Third Party Approval to Change Constitutions
What is the issue?
In 2011, a reader of my articles raised an issue for consideration in this series of articles, saying:
Over the years I have had cause to read many constitutional documents, perhaps more carefully than some of the officers or members of the societies concerned. Frequently there is a clause relating to changes to the objectives of the society that requires the approval of the Inland Revenue Dept to any such changes. … Such clauses have less relevance since the establishment of the Charities Commission in 2005 …
Past and present practice with the IRD
The correspondent was correct in referring to such clauses in constitutions (commonly, also covering the winding-up clause), but I suspect that the provisions in the IRD clauses were, in the past, more honoured in the breach than the observance. Following enactment of the Charities Act, the Department graciously stated on its website that “Some organisations may have rules that prevent additions or alterations to the charitable objects, personal benefit and winding up clauses without first getting Inland Revenue approval. For charitable organisations that are registering with the Charities Commission, we will no longer give approval for changes to rules and recommends that any such requirement be removed from your rules. To enable this to happen, we give general consent to any amendment removing such rule.” The website later stated that the “Inland Revenue must approve any addition to or alteration of the aims/objects, payments to the members clause or the winding-up clause. The provisions and effect of this clause should not be removed from this document and shall be included and implied into any document that replaces this document.”
Entrenching a constitution
The idea of entrenching a constitution may come from an entity’s founders, parent body, or third parties (such as the IRD). Whether such entrenchment (requiring third party approval for change) is lawful is a partly statutory and partly philosophical question. In 2000 when I first wrote Society Law in New Zealand (now in its 3rd Edition, LexisNexis, 2013) I stated there (at 4.5.5, for reasons discussed at some length) “It is doubtful … whether a society can effectively entrench its rules and fetter the later exercise of the right of members to change the rules.”
Nothing in either the Incorporated Societies Act 1908 or the Charitable Trusts Act 1957 authorises entrenchment. Indeed, s 21(1), Incorporated Societies Act, unequivocally provides that “A society may from time to time alter its rules in manner provided by the said rules, but subject to the provisions of this Act,” while ss 23 and 61, Charitable Trusts Act 1957, clearly contemplate changes to the constitutions of charitable entities. Can those statutory provisions be over-ridden? Under s 37(5), Unit Titles Act 1972 (see now ss 105 and 105, of the 2010 Act), changes to bodies corporate rules contrary to the statutory right to change the rules have been held to be ultra vires (Body Corporate 201036 v Broadway Developments Ltd (2011) 11 NZCPR 627 (High Court).
Clarity in Canada and, now, New Zealand (but not Australia?)
The issue of entrenchment of a constitution and fettering the power to change it was considered in two Canadian cases, in 2000 and 2010, and then in New Zealand. The most relevant paragraphs in the judgment in Bath v Singh [2012] NZAR 50 (High Court), where I was counsel for the Defendants, are as follows:
[45] … While constrained by … charitable purposes, the society may still change its rules. That is consistent with the contractual nature of the relationship between the Auckland Society and its members.
[46] A similar conclusion was reached in the Canadian case of Demiris v Hellenic Community of Vancouver Demiris v Hellenic Community of Vancouver 2000 BCSC 733, [2000] BCJ No 907. In that case the by-laws of an incorporated society provided that certain by-laws were unalterable and others could be amended only if approved by a two-thirds majority and provided the written consent of the archdiocese was first obtained. The by-laws were amended by special resolution without first obtaining the written consent of the archdiocese.
[47] The Judge stated:
“[29] I am of the opinion that the contracts as constituted by the Society’s by-laws, were always subject to lawful change. The membership of the Society today is not the same as it was on incorporation, or in the 1960s or in the 1970s or in the 1980s, when earlier amendments were adopted. Even though the Society’s bylaws constitute a contract between its members, and between it and its members, the issue remains that of whether the by-laws were lawfully amended. If they were, then the petition must fail, notwithstanding that the by-laws were changed in a manner which the petitioners consider untenable. ”
[48] The Judge then went on to expressly consider the lack of written consent:
“[42] An issue raised by the petitioners is that the written consent of the archdiocese was not obtained before the 1999 vote.
…
[47] I am of the opinion that the members of the respondent Society were entitled to change its by-laws by acting in accordance with s 23 of the Act. The requirement that there be the written consent of the archdiocese before the vote, which an earlier amendment had sought to entrench, was void, and of no effect.
[48] It is open to a society to adopt objects which are unalterable. … However, the Act does not provide for the adoption of unalterable bylaws. To the contrary, it sets out the manner in which bylaws can be amended. The requirement that amendments be by resolution passed in a general meeting by a majority of not less than 75% of the votes of those members who being entitled to vote, do vote, is the protection to individual members and minority interests which the legislature has adopted. It is that that governs the affairs of all of societies incorporated under the Act, including those of the respondent.”
And later [at [48](4)]:
“The by-laws of the respondent Society do constitute a contract between its members, and between its members and itself. This contract can be amended by a lawful amendment to the bylaws of the Society. ”
[49] The decision was approved in Kwantlen University College Student Association v Canadian Federation of Students [2010] BCSC 1951, 82 BLR (4th) 197, upheld on appeal in Kwantlen University College Student Association v Canadian Federation of Students [2011] BCCA 133, 16 BCLR (5th) 131.]
[65] Although the rules were amended without obtaining the consent of the New Zealand Sikh Society, the members of the Auckland Society were in a contractual relationship inter se, not with the New Zealand Sikh Society. The members of the Auckland Society were entitled to change their rules without obtaining the consent of the New Zealand Sikh Society. The condition purporting to require the approval of the New Zealand Sikh Society was void and of no effect.
In the course of researching the law for the 4th Edition of Law of Societies (in anticipation of the eventual enactment of the new Incorporated Societies Act) I came across an Australian authority, McLean v McKinlay [2004] WASC 2, which was not located when I was researching the law in preparation for the Bath v Singh, and, also, was not cited in the two Kwantlen University College Student Association decisions. This decision, McLean v McKinlay, referring to the equivalent of s 21, Incorporated Societies Act 1908, held that the section “…does allow for alteration of an association’s rules, but in the context of creating an obligatory method for implementing the alteration. It does not expressly prohibit constitutional restrictions antecedent to placing a special resolution on the agenda of a general or special meeting and I can see no valid reason for interpreting the section to include an implied restriction. In my view, [the second] does not prevent the constitution or the rules of an incorporated association from creating compliance with an obligation to an affiliated body. Each member of the incorporated association has access to the Constitution and would be aware, on joining, of the restriction on constitutional change.” That last argument, of course, ignores the possibility that such a restriction might be introduced subsequent to a member joining a society and despite that member’s objections.
Lessons for the future
In my view, if the members agree among themselves to require a certain majority to approve a rule change (such as a 75% majority vote) that will almost certainly still be acceptable.
In my view, the High Court judgment in Bath v Singh (supported by two Canadian decisions, one of which included an appellant Court decision) is unequivocal, and, notwithstanding the Australian authority to the contrary, I believe that members of societies are prima facie entitled to change their society’s rules without the approval of third parties. The ingenious draftsperson will no doubt try to get around the Bath v Singh decision or it could be over-ruled in some later case, but, in the meantime, I consider that my 2011 correspondent has a definitive answer to his question.
For specific advice about any of the issues discussed in this article, please contact Mark at mark@nfplaw.co.nz.