New Incorporated Societies Act – Progress?

NOTE

  • These notes, prepared by Mark von Dadelszen QSM, provide an overview of the more significant elements of the proposals to replace the Incorporated Societies Act 1908.
  • This overview is a much abbreviated summary of the main proposals approved by cabinet in late June (Reform of the Incorporated Societies Act 1908).
  • The Exposure Draft of the Incorporated Societies Bill released in November 2015 (see Incorporated Societies), largely followed the recommendations in the 2013 Law Commission Report 129 (see Incorporated Societies Act 1908 Report).
  • We recommend that new and existing societies be proactive in anticipating the reforms when adopting or revising constitutions.
  • The most recent advice we have is that a Bill may be introduced in 2019, and enacted in 2020.

Incorporated Societies Act Reform

  • The Minister of Commerce and Consumer Affairs hopes the reform Bill will be introduced to Parliament by the end of 2019. The following is a brief background to the reform:
    • The Incorporated Societies Act 1908 has effectively remained unchanged for over a century (in 1920 it was amended to allow for branch societies, and on the introduction of decimal currency in 1967 a shilling fine was changed to 10 cents). In contrast, our companies’ legislation has been totally re-enacted six times since the Joint Stock Companies Act 1860 (1868, 1882, 1901, 1903, 1933 and 1993), all with regular amending Acts.
    • The Law Commission’s 2013 Report 129, A New Act for Incorporated Societies, recommended a complete overhaul of the Incorporated Societies Act 1908.
    • A 2015 Exposure Draft of the Incorporated Societies Bill largely followed the recommendations in the 2013 Law Commission Report.
  • In a 26 June 2019 press release James Hartley, General Manager of Commerce and Consumer Affairs at the Ministry of Business, Innovation and Employment, stated:
    • “The Incorporated Societies Act 1908 is more than 100 years old, outdated and focuses largely on the formation and dissolution of incorporated societies.”
    • “A draft Incorporated Societies Bill, which will replace the original Act, went through consultation in 2015. Cabinet has now signed off on some changes to that draft.”
    • “The new Incorporated Societies Bill will enable incorporated societies – which include everything from netball and rugby clubs to Rotary groups – to run more effectively. The Bill provides an operating environment that meets current and future needs so that incorporated societies can thrive. It also helps society members to more effectively hold their members to account.”
    • “The feedback we received highlighted some important updates that were needed, so I am pleased this new Bill provides long-term assistance and improved clarity around the requirements to run an incorporated society.”
  • The Ministry expects that “The Bill is expected to be introduced to Parliament later this year.”

A new Incorporated Societies Act – as now proposed

  • The June 2019 Cabinet Paper presented by the Minister of Commerce and Consumer Affairs records that “incorporated societies make a significant contribution to New Zealanders’ well-being,” and confirms that the present legislative proposals are to:
    • Completely replace the Incorporated Societies Act 1908,
    • Provide a modern and clearer statutory framework for incorporated society governance,
    • Align the definition of incorporated society officers with the definition in the Charities Act 2005 (a somewhat narrower definition than was previously proposed),
    • Require better processes for how societies deal with member grievances and complaints,
    • Provide standard constitutional provisions for use by incorporated societies,
    • Make significant changes to provisions relating to trade unions,
    • Give existing charitable societies registered under the Charitable Trusts Act 1957 the option to migrate to the new incorporated societies regime (rather than, as previously proposed, requiring them to migrate to the new Incorporated Societies Act regime), and
    • Reduce the originally proposed 4 year transition period for societies to comply with the new statute to 30 months, but also allowing societies to elect whether or not to transition to the new legislative regime, and
  • Those that do not transfer will cease to enjoy the benefits of being incorporated entities (the Cabinet paper recognises that this proposal may “become subject to criticism,” and the author of this article fears that many societies that are poorly governed will elect not to transition, to the potential detriment of their members and third parties), and
  • This option is likely to be taken by smaller societies for which the added administrative burdens imposed by the new statute are considered to outweigh the benefits of incorporation.

