A Society Problem
Ever since I started writing and publishing articles about not-for-profit entities in 2010 those articles have generated various enquiries and responses, but few are more difficult to answer than the type of enquiry set out below (for obvious reasons, the details have been changed):
Hi Mark. I have just read one of your articles from last year. We’re having terrible trouble with the Erewhon Community Society. It built up assets, but a bad committee got in and the society’s premises were closed recently. The chairman and also the secretary refuse to hold a meeting to wind up society. The treasurer refuses to let any members see the financial statements, but we got a copy. They are completely wrong, and the committee and members have not seen or approved them. The Registrar won’t help us and says it’s an internal matter. Some of the committee sold off majority of assets without other committee members knowing, and one of them bought some of the equipment for less than a hundred dollars. You can imagine the rows going on. We want society wound up legally and financial statements out in public. Why are they hiding everything? One of the chairman’s friends is screaming and shouting abuse at anyone who asks the chairman to do the right thing. We won’t give up on it but we desperately need someone to help us.
While some key information is usually provided when I receive an enquiry, there is invariably other information to clarify (some may be obtainable by doing searches into the society from http://www.societies.govt.nz and (in the case of registered charities, from http://www.charities.govt.nz websites), including:
- Is the entity a society or a trust? A society generally has clear accountability requirements to members, while a trust has trustees who are not usually accountable to members, and a trust’s meetings are not generally open to supporters.
- Is the entity registered? If so, if it is registered under the Incorporated Societies Act 1908 or the Charitable Trusts Act 1957 and/or under the Charities Act 2005, and check what information is available from the registers under those Acts.
- What does the constitution say about the requirements for meetings, about governance accountabilities, and about winding up? In the case of societies, society members usually have rights (under the constitution or by virtue of Court decisions) to call meetings and to hold the committee to account.
- Can you access copies of governance reports and minutes from friendly members of the entity’s governing body to help prove the grounds for a formal complaint? Under the proposed new Incorporated Societies Act obtaining such access should be easier.
- Has a local authority or government agency funded or had other dealings with the entity? If so, an official information request could be made for recent documents relating to the entity which might provide independent evidence to prove the grounds for a formal complaint.
What Answers are there?
Regrettably the type of situation described is not uncommon, and at present there are no easy solutions. My usual responses are as follows:
- The Registrar has some powers of investigation (in this case under s 34A, Incorporated Societies Act 1908), but is not funded to deal with issues such as this. In serious cases of the Registrar may take action, as in Registrar v Hearing Association Whangarei Branch Inc, High Court, Whangarei, CIV-2007-488-000406 25 October 2007, but the situation described above was not as serious as in that case.
- Section 25(2), Incorporated Societies Act, provides that the annual “statement shall be accompanied by a certificate signed by some officer of the society to the effect that the statement has been submitted to and approved by the members of the society at a general meeting.” The Registrar registers thousands of documents annually and has little alternative but to accept at face value the fact that documents sent to him for registration have been properly approved (see, particularly, s21(3), Incorporated Societies Act).
- If a local authority or government agency has funded or had other dealings with the society, they may launch an investigation if there is possible impropriety evident to them. In extreme cases that may lead to Court action and, in more serious cases, prosecutions and public disgrace (while examples abound, one example reported at http://www.stuff.co.nz/dominion-post/news/5463616/Public-funding-spent-on-mates reports the conviction of a manager, and governance failings including a trust paying trustees rent without independent advice on an appropriate rental).
- An application could clearly be made to the High Court to require the entity to comply with its constitution or to wind it up, and the facts given would indicate that there are grounds to do so. While a lawyer would normally deal with an application for winding up of a society (I would expect legal fees and Court costs to be in excess of $50,000), a lay person can still make an application, and the necessary forms are set out in the High Court Rules 2016 (especially Part 31) available at https://www.legislation.govt.nz/regulation/public/2016/0225/latest/DLM6953078.html, and a local Community Law Centre may be prepared to assist on a pro bono basis. As this would be a public interest proceeding, an application can be made to the High Court Registrar to waive the filing fees. On winding up a liquidator could look at any sale of assets at less than an appropriate consideration, and other governance and management irregularities.
- If the society is registered as a charity with Charities Services, they have powers of investigation under s 50, Charities Act 2005. In addition, if the society has charitable purposes (and most “community” societies have at least some charitable purposes), Charities Services is still able to investigate, so it might be worth contacting them to make a complaint.
Reform of the Incorporated Societies Act and Charitable Trusts Act
In my view, the circumstances outlined above provide an excellent example of one area where the legislation dealing with societies and charities has been woefully inadequate for many years. Current remedies are not readily accessible to most people, and they are excruciatingly slow and disproportionately expensive. The reforms following the 2013 Law Commission Report, a New Act for Incorporated Societies, should help to address this legislative inadequacy, and the replacement Act is now likely to be enacted in 2021.
For specific advice about any of the issues discussed in this article, please contact Mark at email@example.com.