Who's A Regulatory Creep?

A community response to the new Incorporated Societies Bill

Author: Garth Nowland-Foreman

At the risk of sounding like a conspiracy theory website, our own little Big Brother for non-profits is getting ready to watch you a little bit more closely, and you could get to pay the price in extra compliance requirements - if the new Incorporated Societies Bill currently before Parliament goes through unamended. 

The Bill is currently being considered by the Economic Development, Science and Innovation Select Committee and your chance to make a submission closes on 28 May 2021. It’s not the end of the world, but you may only have seven days to influence your future legal status, or that of tens of thousands of community organisations. While some of the worst changes will disproportionately hit the smallest non-profits, even if that doesn’t apply directly to you, please consider putting in a submission to support the small start-ups that might grow up to be tomorrow’s game-changes, or the small but perfectly formed groups of citizens who have no plans to ever grow much bigger but make up the very fabric of what makes a great community to belong to.

The growth of new Incorporated Societies may be at the lowest rate since figures were collected (Nowland-Foreman, 2021). It seems like more people than ever, including young people, want to volunteer, but we are squeezed in how much time we have available (Volunteer Reference Group, 2017). People coming together to address common issues of concern or to work together for common causes may very well be the essential threads that weave together our civil society, that build social cohesion, and enable us to be active citizens – this is especially so with membership-based incorporated societies. Now, more than ever, we need to make forming and maintain such groups for the common good easier and volunteer-friendly.

Please feel free to pass on and use as much of this blog, and its key ‘headline’ comments that follow, as you want in your own submission to the Select Committee. In turn we have drawn heavily on the excellent legal and policy analysis by Sue Barker and Dave Henderson. 

Here's a simple how-to on making a submission to a Select Committee. You can do it on line:
https://www.parliament.nz/en/pb/sc/how-to-make-a-submission/

And here's where you can make your submission on the Incorporated Societies Bill:
https://www.parliament.nz/en/ECommitteeSubmission/53SCED_SCF_BILL_109429/CreateSubmission

And Now For The Headlines:

This is a complex and extensive Bill with 261 clauses and four Schedules.

• One of the best things about the Bill is the proposed Purposes. These are sound and worth our strong support. In fact, problems with the Bill’s proposals mostly occur when it veers away from these four principles:

  • Members have the primary responsibility for holding a society to account

  • A society should promote the trust and confidence of its members.

  • A society should be self-governing.

  • A society should not distribute profits to its members.

• There is much good news and positives in the Bill. Primarily these ‘codify’ and make more accessible case law (by having it in writing and mostly in one place) – for example, definitions of a Committee, definition of an Officer, Duties of Officers, etc.

• The Bill also fills in some important gaps, which previously were left entirely up to individual societies to address, or not - for example, how to deal with disputes and complaints, and conflicts of interest (though we recommend simplified Conflict of Interest disclosure rules for smaller societies).

• It also deals with some gaps in law – for example, making provision for societies to amalgamate, etc.

• There is a risk in doing so, that the government may unnecessarily interfere in the independence of a society, and its proper accountability to its members. Generally we are pleased with the balance struck – for example the Bill omits earlier proposals to impose a statutory model constitution (which we believe would have gone too far), but retains some basic minimum requirements for a constitution.

• We also support the Bill’s proposed reduction in the minimum number of members of a society to 10 (from 15). We do not favour further significant reductions, as this would undermine the purpose and accountability as membership organisations.

• The Bill does, however, overstep the mark in some proposals that overthrow the delicate balance between providing greater certainty, and falling into unnecessary intrusion, undermining both autonomy and flexibility. In some cases, the Bill inappropriately adopts or adapts provisions from the Companies Act, the Income Tax Act (regarding “donee” organisations), and the Charities Act, with unfortunate consequences.

• The most egregious of these is the imposition of onerous and inappropriate financial reporting standards from the Charities Act, which have already been failing for the smallest charities. Instead we propose an outline of certain simple, minimum financial reporting standards, but leaving it to members to determine what form it takes, cash or accrual accounting, and whether an independent audit or review is needed. (In any case, it needs to be noted that registered charities and “donee” organisations are caught up in their own reporting requirements).

• If our proposal is not adopted we recommend that at least small societies (with annual operating payments under $125,000), be excluded from onerous financial reporting standards.

• Although allowing appeals against decisions of the Registrar to the District Court rather than going straight to the High Court is an improvement, we propose a better alternative is the establishment of a specialist tribunal (as it would be more accessible, probably more affordable, and provide for the expertise that comes from judicial specialisation). These should allow oral hearings of evidence, and the deadline for lodging an appeal should be extended to three months, given how most societies and their committees operate.

• Disqualifying factors for officers of incorporated societies should not be greater than those for officers of registered charities, and ultimately aligned.

• Given that all existing incorporated societies will need to re-register by a transition date, more flexible transitional arrangements are required, including some discretion for the Registrar to avoid loss of legal protection for an otherwise eligible society, if it missed the deadline.

• As there are extensive regulations (at least covering 24 different matters, some of them quite significant), none of which are yet available to consider, we propose they should be released as exposure drafts for consultation before their adoption.

To The Good News:

There are many positives about the proposed new legislation. 

The Purposes of the Bill (clause 3) are strongly supported, especially the important recognition of the principles that—

• Members have the primary responsibility for holding a society to account

• A society should promote the trust and confidence of its members

• A society should be self-governing

• A society should not distribute profits to its members.

Indeed it is essentially when the Bill veers away from these principles that we have difficulties with the proposals.

