose, as long as such a gain is not distributed to or divided among its members (see sections 4(1) and 5(a), Incorporated Societies Act, Ashburton Veterinary Club Inc v Hopkins [1960] NZLR 564, and Automobile Association (Wellington) Inc v Daysh [1955] NZLR 520 at 532–533 (CA)).

Interpretation of objects or purposes

A not-for-profit’s objects or purposes will be interpreted in a fair and reasonable way (see para 4.6, Law of Societies, 3rd Ed, Mark von Dadelszen, LexisNexis, 2013), and activities which are reasonably incidental to achieving the objects or purposes will usually be treated as lawful. The Courts, however, will be vigilant in ensuring that charitable entities act in strict accordance with their charitable objectives.

Lawfulness of a not-for-profit’s actions

Subject to the limitations discussed above, the range of potential objects or purposes of a not-for-profit is unlimited.

Actions not authorised by a company’s constitution were unenforceable against the company under the ultra vires doctrine until the companies legislation was changed in 1993. That ultra vires doctrine has been applied in a number of New Zealand cases relating to incorporated societies; to declare a bylaw (which discriminated against women) void (O’Neill v Pupuke Golf Club (Inc) [1932] NZLR 1012), to declare illegal resolutions creating a new class of membership not recognised in the constitution (Police v Hawke’s Bay and East Coast Aero Club (Inc) (1948) MCD 454), and to hold that a society could not sue on a contract it had no power to enter (Cabaret Holdings Ltd v Meeanee Sports and Rodeo Club Inc [1982] 1 NZLR 673 (CA)). However, the applicability of the ultra vires doctrine to incorporated societies has since been doubted (Finnigan v New Zealand Rugby Football Union Inc [1985] 2 NZLR 159 at 178, and Walker v Mount Victoria Residents Association Inc [1991] 2 NZLR 520 at 523 (CA)).

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.