Law Commission Report Principles which still appear to underpin the Government’s proposed reforms:

  • Societies are organisations run by their members, and those members have the primary responsibility for holding their societies to account, and a group without members to hold it to account should consider an alternative form of incorporation (such as a trust).
  • Incorporated societies should not distribute profits or financial benefits directly to members (who join to achieve a shared purpose, and not for their personal financial profit from the activities of the society) – a key feature setting incorporated societies apart from other forms of incorporation.
  • Societies are private bodies that should be self-governing and largely free from inappropriate State interference.
  • The legislative regime should give societies some flexibility to adapt their operating environment to suit their purposes and their culture.

Members’ pecuniary/financial gain

  • The new statute will prohibit societies from operating for the financial gain of their members and from distributing any gain, profit, dividend, or other financial benefit to its members.
  • However, a society:
    • That ceases to exist may distribute surplus assets to a member which is itself a not-for-profit entity which does not provide for distribution of surplus assets to its members, and
    • As part of an amalgamation, may distribute any gain, profit, dividend or other financial profit to a member who is a body corporate and is the entity into which the society and member are amalgamating.
    • Itself “trades” (runs a business) will be allowed to reimburse members for reasonable expenses related to society, pay members for services on a normal “arm’s length” basis, and provide benefits and incidental prizes and discounts to the public including members or their families.

Membership of societies

  • Minimum membership will be 10 (not the present 15), with corporate members still being equal to 3 individuals.
  • A person must consent to become a member of a society (there may be some minor exceptions).
  • The minimum of 10 will apply at the time of, and after, incorporation (with annual reporting of membership numbers to the Registrar).
  • If the minimum drops below 10 the Registrar may give notice to a society to increase to the minimum or be deregistered.

Minimum content of constitutions and member access to information

Society constitutions will be required to include:

  • Name and purposes of the society,
  • How people become members and cease to be members (a member must expressly consent to becoming a member),
  • Provisions to keep an up-to-date register of members,
  • Provision for the composition, roles and functions of committees,
  • How society enters into legal obligations, controls and manages its finances, and keeps financial records,
  • Members’ rights to access financial reports presented to AGM and access to minutes of previous AGMs (supplemented the right to request other information, which a society may decline to provide – see Clauses 71-72), and
  • Arrangements and requirements for general meetings, including:
    • The intervals between general meetings,
    • When minutes are required to be kept,
    • Manner of calling meetings,
    • The time within which, and manner in which, notices of general meetings and notice of motion must be notified,
    • The quorum and procedure for general meetings, and
    • Voting procedures for general meetings.

Society constitutions

  • A society will be empowered to include rules in its constitution, consistent with the constitution and the statute:
    • To make bylaws (no longer subject to the Bylaws Act 1910),
    • To express its tikanga or culture, and
    • To provide for any other matter relevant to the society’s affairs.
  • The statute will require that all constitutional alterations be notified to the Registrar within 30 days, taking effect from registration or a later specified date.
  • A Court will have discretionary power to amend a society’s constitution if:
    • A constitutional amendment was not made in accordance with constitution or the Act,
    • It is not practicable for a society to amend its constitution itself as required by its constitution,
    • The society’s constitution is operating or would operate in an oppressive, unfairly discriminatory or unfairly prejudicial manner, and
    • In any other circumstances considered just and equitable.

Model constitution or standard provisions

  • While the Law Commission recommended that a model constitution be provided, we agree that societies are “too diverse for standard constitutional provisions or model constitutions” (as stated in the June 2019 Cabinet Paper, paragraph 82.2).
  • It remains to be seen whether the some Government Ministry may pick up on the Law Commission alternative suggestion of a society constitution-builder (paragraphs 7.58-7.59).

Registered Office

  • Every society must have a registered office in New Zealand.
  • Subject to the constitution, a society may change its registered office (and may nominate that this takes effect on a date after the Registrar is notified of the change).