The main problems identified by the Law Commission with the 1908 Act were:

• Committee members and others taking on responsibilities in incorporated societies have duties that are akin to directors’ duties under the Companies Act 1993. These duties are in case law, not in the 1908 Act. As a result, many people elected into governance roles do not have a clear understanding of what they have to do to comply with the law.

• The 1908 Act is silent on a number of important governance issues such as dealing with conflicts of interest, personal liability, and the consequences for third parties who deal in good faith with societies that have acted outside their rules.

• The restructuring options are limited. Unlike the Companies Act 1993, the 1908 Act makes no provision for amalgamations.

In these matters the Law Commission and the resulting improvements in the proposed new legislation drew on extensive input from the consultation with the non-profit sector. In most cases, this involves codifying existing case law, which has been built up over time. So while it may look like more onerous obligations are being imposed, this is not necessarily always the case in practice. In fact, codifying and bringing together existing case law obligations can actually make the information more accessible to an ordinary volunteer.

Clause 41 helpfully clarifies that there must be a “committee” that is responsible for running the society, and must comprise a minimum of three “officers” (clause 40). The Bill also clarifies who an officer is (namely any member of that committee, and those in other positions, such as a chief executive, who can exercise significant influence over the management or administration of the society – clause 5(1)), and explicitly sets out an officer’s legal duties (clauses 49-56), including the useful clarification that these duties are owed to the Society (rather than to members). We do, however, propose a small but significant amendment to the wording of the first duty in clause 49(1).

This codification of duties is based on section 131 of the Companies Act, which is generally appropriate, but fails to appreciate a fundamental difference between commercial and purpose-based entities. For a purpose-based organisation (such as an incorporated society, which requires an acceptable purpose to be incorporated under clause 12), the over-arching purpose can even supersede the survival and narrow interests of the society as an organisation. While its possible to argue that the interests of a purpose-driven society are always ultimately the interests of its purposes, making the duty to act in the best interests of the society’s purposes helps clarify if there is ever any clash between the interests of a society as an entity (for example the entity’s future survival or financial viability), and the interests of better achieving its purposes.

Recommendation: Amend clause 49(1) to delete “the society” and insert “the society’s purposes”.

We also support the provision in the Bill to drop the minimum age for officers from 18 to 16 years (clause 42), and to allow the Registrar to waive various factors that otherwise disqualify an officer (clause 43).

The codification of what is a conflict of interest (clause 57) and how it must be dealt with (clauses 58-67) is also welcomed. As is the clarification on what access to information, members may have (clauses 74-77). However, we are concerned that the process for dealing with conflicts of interest may be too onerous as a minimum for small, especially but not only all- volunteer societies. A simplified process should apply as the minimum for small societies, for example, under a certain annual turnover. The Bill relies extensively on regulations that cover many significant areas, thus we propose. In the absence of sufficient work to identify and consult on a simplified process for dealing with conflicts of interest, the Bill be amended to require the development of a simplified process for small societies (probably defined in the same way as tier 4 charities).

Recommendation: Insert new clause 60, and renumber subsequent clauses: “Small societies, as defined in regulations, shall not be bound by Conflict of Interest Disclosure Rules in clauses 57-59, if they elect to satisfy simplified rules for small societies as set out in regulations.  

The Bill also usefully fills in gaps with the 1908 Act, such as: 

• Requiring constitutions to have procedures for resolving disputes between members and between members and the society, including dealing with complaints and grievances (clause 26(1)(j), and outlining procedures that satisfy the rules of natural justice (Schedule 2); and

• Providing an express mechanism for societies to voluntarily amalgamate (clauses 184-189) (this is currently not possible, and awkwardly instead, one or more of the parties need to formally wind up and transfer assets and liabilities to another),

Minimum number of members (Clauses 8(1), 68 and 69)

Under Clause 8 the key eligibility criteria for incorporation are outlined, including the minimum number of members. Under the 1908 Act, a minimum of 15 members is required to incorporate and this minimum must be maintained at all times. It is unclear where this particular number originated from, though White (1972) suggests it may have something to do with the number also required for a rugby team! Many organisations report that it is more and more difficult for them to attract and retain members. Australasian statutes tend to have lower limits, as low as five in Victoria and New South Wales. However, Australian States also generally have no equivalent to the Charitable Trusts Act, as a means of incorporating non-profits that are not primarily membership associations. 

The OECD Open Government Partnership, to which Aotearoa New Zealand is committed, recommends in “The Guide to Opening Government: An Enabling Environment for Civil Society Organizations” (2018:7), that the number of founders needed to register an organisation should be no more than 2 or 3 natural and/or legal persons. However, in Aotearoa New Zealand other options for incorporating not as a membership association are available – for example, under the Charitable Trusts Act or the Companies Act, where even lower minima for founders already apply. 

The Law Commission recommended the minimum membership be dropped to 10 members. This is also the proposal number taken up in the Bill. Other submitters may recommend it be dropped even further to a minimum of 7, 5 or even 3 members. It is worth recalling that Incorporated Societies were designed to be membership associations. As the Law Commission (2013: 4) describes, one of the three fundamental principles that they heard time and time again from consultation meetings and submitters, and which they thus took to guide their recommendations was:

“Societies are organisations run by their members. This means both that members have primary responsibility for holding societies to account, and that a group without members to hold it to account should consider an alternative form of incorporation.”

If the minimum overall membership is allowed to fall to (or even below) that of the number of officers on a governing committee, who are the members these officers are accountable to, if only themselves? It is difficult to see how a self-perpetuating band of officers (with no other wider group of members to be accountable to) could truly meet the expectations of a membership association.

