These notes, prepared by Mark von Dadelszen, provide an overview of the more significant elements of the proposals to replace the Incorporated Societies Act 1908.
New and existing societies should be proactive in anticipating the reforms when adopting or revising constitutions.
An Exposure Draft Bill was produced in 2015, and a Bill was introduced in Parliament in March 2021.
Incorporated Societies Act Reform
- 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, without allowing for the effects of inflation over six decades). 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 (see www.lawcom.govt.nz/project/review-incorporated-societies-act-1908/report).Not for
- A 2015 Exposure Draft of the Incorporated Societies Bill largely followed the recommendations in the 2013 Law Commission Report (see http://www.mbie.govt.nz/info-services/business/business-law/incorporated-societies).
- The following principles in the Law Commission’s 2013 Report still underpin the proposed new statute:
- 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 that sets incorporated societies apart from other types of incorporated entities.
- 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.
- The following notes are based on the assumption that the new Act will very closely follow the Bill introduced into Parliament. N.B.: The eventual new Act may be different!
Members’ pecuniary/financial gain:
The new statute will continue (with minor exceptions) to 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 will be permitted to “trade” (run a business), 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 society membership is proposed to be 10 (with corporate members still being equal to 3 individuals), and a person must consent to become a member of a society (there may be some minor exceptions).
Minimum content of constitutions and member access to information:
Society constitutions will be required to be far more detailed than previously, and to include:
- Provisions to keep an up-to-date register of members,
- Members’ rights to access financial reports presented to AGM and access to minutes of previous AGMs,
- Procedures to deal with internal disputes (complaints concerning misconduct of or discipline of members, and grievances brought by members concerning their rights or interests as members). A society’s misconduct, complaint, disciplinary or grievance procedures must satisfy relevant specified natural justice minima (e.g. right to be heard and time to prepare a defence), and decision-makers in all classes of dispute will need to be impartial and able to consider the issues without having a predetermined view.
- A society will be empowered to express its tikanga or culture in its constitution and to make bylaws.
- A Court will have some discretionary powers to amend a society’s constitution,
Every society will be required to have a registered office in New Zealand.
Branch – parent society relationships will be defined by those entities, not by legislation (at present the Incorporated Societies Amendment Act 1920 provides for branches).
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 out 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.
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, with some protection for innocent third parties.
Every society must have a committee of at least three “natural persons” with responsibility for the affairs of the society.
Society contact person:
Every incorporated society will be required to have a statutory “contact person” at all times (with whom the Registrar may communicate) who may or may not be a member of the society’s committee (it is likely that most societies will designate the secretary as the “contact person”), and that person must be eligible to be a Committee member, must be 18 years of age and resident in New Zealand.
Officers, duties, etc:
- The new statute will provide that a contact person, 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 have all the relevant duties of e an officer.
- The actions of any person as contact person, committee member or other officer will not be 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, to 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 will be required to disclose, as soon as practically possible, that interest to the society’s 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, and a register of officers’ disclosures must be maintained and be open for members’ inspection, with a summary presented to each AGM.
An annual return will be required (with online annual returns being facilitated), with prescribed minimum annual return contents.
Complaints and grievances
- Every society constitution will be required to include detailed procedures to deal with internal disputes (complaints concerning misconduct of or discipline of members, and grievances brought by members concerning their rights or interests as members).
- While societies will be free to continue, develop or adopt disputes procedures to meet their needs, but their procedures and practices must satisfy the requirements for natural justice defined in Act.
- Decision-makers in all classes of dispute will need to be impartial and able to consider the issues without a predetermined view.
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.
Statutory sanctions and powers
- The new Act will provide for applications to a Court for orders for redress for officers’ breaches of duties.
- 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 for infringement offences, and a range of new offences with meaningful penalties.
- In addition to any other penalty, a Court will have power, upon convicting that person of an offence under the new Act, to ban a person from holding a position of governance or management of an incorporated society or from being the contact person of a society.
- 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 facilitate amalgamations and mergers of societies.
- Other changes will be made in respect of the winding up of societies.
Transition to the new Act
The new Act will provide for a transitional period, during which transitional period every existing society will need to check that its constitution complies with the new requirements.
Mark von Dadelszen’s Recommendations
- 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).
- 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?
- 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.
Mark Dadelszen is well-placed to advise on the implications of the proposed new Incorporated Societies Act, and he advises societies and trusts throughout New Zealand, involved in a wide range of activities – you can contact him at firstname.lastname@example.org. Mark von Dadelszen was a member of the Reference Group advising the Law Commission on the review of the 1908 Act, and was engaged by MBIE to advise on the proposed model constitution as originally recommended by the Law Commission and later he contributed to the development of the Department’s society constitution-builder. 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 other Societies and Charities [add link] pages). For specific advice relating to the issues discussed in this article, please contact Mark at email@example.com.