Branches

  • Branch – parent society relationships will be defined by those entities, not by legislation.
  • There will be no separate provision for incorporation of branches, but a branch may be incorporated as a society in the normal way, and existing registered branches will be “grand-parented.”
  • However, the implications relating to the inter-relationship between the proposed new Act and the Employment Relations Act 2000 and on its application to societies whose members are other societies or who have a multiple branch structure will be given further consideration.

Limitation of member liability

  • Members will not be liable for a society’s obligations, and the new provision will be generally aligned to that in section 97, Companies Act 1993.
  • Societies will be empowered to indemnify members and employees who act in good faith in pursuing a society’s activities, and to take insurance for the purposes of that indemnity.

Legal capacity of societies

  • Societies will be deemed to have full capacity to carry on or undertake any business or activity, do any act, or enter into any transaction, and the new provision will be generally aligned to that in section 16, Companies Act 1993.
  • For avoidance of doubt, a society will have generally wide powers (unless expressly negated in its constitution) to:
    • Buy, sell, exchange, develop and mortgage property,
    • Borrow money and give security for it and to issue negotiable instruments,
    • Receive and make gifts, enter contracts and leases, employ people, and
    • Belong to other similar societies or associations.
  • How societies may enter into legal obligations is likely to be spelt out (see Clauses 91-92 of the Exposure Draft of the Bill.

Ultra vires actions

  • The new statute is expected to provide that no act of a society and no transfer of property to or by a society is invalid merely because the society did not have the capacity, the right, or the power to do the act or to transfer or take a transfer of the property.
  • The new statute will protect third parties who are unaware of any incapacity when they deal with a society.

Costs in legal proceedings

  • The new statute will not include a provision relating to security for costs in legal proceedings (existing Court rules are considered adequate).

Society committees

  • Every society must have a committee of at least three “natural persons” with responsibility for the affairs of the society.
  • Constitutions will be required to contain rules setting out the composition, roles and functions of the committee, including:
    • Number of committee members,
    • Election or appointment of committee members,
    • Terms of office of committee members,
    • Qualifications for appointment of committee members, and
    • Grounds for removal of committee members from office.

Society contact officer

  • Every incorporated society will be required to have a statutory “contact officer” (with whom the Registrar may communicate) at all times as a member of the society’s committee (we expect most societies will designate the secretary as the “contact officer”), and that person:
    • Must be eligible to be a Committee member,
    • Must be 18 years of age and resident in New Zealand,
    • May hold any other office as a committee member or in the society, and
    • Name and address, and any changes, must be notified to the Registrar.

Officers, duties, etc

  • The new statute will provide that:
    • A contact officer, committee member or other officer of a society must retire if he/she becomes disqualified, and
    • If a person is disqualified or banned from being an officer of a society but acts as one then he/she will be deemed to be an officer.
  • The actions of any person as contact officer, committee member or other officer are not invalid merely because the person’s appointment was defective or the person was not qualified for appointment to the relevant office.

Committee member disqualifications

  • A Committee member will be disqualified if he/she:
    • Is an undischarged bankrupt,
    • Is prohibited from being an officer of incorporated society under the new Act,
    • Is prohibited from being a director or taking part in management of an incorporated or unincorporated body under the Companies Act, the Securities Act, the Securities Markets Act, or the Takeovers Act,
    • Is subject to a property order under the Protection of Personal and Property Rights Act 1988, or
    • Does not comply with any qualifications for officers in the society’s constitution.

Officers’ statutory duties

  • Statutory duties will be imposed on society officers, and owed to society, including:
    • To act in good faith and in the best interests of the society, and use powers for a proper purpose,
    • To comply with the statute and with the society’s constitution,
    • To exercise the degree of care and diligence of a reasonable person with such responsibilities,
    • Not to allow society activities to be carried on recklessly or in a way likely to create a substantial risk of serious loss to the society’s creditors, and
    • Not to allow the society to incur obligations that the officer does not reasonably believe will be fulfilled.