Elsewhere (Nowland-Foreman, 2021), I have suggested that several long-term trends are already working to increase the democratic and participatory deficit in Aotearoa New Zealand non-profits – (1) the reducing size of boards and committees, (2) the centralisation of federated and branch structures to come under under unitary national boards, and (3) the shift away from dominance of Incorporated Societies (which require a wider membership to whom the officers are accountable) to Charitable Trusts (previously over 2:1, and now reduced to 1:1. This would only be exacerbated by reducing the minimum membership requirements of incorporated societies to a level that eliminated the need for any wider membership beyond the officers. All of these moves appear to be made in the name of efficiency and convenience, but potentially at the cost of democracy, citizen engagement and accountability.

On balance, we believe the Bill has probably got the balance about right – not setting the minimum membership at too onerous a level, nor having such a low minimum that it robs the society of any legitimate identity as a membership association.

Statutory Model Constitution not imposed

One of the most admirable aspects of the Bill is what is not in it. 

The Law Commission (2013) and the Exposure Draft of the Bill proposed to impose a basic model constitution in the regulations – covering the minimum rules required by statute. An applicant for incorporation would need to either adopt the whole model constitution, or submit a constitution that complies with the statutory minimum. If it adopted the model constitution, it would automatically be subject to any amendment to the model constitution.

Even from the beginning, the Law Commission (2011: 13) was ambivalent, acknowledging “members of non-profit societies should be able to decide how they govern themselves”. Despite its age and limitations, one of the great advantages of the 1908 Act is its light-handed regulation, maximizing both autonomy and flexibility. 

As the Law Commission (2013: 4) describes, one of the three fundamental principles that they heard time and time again from their consultation meetings and submitters, and which they thus took to guide their recommendations, was:

“Societies are private bodies that should be self-governing and largely free from inappropriate state interference. Societies value the flexibility that the current regime gives them to adapt their operating environment to suit their purposes and their culture. That flexibility should be retained as much as possible.”

In recognition of the need to preserve these features as much as possible, the proposals for a statutory model constitution and all references to “standard” rules were not included in the current Bill. All that remains is a requirement (Clause 26) for an incorporated society to have a set of basic rules that at least cover 12 matters – not unlike the existing 11 requirements in the 1908 Act (s. 6). As well as dropping the requirement from the 1908 Act for a “common seal” and that the rules be “printed or typewritten”, the additional items, under the new Bill, that must be in a society’s constitution include: arrangements for keeping the register of members up to date; various aspects of the structure and procedures of a committee (the 1908 Act does not necessarily require a committee); appointment of contact person(s); procedures for resolving disputes, etc; and arrangements for general meetings of members. 

These are all reasonable additions, which from our experience will not unnecessarily intrude on a society’s reasonable autonomy or flexibility, especially because of the effect of clause 28(10(d), which provides that a society’s constitution may contain any other matters not inconsistent with statute, including to provide for the society to express its [own] tikanga or culture (a welcome specifically highlighted area) and “any other matter relevant to the society’s activities.” The intention is for this to be wide-ranging, but to put beyond doubt and for the sake of consistency with other references in the Bill (clauses 41, 75, 80, 119, 13 and 147), the more expansive phrase “operations or affairs” is preferred to the potentially more limited “activities”.

Recommendation: Amend clause 28(1)(d) by replacing the word “activities” with the words “operations or affairs.”

Clause 29 generally replicates the equivalent clause from the Exposure Draft, except it removes the example and adds the words “or any other Act”. Extending constitutional invalidity to inconsistency with any other Act goes too far, with potentially significant unintended consequences.  We agree than an incorporated society’s constitution should have no effect to the extent that it contravenes or is inconsistent with the Incorporated Societies Act. However extending constitutional invalidity to any other Act is unnecessary and goes beyond equivalent provisions in the Companies Act, confusing eligibility for incorporation with contravention of the law.

Another Act will already overall anything in a society’s constitution. Furthermore, if an incorporated society’s constitution contravenes another Act, the penalty for contravention would already be in that other Act. To hold that the provision is of no effect is double jeopardy. 

Furthermore, neither the Registrar (nor the applicant) may be necessarily aware of all the intricacies of other legislation, and may not realistically know if a constitution contravenes another Act (particularly in areas such as the Charities Act where jurisprudential interpretations can be very subjective and inconsistent).  

Clause 39(4) provides for trade union disputes to be dealt with by the Employment Court. The example at clause 39(4) states that the trade union’s constitution must not provide for employment relationship problems to be dealt with by arbitration because this would be inconsistent with section 161 of the Employment Relations Act 2000. If the intention behind the additional words in clause 29 is to address the situation pertaining to trade unions, it should be addressed in a more targeted way, perhaps in clause 39(4) itself, rather than a broad brush extension to all incorporated societies with likely significant unintended consequences.

Recommendation: Delete the words “or any other Act” from clause 29(1).

The only other residue of the dropped imposition of a statutory model constitution is the retention in Schedule 2 of a disputes procedures that will be presumed to satisfy the rules of natural justice. A society is not required to include these procedures in its constitution. However, if it does include consistent procedures, it is provided with some statutory assurance of meeting the rules of natural justice.

But, why is there always a but?

Both the Law Commission and the Government of the day have agreed that overall the 1908 Act has been a success story, and that the fundamentals of incorporated societies should remain unchanged, in particular:

• Societies are organisations run by their own members

• Societies should generally not distribute profits or financial benefits to members, and

• Societies are essentially private, and should be self-governing and remain free from unnecessary state interference.

The balance, however, between offering greater certainty, without unnecessary intrusion and reduced flexibility is not also well achieved.

