Residents’ Societies and the Incorporated Societies Act 2022

Transition to the new Act

The 1908 Act is still in force, and section 256 of the 2022 Act provides for the making of Orders-in-Council to bring the balance of the 2022 Act into force and to facilitate the orderly implementation of 2022 Act. In simple terms, there is no immediate change affecting existing and newly formed incorporated societies, but the Boy Scouts motto to “Be Prepared” should be borne in mind. It appears probable that existing societies will have a period from around October 2023 to April 2026 to re-register with constitutions complying with the 2022 Act.

Introduction – Residents’ societies

A common method of arranging for the running and maintenance of common infrastructure in residential developments is to form an incorporated society to manage common infrastructure (such as roading, pedestrian paths, water reticulation, drainage and sewerage treatment systems and common area gardens), and often to control what ancillary building may be placed on residents’ properties, the keeping of animals, building alterations and additions, and the colour scheme on buildings. Such societies have been formed under the Incorporated Societies Act 1908 and they usually have power to levy members to meet the costs of maintaining common property and facilities.

The 1908 Incorporated Societies Act was not very complicated, but the new Incorporated Societies Act 2022 includes a number of provisions that will create challenges for existing residents’ societies and may result in a reduction in the use of incorporated societies to run and maintain common infrastructure in residential developments.

It has become common in newer subdivisions and their societies’ constitution to set out the obligations and requirements of each owner. It is very important that owners are aware of these obligations and understand the rules, their financial commitment and restrictions that govern the society, as these often tie back to Resource Consent conditions that govern the subdivision.

In addition to these provisions, a residents’ society constitution will set out general rules that all residents (owners and occupants) must adhere to, such as rules relating to:

• Pets,
• Gardens and lawns,
• External alterations to buildings,
• Exterior paint colours,
• Parking, and
• The debt collection of levies.

Members’ pecuniary/financial gain

The new statute continues (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 is 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 membership under the new Incorporated Societies Act is now 10 (with corporate members still being equal to 3 individuals), and a person must consent to become a member of a society (that consent should be obtained in writing and retained in each society’s records).

Minimum content of constitutions and member access to information

Society constitutions are now required to be far more detailed than previously, and must include:
Provisions to keep an up-to-date register of members,
Members’ rights to access financial reports presented to an Annual General Meeting and access to minutes of previous Annual General Meetings,
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 to prepare defence), and decision-makers in all classes of dispute need to be impartial and able to consider the issues without a predetermined view.

Society constitution

A society is empowered to include rules in its constitution to make bylaws and to express its tikanga or culture.
A Court now has some discretionary powers to amend a society’s constitution.

Limitation of member liabilities

Members are not liable for a society’s obligations, and the new provision is generally aligned to that in section 97, Companies Act 1993.
Societies are 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 are 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 is generally aligned to that in section 16, Companies Act 1993.

Ultra vires actions

The new statute provides 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.

Society committees

Every society must have a committee of at least three “natural persons” (who consent in writing to be on the committee, and I recommend that every such consent should held in the society’s records) with responsibility for the affairs of the society.

Society contact person

Every incorporated society is required to 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 are likely to 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 provides 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 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 are 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, and a register of officers’ disclosures must be maintained, and be open for members’ inspection, with a summary presented to each AGM.

Annual reporting

An annual return is required (with online annual returns being facilitated), with prescribed minimum annual return contents.

Complaints and grievances

• Every society constitution is 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 are free to continue, develop or adopt disputes procedures to meet their needs, their procedures and practice must satisfy the requirements for natural justice defined in Act.
• Decision-makers in all classes of dispute need to be impartial and able to consider the issues without a predetermined view.

Statutory enforcement of obligations

• The new Act provides that a society, a member, or a former member may apply to a Court for orders to enforce the constitution.
• The new Act empowers 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 power

• The new Act provides for applications to a Court for orders for redress for officers’ breaches of duties.
• A member or a former member is 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 provides for infringement offences, and a range of new offences with meaningful penalties.
• In addition to any other penalty, a Court has power 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, upon convicting that person of an offence under the new Act.
• The Registrar has 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.

Registered Office

• Every society must have a registered office in New Zealand.

Terminating, restructuring and rescuing societies

• There is a new statutory power for the Registrar to remove a society from the Register on request of a society or its liquidator.
• There are new procedures to restore removed societies to the Register.
• The new Act facilitates amalgamations and mergers of societies.
• Other changes are made in respect of the winding up of societies.

Recommendations

1. 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?

2. To avoid the pressure of having to revise a society’s constitution during the transitional period following enactment of the new Incorporated Societies Act:

• Societies being formed now should seek to anticipate the changes by adopting constitutions that complies with the provisions in the 2022 Act,
• 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 2022 Act, and
• All other existing societies should consider the issues discussed in paragraph 2 above, and should then commence reviewing their constitutions now.

Mark is able to advise on the implications of the proposed new Incorporated Societies Act, and advise societies and trusts throughout New Zealand, involved in a wide range of activities. He was a member of the Reference Group advising the Law Commission on the review of the 1908 Act, and was engaged by the Ministry of Business, Innovation and Employment to assist in the creation of the 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), he is the author Law of Societies in New Zealand (the only specialist text on the subject in New Zealand – currently being edited for a 4th Edition to be published following the enactment of the new Incorporated Societies Act), and he writes regular articles on issues relating to societies and charities (see his Societies and Charities LINK page).

While Mark does not claim to have specialist knowledge about residential subdivisions, in respect of the issues referred to in this article, please contact Mark at mark@nfplaw.co.nz.