Conflicts of interest

  • Officers of an incorporated society with a direct or indirect financial interest in a matter must disclose, as soon as practically possible, that interest to the committee and in a conflicts of interest register.
  • An officer who has disclosed a financial interest in a matter must not vote on that matter.
  • An officer prevented from voting because of a financial interest may continue to be counted as part of the quorum.
  • A register of officers’ disclosures must be maintained, and be open for members’ inspection, with a summary presented to each AGM.
  • A professional adviser will not be considered to be a society officer merely because the adviser gives advice to a society.

Annual reporting

  • An annual return will be required (with online annual returns being facilitated), with prescribed minimum annual return contents.
  • Larger societies will prepare annual financial reports (the format to be determined by the External Reporting Board), filed with the Registrar.
  • The Minister’s current proposals will lessen the burden for smaller societies not registered as charities (those with annual expenditure of less than $10,000, or assets less than $30,000 or do not have “donee” status under the Income tax Act 2007).

N.B.

  • The new “Accounting Standards Framework” altered the form of financial statements (Financial Reporting Act 2013 and External Reporting Board) for accounting periods commencing from 1 April 2015.
  • The current Accounting Infrastructure Reform Bill proposes different levels of audit or review depending on an entity’s annual expenses (over $1M audit, between $500K – $1M audit or review, under $500K none).

Complaints and grievances

  • Every society constitution will be required to include procedures to deal with internal disputes.
  • Societies will be free to continue, develop or adopt disputes procedures to meet their needs, but their procedures and practice must satisfy the requirements for natural justice defined in Act.
  • The dispute categories that societies must maintain procedures for are:
    • Complaints concerning misconduct of or discipline of members, and
    • Grievances brought by members concerning their rights or interests as members.
  • Each society’s misconduct complaint, disciplinary or grievance procedures are for it to determine, but must satisfy relevant specified natural justice minima (e.g. right to be heard and to prepare defence).
  • Decision-makers in all classes of dispute need to be impartial and able to consider the issues without a predetermined view.
  • Society may elect not to consider or continue considering a complaint or grievance if:
    • The issues are trivial,
    • No material misconduct is disclosed by the complaint or grievance,
    • The complaint or grievance appears to be without foundation,
    • The complainant has an insignificant interest in the matter, or
    • The issue has already been investigated and dealt with.
  • Societies will be able to meet their obligations in dealing with complaints or grievance procedures by referring them to an external arbitrator or arbitral tribunal, by appointing a visitor (or referee), or through binding arbitration.

Statutory enforcement of obligations

  • The new Act will provide that a society, a member, or a former member may apply to a Court for orders to enforce the constitution.
  • The new Act will empower the Registrar to apply to a Court for orders to enforce the constitution if in the society’s interest and the public interest. To guide the Registrar as to what constitutes the public interest (bearing in mind the society’s general right to be free to manage its own affairs), he should consider:
    • The size of a society,
    • The income and assets of a society,
    • The source of the society’s income and assets,
    • The society’s ability or intention to act, and
    • The impact failure to act would have.

Statutory sanctions and powers

  • The new Act will provide for applications to a Court for orders for redress for officers’ breaches of duties:
    • By a society,
    • By a member, on behalf of a society, with the leave of the Court, and
    • By the Registrar on behalf of a society if it is the society’s and the public interest to do so.
  • A member or a former member will be empowered to apply to a Court for orders on the grounds that conduct of the society has been, is being, or is likely to be oppressive, unfairly discriminatory, or unfairly prejudicial to him or her.
  • The new Act will provide that applications may be made to a Court for orders to restore to the society money wrongly paid to members in breach of the prohibition against monetary gain by:
    • A society, and
    • A member (with the leave of the Court), or
    • The Registrar
  • The new Act will provide for infringement offences, and a range of new offences with meaningful penalties.
  • In addition to any other penalty, a Court will have power to ban a person from holding a position of governance or management of an incorporated society or from being the contact officer of a society, upon convicting that person of an offence under the new Act.
  • The Registrar will have powers to require a society to supply information about its business, operation, or management, to require audits, to enter and search society premises, to investigate a society, to advise and assist, and to “freeze” property and funds for 21 days.