Unfortunately in several places the Bill makes the mistake of conflating membership societies with “donee” organisations under the Income Tax Act or “registered charities” under the Charities Act. While some incorporated societies may be “done” or registered charity status, many are neither. In any case, to the extent that they are, adequate regulation and controls is more appropriately in the other legislation. It is a false equivalence to drag those that are not, into the same more intrusive regulatory regimes, and there is no significant public interest in doing so. Incorporated societies are fundamentally private bodies, accountable to their members, and without any significant tax concessions in their own right.

The most egregious result of this confusion is the over-the-top financial reporting requirements for small societies discussed in more detail below, but it also results in other drafting errors, such as clause 5(3), whereby sporting bodies that happen to be structured as trusts, and charities that are not registered under the Charities Act, may be inadvertently excluded from otherwise eligible recipients of a society’s funds upon winding up. (This is especially unfortunate, as Charities Services positively encourages certain charities not to register https://www.charities.govt.nz/news-and-events/blog/is-being-registered-with-charities-services-still-right-for-your-organisation/).  

Similarly, in this same clause, the territorial restriction on otherwise eligible recipients of a society’s funds upon winding up, is a throw-back to governments’ decisions under tax policy, that they wished to restrict the ‘donee’ tax concession to named organisations. This is not a relevant consideration for societies, especially when elsewhere (clause 18(1)) the Bill clearly envisages an incorporated society able to operate outside as well as within New Zealand. Any such restriction should be limited to societies with “donee” status.

Recommendation: Insert the words “Charitable, sporting,” after the word “cultural” and delete the words “in New Zealand” in Clause 5(3)(a)(iii).

There are numerous other niggling intrusions into the principle of independence and that the members are responsible for holding the society to account, rather than having to always be ‘supervised’ by a regulator. This is totally inappropriate for a private, membership association, especially as the purpose of this legislation is to provide a legal identity to a society, not to regulate or supervise its operation. Furthermore while any individual addition to compliance costs may not be large the cumulate effect can certainly be significant, especially for the smallest societies most likely to be effected, for example the effective approval by the registrar of each officer of a new society by requiring excessive information about each officer, when it is the role of the members to hold the officers to account. The Open Government Partnership (2018: 9) recommends that documentation needed for registration should not require a lengthy or difficult process to compile, should not demand sensitive personal information, and that the government should consider the steps that a society needs to take in order to retrieve all of the needed documents.

Recommendation: Amend clause 9(e) by replacing it with the words “(e) contain, or be accompanied by, a list of the names of every person named as an officer, and a certification that none of them are disqualified from being an officer of the society.”

Onerous financial reporting (clauses 95-101)

The Open Government partnership (2018:12) recommends that reporting requirements are proportional to the size and scope of different types of civil society organisations and are not more burdensome than for other legal entities (emphasis added). 

Unfortunately the Bill proposes (clauses 95-101) imposing virtually identical financial reporting burdens on incorporated societies as currently apply to registered charities, even when incorporated societies may be private membership associations with essentially no tax concessions. (There is only a small, though welcome, relief for micro-organisation with total operating payments for each of the two preceding financial years under $10,000, and total assets at balance date for each of the two preceding years is under $30,000.

This is inappropriate for a number of reasons:

• Incorporated societies that are not registered charities or “donee” organisations are different types of civil society organisations, without the same public interest justifications for intrusion into their internal affairs in determining how financial reports be prepared. This should be a matter for the members to determine. (Where an incorporated society is also a registered charity or “done” organisation, their reporting obligations can and are dealt with in other legislation.)

• It hasn’t worked with small registered charities and is even less likely to work with small incorporated societies. In 2020, 5 years after the introduction of new reporting standards for registered charities, a random sample reveals that while 100% of the largest charities (Tier 1) are now complying with the reporting standards, only 59% of the smallest charities (Tier 4) complied with their lesser requirements – and apart from some initial, small improvements, in the last three years the proportion complying has fallen each year – that is, “more of these smaller charities struggle to use the (reporting) standards” (Charity Services, 2021:13-14).

• It appears that even when registered charities submit these reports, they are not read, let alone analysed, by the forty-odd staff in Charities Services. In order to report on compliance, Charities Services has had to undertake annual surveys of just 1-2% of registered charities. What is the point of imposing reporting costs on small and medium-sized incorporated societies if no-one is actually going to read, let alone monitor, the reports. Just-in-case compliance requirements are bad practice.

Another potential ‘public interest’ in standardizing financial reporting relates to money-laundering. Recommendations of the global Financial Action Task Force (FATF), set up following the September 2001 terrorist attacks in the United States of America, are behind some of the recent increase in regulatory surveillance and control of not-for-profit organisations, especially FATF’s recommendation 8 that participating countries, which includes Aotearoa New Zealand, review the adequacy of laws to ensure not-for-profit organisations cannot be misused for the financing of terrorism. In addition to criticisms of FATF’s recommendation 8 by the UN Special Rapporteur on Civil Society, as undermining the relationship and level of trust between governments and civil society, FAFT (2021) has, itself, also recently passed judgement on the Aotearoa New Zealand approach of blanket regulation and blanket financial compliance demands, with the evaluation concluding:

“New Zealand’s legislation does not focus on non-profit organisations (NPOs) identified as vulnerable to abuse for Terrorist Financing (TF), nor considers the proportionality or the effectiveness of regulatory actions available to addressing the TF risk. 

• Some non-charity NPOs and tax-exempt non-resident charities that may present some risk of abuse for TF, are only subject to policies to combat tax evasion. 

• There has been insufficient work with NPOs on development and refinement of best practices to address TF risks and vulnerabilities and protection against TF abuse.

• Some categories of NPOs identified as being of moderate risk of abuse for TF including foreign charities, overseas donee organisations and charitable trusts, are not subject to riskbased monitoring or supervision. 

