Reform of Incorporated Society and Charitable Trust Law
The problem with outdated legislation
Many society members and lawyers regularly advising on society and charitable trust issues will be aware of the inadequacy of the legislative framework for the governance and management of incorporated societies and charitable trusts. The Incorporated Societies Act 1908 is over a century old, and the Charitable Trusts Act 1957 was enacted more than five decades ago. Much has changed in that time, but little has previously been done to keep these statutes up-to-date, leading me to assert in an earlier article that “With the statutes providing for the incorporation of societies and charities being, respectively, over a century or over half a century old, there should be Parliamentary attention given to enacting minimum standards of governance required of voluntary sector entities.”
The Companies Act 1908 was replaced in 1933, 1955, and 1993, and all of those statutes were themselves extensively amended many times, and there is much legislation applying to companies that is found in other statutes. In contrast, there have been just six minor Incorporated Societies Amendment Acts (1920, 1922, 1953, 1993, 2005 and 2010), and only three minor Charitable Trusts Amendment Acts (1993, 2007 and 2010).
Reform in prospect
The legislation governing the voluntary sector in society is seriously out-of-date. That may not seem important for a tiddlywinks club, but the reality is that, collectively, recreational, social welfare and educational entities control many millions of dollars’ worth of assets (some owned by local and central government) and receive millions in government funding, while many are the means by which many important government services are provided or entities that provide richness to our cultural and social lives.
The problems received some Government recognition when the then Minister of Justice has asked the Law Commission in 2011 to review the Incorporated Societies Act 1908. The Commission produced a report, “a new Act for Incorporated Societies,” in 2013, but, despite the fact that submissions on an Exposure Draft Bill closed on 30 June 2016, a Bill to replace the Incorporated Societies Act 1908 was introduced to Parliament until March 2021. The author now expects the new Incorporated Societies Act to be enacted in 2021!
The legislation in context
In the first of these articles, originally written in 2010, (“As Common As Dirt”) I noted that at 30 June 2009 there were 22,681 societies incorporated under the Incorporated Societies Act (illustrating the need for review of that statute) and 18,794 charitable trusts and societies incorporated under the Charitable Trusts Act. The Registrar appears no longer to be publishing that information annually, but one may assume that the numbers have continued to increase. The number of charitable entities registered with the Charities Commission in March 2021 exceeded 27,700 (many of which will be registered under either the Incorporated Societies Act or the Charitable Trusts Act). In that first 2010 article I speculated that, including unincorporated societies and clubs, there may be about one community organisation for every 50 people in the country, making such entities “an important part of the fabric of our communities, facilitating much of our social, cultural, sporting, and religious life.”
My article “Audits or Review of Accounts” suggests that (expensive) audits are not particularly effective in identifying fraud or other losses, and that is not helped by having inadequate legislation covering societies and charities. The fiscal implications for various Government Departments funding community organisations that are poorly governed and managed are, I suspect, significant. One modest example may serve to illustrate the reason for my concern. A Hastings woman was convicted in 2008 for stealing $20,000 from a community organisation. The following year she misappropriated $6,894 from the Ministry of Education, and in 2010 she was convicted on charges of using a document for pecuniary advantage and forgery, arising from her administration of a playgroup. At sentencing the woman’s lawyer blamed the offending on “bad practices and bad management.”
Reforms I would like to see
Neither of the 1908 or 1957 Acts contemplated meetings being held by telephone conference (let alone video conferencing), conducting ballots by email or website voting, electronic banking, or even the relative ease of being able to get to meetings by car or air travel. The world has moved on, but the legislation hasn’t.
Some wise person once said “any fool can criticise, but few fools could do better,” which leads me to consider what changes might be desirable. What follows is what was my 2011 “top of the head” list of things to consider in any new legislation dealing with the rules, governance and management of societies and charities (updated having regard to developments since then, and noting that many of the listed items are features of the Incorporated Societies Act Bill 2021):
- Any new legislation should address minimums required in constitutions to ensure adequate standards of governance and management of entities. Section 6, Incorporated Societies Act, includes a minimal list of essential provisions in rules (the Charitable Trusts Act has no equivalent) – the name of the society, including “Incorporated” as the last word in the name, the society’s objects, how people become and cease to be members, how rules may be altered, added to, or rescinded, how to call, hold and vote at general meetings, how officers are appointed, the control and use of the common seal, the control and investment of funds, any powers to borrow, and what happens to society property on liquidation. Some Australian States have legislated standard sets of rules, and that was recommended in the Law Commission’s 2013 Report. While a standard set of rules might make it easier for societies to draft rules and make the task of the Registrar simpler on registration, arguably no “standard” set of rules will suit all societies and having a standard template would make it more difficult to draft an integrated, coherent set of rules best suited to each society. The Exposure Draft Incorporated Societies Bill did not adopt the Law Commission’s recommendation (and, having drafted a model set of rules for the Ministry of Business, Innovation and Employment, I agree that it is impractical to draft a “one size fits all” society constitution). However, what is clear to me is that our present legislation is woefully inadequate.
- Minimum requirements for the keeping of records should be prescribed, so an auditor, the Registrar, Charities Commission or interested members can verify how, when and why decisions were made and expenditure was authorised. Where a constitutional document authorises the making of bylaws, regulations or policies provisions should be made for those to be available for inspection at any time or place the constitution can be inspected. The extent to which those records should be available for public inspection, and whether or not membership details and minutes of meetings should be available for inspection, and by whom, also requires consideration.
- Minimum standards of practice in dealing with complaints and discipline and meeting the principles of natural justice should be considered.
- How financial information is recorded and how financial transactions are conducted also requires careful thought. With many transactions now being carried out through internet banking the legislation needs to facilitate this, while also ensuring adequate controls and accountability. Given the rising costs of auditing and the limited success audits have in detecting misappropriation of funds, consideration might usefully be given to providing legislative recognition to something less onerous or expensive than a formal audit.
- The implications of technology in decision-making should also be considered – facilitating making rule changes and policy decisions by postal and electronic ballot, telephone and video conferencing, passing of resolutions by email poll, and the like.
This list was but a modest start, and the reform process has been neither rapid nor easy.
Finally, I believe the implications of the changes recommended by the Law Commission should extend beyond just the Incorporated Societies and Charitable Trusts Acts. Statutes such as the Agricultural and Pastoral Societies Act 1908, Building Societies Act 1965, Friendly Societies and Credit Unions Act 1982, Racing Act 2003, and Acts dealing with various occupations would also benefit from similar reforms.
For specific advice about societies of charities, please contact Mark at mark@nfplaw.co.nz.