Overview of Proposed New Incorporated Societies Act

NOTE:

  1. The Incorporated Societies Act 1908 is badly out-of-date
  • Our companies’ legislation has been totally re-enacted six times in the last 152 years (1868, 1882, 1901, 1903, 1933 and 1993) since the Joint Stock Companies Act 1860, all with regular amending Acts.
  • In contrast, the Incorporated Societies Act 1908, the Agricultural and Pastoral Societies legislation, and the Industrial and Provident Societies Act 1908 have been changed little in over a hundred years, and: 
    • Do not reflect current good governance practices,
    • Have been overtaken by technological advances,
    • Are all well past their respective “use-by” dates, and
    • Do not reflect modern legislative drafting.

2. A new Incorporated Societies Act

The then Government in early 2014 accepted most of the Law Commission’s 2013 Recommendations, and the 2015 Exposure Draft of the Bill proposed (and now the Bill in Parliament proposes) to: 

  • Completely replace the Incorporated Societies Act 1908,
  • Provide a clearer statutory framework for society governance,
  • Require better processes for how societies deal with member grievances and complaints,
  • Transfer charitable societies under the Charitable Trusts Act 1957 into the new statutory regime, and
  • The Request for Submissions on the Exposure Draft Bill mentioned the possibility that Agricultural and Pastoral Societies might transfer to the new statutory regime (but this is not proposed in the 2021 Bill).

3. Law Commission Report Principles (reflected in the 2021 Bill):

  • 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, not for 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 current legislative regime should basically be retained, giving societies flexibility to adapt their operating environment to suit their purposes and their culture.

4. 2011 Law Commission Report Recommendations (reflected in the 2021 Bill): Pecuniary/Financial gain

The new statute will prohibit incorporated societies from operating for the financial gain of their members, and therefore: 

  • A society will not be permitted to distribute any gain, profit, dividend, or other financial benefit to its members,
  • But, a society can itself “trade” (run a business), members can be reimbursed for reasonable expenses related to society, members can be paid for services on a normal “arm’s length” basis, providing benefits to the public including members or their families would be acceptable, and incidental prizes and discounts for members can be acceptable.

5. Report Recommendations (reflected the 2021 Bill): Membership

  • 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.
  • The minimum of 10 members will apply at the time of, and after, incorporation (with annual reporting of membership numbers to the Registrar).
  • If the membership drops below 10 the Registrar may give notice to a society to increase to the minimum or be deregistered.

6. Report Recommendations (reflected in the 2021 Bill): Minimum in 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.

7. Report Recommendations (reflected in the 2021 Bill): 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 20 working 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.

8. Report Recommendations (not adopted in the 2021 Bill): Model constitution 

  • The 2021 Bill does not follow the Law Commission’s recommendation that a model society constitution be provided, but the Ministry of Business, Innovation and Employment has made a constitution-builder available (https://isb.companiesoffice.govt.nz/constitutionbuilder/startscreen/).
  • New societies seeking registration will be required to submit a constitution complying with the statutory minimum requirements.
  • After the transitional period all existing society constitutions must comply with the statutory minimum requirements.

9. Report Recommendations (reflected in the 2021 Bill): 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).

10. Report Recommendations (reflected in the 2021 Bill): 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.”

11. Report Recommendations (reflected in the 2021 Bill): 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.

12. Report Recommendations (reflected in the 2021 Bill): 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 spelt out in Clause 116 of the the Bill.

13. Report Recommendations (reflected in the 2021 Bill): Ultra vires actions

  • The new statute will 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.

14. Report Recommendations (reflected in the 2021 Bill): 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).

15. Report Recommendations (reflected in the 2021 Bill): 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 (subject to Clause 42), and
    • Grounds for removal of committee members from office.

16. Report Recommendations (reflected in the 2021 Bill): Society contact person

Every incorporated society must have a statutory “contact person” (with whom the Registrar may communicate) at all times as a member of the society’s committee (I expect 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,
  • 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.

17. Report Recommendations (reflected in the 2021 Bill): 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 be an officer.
  • The actions of any person as contact person, 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.

18. Report Recommendations (reflected in the 2021 Bill): Committee member disqualification

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.

19. Report Recommendations (reflected in the 2021 Bill): 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.

20. Report Recommendations (reflected in the 2021 Bill): 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.

21. Report Recommendations (reflected in the 2021 Bill): Annual reporting

  • All societies will prepare annual financial reports (the format to be determined by the External Reporting Board), filed with the Registrar.
  • An annual return will be required (with online annual returns being facilitated), with prescribed minimum annual return contents.

N.B.

  • The new “Accounting Standards Framework” alters 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).

22. Report Recommendations (reflected in the 2021 Bill): 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.

23. Report Recommendations (reflected in the 2021 Bill): 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.

24. Report Recommendations (reflected in the 2021 Bill): 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.

25. Report Recommendations (reflected in the 2021 Bill): 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.

26. Report Recommendations (reflected in the 2021 Bill): Transition

The new Act will provide for a transitional period of four years, 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.

Mark von Dadelszen’s Recommendations

  1. The substance of the reform proposals contained in the Exposure Draft of the Bill are unlikely to change as the reforms are not considered to be politically controversial.
  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 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 von 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.   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 – the 4th Edition will be published after the new Incorporated Societies Act is enacted), and writes regular articles on issues relating to societies and charities (see these Societies and Charities pages LINK).  For specific advice the issues discussed in this article, please contact Mark at mark@nfplaw.co.nz.

This is one of a series of articles on societies and charitable trusts by Mark von Dadelszen, a lawyer and author of Members’ Meetings, 3nd Edition, 2012, and Law of Societies, 3nd Edition, 2013 (both texts being in the course of editing for 4th editions to be published after the new Incorporated Societies Act is enacted).