• There are no relevant powers to impose sanctions in relation to other moderate-risk NPOs such as non-charity NPOs and tax-exempt non-resident charities. 

• The focus under some legislation governing legal persons and arrangements, is on investigating compliance rather than broader wrongdoing by the NPO.

Yet, the Bill essentially proposes a continuation of this discredited and compliance-costly ‘blanket’ approach, in particular in extension of unnecessarily burdensome financial reporting.

Time and time again, despite advice to the contrary from the sector, regulators have over-estimated both the capacity and capability of the smallest non-profit organisations to readily satisfy what appear to be modest and relatively straightforward compliance requirements.

And as the Financial Action Task Force observed in slightly more polite language, what’s the point of an untargeted, blanket approach, especially if even current reports are not read nor monitored.

Instead, incorporated societies should be required to report to their members, and make such reports available to the Registrar. These reports should contain certain minimum information. Members should have the opportunity to require an independent audit or review, unless specified in the constitution. If an independent audit or review is undertaken, it must be reported to the members (and made available to the Registrar).

At the very least Tier 4 incorporated societies (those with annual operating payments under $125,000) should be exempt from any requirement under the Incorporated Societies Act from reporting using the Generally Accepted Accounting Practice (GAAP) standards. 

NB: Under either arrangement incorporated societies may still be required to report using GAAP standards or equivalent, under other legislation, such as the Charities Act when they are a registered charity,

Recommendation: Replace clauses 95-98 with the following words: 

“95 Annual financial statements must be prepared and registered

(1) Every society must ensure that, within 6 months after the end of the accounting period of the society, financial statements are—

(a) completed in relation to the society and that accounting period; and

(b) dated and signed by or on behalf of the society by 2 members of the committee.

(2) The financial statements for an accounting period must—

(a) contain the following information:

(i) the income and expenditure of the society during the accounting period; and

(ii) the assets and liabilities of the society at the close of the accounting period; and

(iii) all mortgages, charges, and other security interests of any description affecting any of the property of the society at the close of the accounting period; and

(b) otherwise comply with requirements prescribed by the regulations.

(3) Every society must ensure that, within 6 months after the balance date of the society, copies of the financial statements of the society for the period ending on that date are given to the Registrar for registration.

96 Options to undertake Audit or Review

(1) Unless specified in an incorporated society’s constitution, members of an incorporated society may require an independent Audit or Review of the society’s financial accounts to be undertaken. Failing that, a Society’s Committee may require an independent Audit or Review of the society’s financial accounts.

(2) If an independent Audit or Review is undertaken, that report must be reported to the members of the society.

(3) If an independent Audit or Review is undertaken, that report must be given to the Registrar for registration. 

Re-number any subsequent clauses as required.

Appeals under the Incorporated Societies Act (Clause 240)

Clause 240 allows for appeals against decisions by the Registrar to be heard in the first instance in the District Court (rather than the High Court, as previously proposed in the Exposure Draft of the Bill. This is definitely an improvement. However, there is a much better, practical alternative that would make Appeals more accessible, and likely affordable.

We support the recommendations being developed by Sue Barker as a result of her research on a world-leading framework for charities law (https://www.charitieslawreform.nz) for a specialist tribunal, like in many other jurisdictions, to provide a more accessible appeal system for registered charities. It would make sense for an expanded version of this body (perhaps, a Charities and Societies Tribunal or Review Authority) to consider appeals under the Incorporated Societies Act. It would allow for a less formal, and potentially less costly, appeal mechanism, and also for judicial specialisation (the case for which was also acknowledged by Ellis, J speaking to the Charity Law Conference (2018) http://www.charitylawassociation.org.au/images/NZ%20event%202018/Presentations/Justice%20Ellis%20Speech.pdf). It could be a part-time body or attached to an existing tribunal, with societies (and charities) having the choice of appealing to the High Court or this specialist tribunal (as is currently the case with the Taxation Review Authority), and permitting oral hearings. Such an approach is consistent with the approach outlined by the Law Commission (2010: 51-53) in its review of the law of trusts.

The legislation should make clear that the hearing authority is able to convene an oral hearing of evidence if either party so requests. The 28-day deadline for lodging an appeal should be substantially extended to take into account the typical meeting pattern of societies, and even their capacity, as volunteer groups, to meet more frequently and make necessary decisions in the several stages involved in lodging an appeal (gather information, get advice, decide to lodge an appeal and lodge it). Two or three months is a more realistic timeframe. The Tribunal or Authority could also facilitate test cases to relieve the burden on individual societies.

Recommendation: A specialist Charities and Societies Tribunal (or Review Authority) should be established to hear appeals under the Incorporated Societies Act, the Charitable Trusts Act and the Charities Act, with concurrent jurisdiction with the High Court. Where requested oral hearings on the evidence should be able to be held when requested by either party. The deadline for lodging an appeal should be extended to 3 months.

[NB: Paragraphs 3(b)(ii) and (iii) in Schedule 1 will also need to be amended by replacing the words “28 working days” with the words “3 months” to give effect to our recommendation to extend the deadline for lodging an appeal.]

Sharing Information on Registered Charities (Clause 242)

Clause 242 enables the Registrar to share certain (widely defined) information regarding incorporated societies that are charities with the Chief Executive under the Charities Act 2005 (to assist with the performance of their respective functions.) While this permissive power is potentially useful and welcome, it does not go far enough in requiring the kind of one-stop shop promised by the government of the day when the Charities Act 2005 was imposed on the sector. 

For example, clause 33 requires a society to provide a copy of an amendment of its constitution, and a copy of the constitution as amended to the Registrar within 20 working days after the amendment is approved at a general meeting of the society. Likewise clause 47 requires a society to notify appointments and other changes concerning officers to the Registrar within working 20 days. 