Terminating, restructuring and rescuing societies

  • There will be a new statutory power for the Registrar to remove a society from the Register on request of a society or its liquidator.
  • There will be new procedures to restore removed societies to the Register.
  • The new Act will provide that, generally, a resolution of the majority of members voting at a single general meeting is sufficient to appoint a liquidator or to request the Registrar to remove a society from the Register.
  • The new Act will provide that notice of a proposal to appoint a liquidator or to request the Registrar to remove the society from the Register must be given to members in accordance with the constitution, and not less than 30 days in advance of the meeting to consider the proposal.
  • The new Act will provide that:
    • A society’s constitution must nominate a particular not-for-profit entity, or a type of not-for-profit entity to which any surplus assets will be distributed on liquidation or removal of the society from the Register, and
    • The final meeting of a society may (by a valid constitutional amendment) approve a different distribution to a different entity from that proposed in the constitution.
  • The new Act will provide that financially distressed societies to enter into compromises with creditors.
  • The new Act will facilitate amalgamations and mergers of societies.

Transition to the new Act

The new Act will provide for a transitional period of two years and six months, during which transitional period:

  • Every existing society will need to check that its constitution complies with the new requirements (many existing constitutions may comply with the new requirements, but where a constitution lacks a rule required by the new statute, or does not comply with the new constitution content requirements societies will need to amend their constitutions),
  • Providing for distribution of assets to individual members on dissolution or liquidation is not invalid, and
  • Any dissolution or liquidation will deal with the distribution of assets as if the 1908 Act had not been repealed.

Bannister & von Dadelszen’s Recommendations

  1. The substance of the reform proposals approved by Cabinet in June 2019 are unlikely to change significantly as the reforms are not considered to be politically controversial, but there will be opportunities for public submissions (particularly during the Committee stages of the Bill’s passage through Parliament).
  2. The new requirements placed on incorporated societies by the proposed new Act (the trade-off in return for the benefits of incorporation) will be onerous for some and may prompt some fundamental reconsideration about societies:
    • Why do we have a society, what need is it meeting, and are we fulfilling the wants and needs of our members – fundamentally what is our “purpose or “mission”?
      Do we need a society (with voting members) or might some other type of organisation (perhaps a trust) meet our needs?
    • Might there be merit in considering combining forces with some other organisation or organisations providing similar community services (such as forming a combined sports club or combined cultural society)?
    • Do we actually need to be incorporated (the main benefit of incorporation for most societies being to protect members from most personal liability for society activities)?
    • If we choose to remain incorporated, how will we meet the greater reporting and accountability requirements of the new Act? Will we need to pay or increase committee honoraria or engage some external professional help?
  3. To avoid the pressure of having to revise a society’s constitution during the transitional period after the new Incorporated Societies Act is enacted:
    • Societies being formed now should seek to anticipate the changes by adopting constitutions that complies with the provisions in the Exposure Draft of the Bill,
    • Existing societies reviewing their constitutions now should consider the issues discussed in paragraph 2 above, and if the review proceeds draft a new constitution that complies with the provisions in the Exposure Draft of the Bill, and
    • All other existing societies should consider the issues discussed in paragraph 2 above, and should then commence reviewing their constitutions now, even if they delay putting a revised constitution to their members until after the new Act is passed.

Bannister & von Dadelszen is well-placed to advise on the implications of the proposed new Incorporated Societies Act, and we advise societies and trusts throughout New Zealand, involved in a wide range of activities.   Mark von Dadelszen was a member of the Reference Group advising the Law Commission in the preparation of its Report on the proposed reforms, and was engaged by the Ministry of Business, Innovation and Employment to advice on the proposed model constitution as originally recommended by the Law Commission.  Apart from having decades of practical experience in governance of societies and charities (for which service he was awarded a QSM in 2012), Mark is the author Law of Societies in New Zealand (the only specialist text on the subject in New Zealand), and writes regular articles on issues relating to societies and charities (see our Societies and Charities page).