As is already provided for with respect to the submission of financial statements and annual returns, in clauses 101(b) and 102(3) of the Bill, registered charities are not required to submit these pieces of information to the Registrar of Incorporated Societies, as they are already required by Charities Services. Similar exemptions should be extended to all such duplication of returns or advice. This would be facilitated by a (joint) format for submission, and harmonisation of the deadlines for submission. For example, the Charities Act requires notification of amendments to a constituting document, and of changes to officers within three months, while this Bill proposes notification within 20 working days (approximately one month, but not exactly). Duplication of work should not be imposed on Registered Charities, just for the convenience of over-lapping bureaucratic systems. 

Recommendation: Retain clause 242 as a general information sharing power, with reciprocal provisions in the Charities Act (currently under review). Amend Clauses 33 and 47 to either remove the obligation on Registered Charities to notify the Registrar of Incorporated Societies, or deem notification to Charity Services by a Registered Charity as meeting the obligations to notify the Registrar of Incorporated Societies (with Charity Services obligated to immediately pass on such information to the Registrar of Incorporated Societies).

Harmonisation of disqualifying factors (clause 42(2))

It almost seems ridiculous to have to say that the factors which disqualify a person from being an officer of an incorporated society should align with the factors that disqualify a person from being an officer of a registered charity (under section 16 of the Charities Act). It seems especially ludicrous that it would be easier to be an officer of a registered charity, with its significant public interest components, than of a private, membership-based incorporated society.

While the disqualifications listed in clause 42(2) of the Bill generally align with the circumstances that would disqualify a person from being an officer of a registered charity under section 16(2) of the Charities Act. However, there are 7 exceptions where clause 42 includes a disqualifying factor that is not included in section 16: these additional disqualifications are listed in clause 42(e)(i), (iv), (v) and (vi) and 42(f)(i), (ii) and (iii) of the Bill. While alignment is the goal, it is not appropriate to simply add these additional disqualifications to the Charities Act without adequate consultation However, as the Charities Act is currently under review, this could consultation could take place in the near future. In the meantime, the equivalent disqualifications as currently appear in section 16 of the Charities Act should also apply in the Incorporated Societies Act.

Recommendation: The factors which disqualify an officer of an incorporated society and of a registered charity should be aligned. This should be considered as a part of the current review of the Charities Act, and in the meantime amend clause 42 of the Bill to remove the 7 additional factors so that it is aligned to section 16 of the Charities Act.

Transitional provisions (Schedule 1)

Clause 4 (2) set the deadline for all existing incorporated societies to re-apply, meeting the provisions under the new Act, by the later of either 01 Dec 2025, or 2 years 6 months after the date societies can no longer apply to be incorporated under the 1908 Act. If the new Act comes into effect this year, then this ensures at least 4 years, which should be sufficient time in most cases, but almost inevitably, not for all.

It should be recognised that this will be onerous for all but the largest and well-resourced societies with administrative staff able to undertake this work on their behalf. In order to re-apply under the new Act, a society needs to ensure its proposed constitution complies with all the requirements of the new Act, and that its officers are all qualified to be appointed under the new Act. Many of the 23,000 incorporated societies will certainly want the assurance of legal advice. While there are many lawyers in Aotearoa New Zealand, few specialise in non-profit law (to the extent the Law Society does not offer this as a specialty when searching for a lawyer on their data base). In addition, many small societies will be seeking pro bono legal assistance – all within the same few years, and (knowing human nature) especially concentrated as the deadline approaches – making the pool of lawyers available to assist even smaller, and potentially spread very thinly. 

In addition, it is likely that at least some societies will assume they are compliant (as they have never been in trouble before) only to find ‘late in the day’ that they may need the time to go through their existing requirements to amend a constitution (which could involve up to two Special General Meetings of members, with appropriate notification periods) no matter how minor or ‘technical’ any constitutional amendments may be, before they can seek re-registration. 

Even among those who pay attention to up-dating their constitution in a timely manner, some may overlook confirming eligibility of officers.

Time and time again, despite advice to the contrary from the sector, regulators have seriously over-estimated both the capacity and capability of the smallest non-profit organisations to satisfy what appear to be modest and relatively straight-forward compliance requirements. As noted above, Charities Services has only been able to achieve a 59% compliance rate for its reporting requirements with the smallest (Tier 4) charities, and this proportion is dropping, not improving.

All of these factors conspire to mean that some incorporated societies doing useful work will miss the transition deadline. A deadline is important in ‘focusing the mind’ and not letting old and outdated arrangements linger on too long. However given that it took all the resources of government six years to get a bill to even get it on the parliamentary order papers, expecting a 33% speedier response in implementing these changes by part-time volunteers is at least ambitious.

The Government (2014), in its response to the Law Commission report, acknowledged that the reforms can only be successfully implemented if the not-for-profit sector has a good understanding of them. It concluded that sector education will be an integral part of the implementation programme, including the preparation of practical guidance material, and relevant government agencies working with not-for-profit sector umbrella organisations to develop a sector education package. 

While checklists, guidance and education programmes will help, we are concerned:

• There appears to be no special allocation for the essential implementation costs, assuming that the Ministry will cover it all out of existing base-lines. This may or may not be possible, but it provides no comfort to the sector in terms of the adequacy of the support for implementation.

While the Registrar has some limited powers to restore societies, where an application is received before the transition date, but not finally determined by that date (Schedule 1: clause 10(3)):

• Otherwise if an existing society has not registered by the transition date, it “ceases to exist” at the transition date.

What public purpose is achieved if the legal protection of a small volunteer society is lost for a time, while it applies for re-registration, just because it happened to run out of time to apply before the transition date? In fact, unnecessary disruption to continuity of legal identity can have important consequences not only for the society but also for third parties it may be dealing with. While the integrity of any deadline needs to be preserved, this could still be achieved by giving the Registrar the discretion to consider reregistration for a certain period following the transition date, of say 6 months, as if the application had been received and dealt with before the transition date (similarly to the arrangement in Schedule 1: clause 10(3)). This is important for maintaining the several consequences of continuity of legal identity, as outlined in Schedule 1: clause 9.

Recommendation: Insert a new subclause 10(4) in Schedule 1, and: “(4) Despite subclause (2), if an application for the reregistration of the existing society is received by the Registrar on or after the transition date, up to a date six months from the transition date, the following applies:

(a) the Registrar may, at the Registrar’s discretion, continue to deal with the application as if it were made before that date:

(b) the society continues to be incorporated under the 1908 Act until—

(i) the date of reregistration under this Act; or

(ii) 3 months after the date on which the Registrar notifies the society that the Registrar has made a final decision to refuse to reregister the society (without giving any further opportunity to address the grounds for refusal); or 

(iii) the expiry of any further time allowed by a court to allow an appeal against the Registrar’s decision (where the court gives an order allowing the further time before the expiry of the 3 months referred to in paragraph (b)(ii) or before the expiry of any previous extension of the time allowed by a court):

Renumber and amend subclause 10(4) in Schedule 1 to read: “(5) The consequences of subclauses (2)(b), (3)(c)(ii) and (4)(c)(ii) (include the following:

(a) the existing society may be restored to the register under sections 177 to 183:

(b) subpart 5 of Part 5 applies.

Renumber subsequent subclauses as required.

Consultation on extensive Regulations

While not necessarily exhaustive, the Bill provides for regulations to determine at least the following matters:

1. classes of persons declared to be or not to be officers (clause 5);

2. changes in information relating to officers that are required to be notified (clause 47);

3. how members are notified (clause 61)

4. information which must be contained on the register (clauses 73(2)(d) and 224(1)(i));

5. the types of societies other than unions that may provide for delegates only to attend annual general meetings (clause 78(4);

6. the information to be contained in the annual report (clause 80(2));

7. the requirements for the financial statements of small societies (clause 97(b);

8. the information that must be contained in annual returns (clause 102(2));

9. the manner of notifying a change in registered office (clause 104(2));

10. the manner of serving a legal document on a society (clause 118);

11. the terms or conditions of conversion of entities into incorporated societies (which may be grounds for removal from the register under clause 168(1)(f)(ii));

12. the circumstances when surplus assets must be distributed as the Registrar directs, and the persons who may apply (clause 209);

13. the circumstances when the register may not operate (clause 222);

14. criteria under which the register may be searched (clause 228);

15. Acts under which an association is incorporated which may permit the association to apply to be reregistered under the Bill (clause 248 and schedule 3);

16. terms and conditions that must be complied with by an entity after it has reregistered as an incorporated society (clause 245(1)(q) and 249);

17. information and fees for applying for incorporation (clause 9) and reregistration (clause 5 of schedule 1 and clause 3 of schedule 3);

18. persons required to be given notice of an intention to remove a society from the register (clause 170(1)(a)) and the objection notice period (clause 170(2)(a));

19. persons required to be given notice of a proposed restoration (clause 179(2)) and the objection notice period (clause 179(3));

20. people who may apply for an order for restoration of a society (clause 181(2)(a));

21. information required to be contained in an amalgamation proposal (clauses 185 and 186);

22. information required to notify changes in constitutions (clause 33).

23. the manner in which the committee must notify members of a failure to comply with the conflict of interest disclosure rules (clause 60); and

24. the amounts of infringement fees (clause 153).

While there are often good reasons to leave detail to regulations, this is also an area ripe for regulatory creep. It requires vigilance to guard against unnecessary increases in compliance costs and obligations, reduction in the autonomy of societies and of its accountability to members, as well as inappropriate proposals without the input of societies. The regulation-making powers in the Bill come into force on the day after the Royal assent. The detail is clearly significant and should be subject to consultation.

Recommendation: Exposure draft(s) on proposed regulations are made available for consultation and comment ahead of their adoption.

Other matters

• The Registrar’s ability to permit a society to incorporate under a name that is similar to a company’s name, where that company consents to the similar name, should be retained. As it stands under the Bill, the Registrar would no longer have any discretion to do so.

Recommendation: At the end of clause 11(1)(b) insert the words “except where that other society, company or body corporate signifies its consent in such manner as the Registrar requires.”, and at the end of clause 11(1)(c) insert the words “except where the applicant for name reservation signifies its consent in such manner as the Registrar requires.”

• Societies proposing to incorporate should be permitted to reserve a name in a manner similar to section 22 of the Companies Act 1993. This is not possible under the 1908 Act or the Bill, but would be very useful for non-profit groups in the process of incorporating to have this as an option. There is no need for it to be required as an additional step in the process of incorporation.

Recommendation: Provision is made for names to be able to be ‘reserved’ (on a non-mandatory basis) under the Incorporated Societies Act.

• Incorporated societies with not-for-profit members should be able to distribute funds to their members for matters that are more than incidental to the purposes of the society. The focus on ensuring that incorporated societies are not generally able to distribute profits, either when they are operating or when being wound up is a key defining principle. However, some incorporated societies are ‘umbrella bodies’ for their non-profit members – for example, a national sporting association may comprise regional or local sporting associations as its members.

Clause 24(1)(g) of the Bill provides a welcome recognition that on winding up, an exception can legitimately be made for an incorporated society to distribute surplus assets to not-for-profit organisation members. By the same reasoning, an incorporated society should also be able to distribute funds to not-for-profit members while they are still operating. For example, the national sporting association could undertake a fund-raising campaign or receive grants that should be able to be shared with regional or local sporting associations, even if they are members. As such a practice is almost always carried out to further the society’s purpose, it is not covered by the current exclusion for payments incidental to a society’s purpose in clause 24(b).

Recommendation: Amend clause 24(b) to read: “(b) pay a member for matters that are incidental to or in furtherance of the purposes of the society, and the member in a not-for-profit entity.”

• Clause 49(2) proposes, as a modification to the overriding duty to act in the best interest of the society (or its purposes, as we recommend), that an officer may make provision for the benefit of employees or former employees, and their dependents, when a society is ceasing whole of part of its activities. This is supported as a reasonable and fair exception. However, it is further modified under clause 49(3) to not be available for “an employee or former employee who is or was an officer of the society.” This is unfair exclusion, as there is frequently movement in the not-for-profit word between boards and staff, with volunteer jobs overlapping both. It is especially unreasonable as there is no limit on the time passed since this occurred, nor the length of time in either role, nor the order of undertaking the roles, nor the gap between fulfilling different roles.

Recommendation: Delete the words “, but does not include an employee or a former employee who is or was an officer of the society” in clause 49(3).

• Clause 168(1)(e) of the Bill provides for a new ground on which a society can be removed from the register, namely when the Registrar has reasonable grounds to believe that the society or one or more of its officers, has failed in a persistent or serious way to comply with duties relating to the society under the Act. It is disproportionate to deregister a society (with all the additional risk and uncertainty that brings) on the basis of the actions of one officer. Actions of a particular officer can be dealt with by other provisions of the Act, such as banning orders

Recommendation: Delete the words “or 1 or more of its officers” from clause 168(1)(e).

Appendix: How did we get here?

In 1908 the original Incorporated Societies Act was passed in Aotearoa New Zealand – and was world leading, as one of the first of its type and innovative. In many other jurisdictions, the development of stand-alone legislation to incorporate non-profits has been relatively recent and often drawing on the example of our legislation, for example the Associations Incorporation Act was not passed in New South Wales until 1984, and there is still no equivalent legislation for the United Kingdom (though it is now being discussed).

Fast-forward more than a hundred years later and in 2010 the, then, Minister for Justice asked the Law Commission to review this legislation.  The Law Commission released an Issues Paper “Reforming the Incorporated Societies Act” to promote public discussion and as a useful vehicle for consultation in 2011.

Their report “A New Act for Incorporated Societies”, published in 2013, following wide consultation, identified a number of problems with the original Act, which have been broadly categorised as follows:

• the law is incomplete, inaccessible, and unclear;

• the law is inconsistent with incorporated society and governance principles;

• the law is difficult to enforce;

• there are issues with other statutes under which societies operate.

As a result the Law Commission recommended that the 1908 Act should be repealed and replaced by a more modern statute, and included suggested clauses for a possible exposure draft.

In 2014 the Government of the day responded to the Law Commission report, formally agreeing to 101 of the report’s 102 recommendations in full or at least in principle.

An Exposure Bill (a draft for public discussion) was released in 2015. This, in line with Law Commission proposals, included a ‘model constitution’ to be the default constitution unless certain other specific provisions were adopted by the organisation.

The proposals for new legislation then languished under several governments, not getting enough priority to be allocated a place on the parliamentary order papers, until the current Bill was introduced to Parliament in March 2021 and its first Reading (debate and referral to a select committee) took place in April 2021. Despite the six-year delay where the proposed Bill languished in its own legislative purgatory for lack of political interest, consultation on the Bill is now squeezed into a one month period before submissions are due on 28 May 2021. The select committee is due to report back in October, which, if it sticks to its time-table could see a new Act finally passed before the end of the year.

Key Links:

Read the Law Commission’s 2013 Report (and its earlier 2011 Issues Paper distributed for public discussion) and the Government’s 2014 Response at: https://www.lawcom.govt.nz/our-projects/incorporated-societies-act-1908?id=913 

Read the proposed Bill at: https://legislation.govt.nz/bill/government/2021/0015/latest/LMS100809.html?src=qs  

Read other’s submissions, when released by the select committee at: https://www.parliament.nz/en/pb/sc/submissions-and-advice/all?Criteria.Related=BILL_109429 

References

Charity Services. (2020). 2019/2020 Annual Review, Wellington: Department of Internal Affairs.

Financial Action Task Force (FATF). (2021). Anti-money laundering and counter-terrorist financing measures – New Zealand, Fourth Round Mutual Evaluation Report, Paris: FATF.

Law Commission. (2010). Court Jurisdiction, Trading Trusts and Other Issues (Issues Paper 28), Wellington: Law Commission. 

Law Commission. (2011). Reforming the Incorporated Societies Act 1908 (Issues Paper 24), Wellington: Law Commission.

Law Commission. (2013). A New Act for Incorporated Societies, Wellington: Law Commission

Nowland-Foreman, G. (2021). “Trust Law Overhaul – are you still running by the book?” in LEAD Newsletter, 13 April, 2021.

Open Government Partnership. (2018). The Guide to Opening Government: An Enabling Environment for Civil Society Organisations, International Centre for Not-for-profit Law.

Volunteer Reference Group. (2017). Overview paper on the state of volunteering in New Zealand, Wellington: Volunteer New Zealand.

White, D. (1972). “The Law Relating to Associations Registered Under the Incorporated Societies Act”, LLM Thesis, Victoria University of Wellington.