Incorporated Societies: Relocate or Renovate?

Author: Garth Nowland-Foreman

The 100 maximum places were quickly booked out for LEAD’s webinar Overview of the Incorporated Societies Act 2022 - Coming Ready or Not last week. The session provided a useful overview of the new Act, and the result of 12 years of attempted reform of the century-old legislation that preceded it.

The resulting 2022 Act is a legislative ‘extreme make-over’! It is complex and extensive and a complete rewrite of the 1908 Act. Despite describing the 1908 Act as out of date and deficient in a number of respects, both the Law Commission and the Government and many submitters to the Select Committee recognised that the 1908 Act was world leading at the time. It has been a success story over the years and has sound bones, which should remain unchanged. These are the three fundamentals of how an incorporated society was essentially envisaged and what the new Act aims to retain:

• organisations run by and accountable to their own members (the democratic principle)

• not distributing profits or financial benefits to members, but reinvesting in the work of the society (the collective principle), and

• essentially private, self-governing and free of unnecessary state interference (the independent principle).

The greatest limitation of the old Act was what was not in it – and these potential holes have been filled in – in spades! The new Act, which received Royal Assent last month, is much more prescriptive than the Act it replaces. This can be a good thing, as much of the legal duties of board or committee members was not in written legislation, but drawn by inference from the duties of company directors and scattered in the potential precedents of dozens of separate court decisions. The old Act’s silence, gave organisations both greater flexibility, but also greater responsibility to know what they had to cover in their own constitution or policies. 

With 261 clauses, four schedules and several regulations (still to come), there are a lot of changes that Incorporated Societies will need to get used to. While by no means comprehensive, we highlight here what we see as the top ten renovations that will significantly impact Incorporated Societies:

1. All existing Incorporated Societies will need to re-register (meeting all the requirements of the new Act including in almost all cases a new Constitution) by (what will soon become the dreaded) Transition Date – defined as either 01 December 2025 or two and a half years after clause 4 commences, which ever is later. If you do not successfully re-register, you will lose all the protection of incorporation by that date. If we were you, we would start now! The process is outlined in Part 1 of Schedule 1.

2. The minimum number of members to form a society will be reduced to 10 (currently 15), but it is explicit that this new minimum must be maintained at all times (Section 74). (Incorporated organisational members generally will still count as three members – Section 14.) It is also made explicit that a person must consent to being a member (Section 76).

3. You may be surprised that the old Act has no requirement that you have a committee (or board or whatever). Under the new Act a committee is required and the committee must have at least three people – who are referred to in the Act as Officers (Section 45). The qualifications (and disqualifications) for Officers are spelt out in Section 47. In a new requirement, a majority of Officers must be members. A person must also be notified as the Contact person (as a stand-alone position or in conjunction with any other office – Clause 112-116). You can have any other positions or none. You will still also need to maintain a Registered Office (Clause 110-111).

4. There are many more ‘must haves’ in your Constitution (or Rules), which you must now include under the new Act. In fact, there are twenty-seven particular requirements about what must be in your Constitution in Clause 26. Your Constitution can’t give members rights or interests in the organisation’s property (clause 27). However, it may contain any other matter (not inconsistent with the Act), including how to make by-laws, how you wish to express tikanga, kawa, culture or practice, and even penalties you can impose on members (though they must be “reasonable”) (Clause 28). It specifies a minimum process for amending your constitution in the future, of at least a simple majority of members (Clause 30), and allows for minor or technical amendments to be passed without calling a meeting on a “no objections” basis (Clause 31).

5. The Duties of Officers are - for the first time - collated and spelt out in Clauses 54-61, which can be summarised as:

   • a duty to act in good faith and in the society’s best interests,

   • a duty to exercise powers for a proper purpose,

   • a duty to comply with the new Act and the society’s constitution,

   • a duty of care (the care and diligence that a reasonable person with the same responsibilities would exercise in the same circumstances, taking into account, but without limitation, (a) the nature of the society; and (b) the nature of the decision; and (c) the position of the officer and the nature of the responsibilities undertaken by them),

   • duty not to create substantial risk of serious loss to creditors, and

   • duty not to agree to the society incurring obligations that it cannot perform.

(As has been pointed out, these last two duties were subject to some criticism in the final reading of the Bill, with some MPs arguing that they are more appropriate for commercial contexts where directors are well compensated.  However, they have now been adopted here, so we have to apply them. This, perhaps, provides even more reason for societies to consider taking out Directors’ & Officers’ Insurance, especially given the wide definition of Officers.

6. The Constitution must include a procedure for receiving complaints and resolving disputes (widely defined as any dispute between or among any combination of Members, Officers, and/or the Society, on any misconduct, breach of duties, breach of Constitution or By-laws or the Act, or damage to members rights or interests) - Clause 26 (1) (j). This must be consistent with the principles of natural justice (fairness). The procedure in Clauses 2-8 of Schedule 2, provides an organisation with a ‘safe harbour’. If such a procedure is adopted, it is presumed to meet the requirements of natural justice (Section 41).

7. The new Act requires an Officer to disclose a Conflict of Interest in any matter the Society is dealing with where they (or certain relatives or organisations they are involved in) may get a financial benefit (Section 62). There are some exclusions. This disclosure must be made as soon as practicable after the Officer becomes aware of it and must be recorded in an Interests Register. Once declared, the conflicted Officer cannot vote or take part in a decision of the Committee on, or sign a document initiating, the matter. – unless everyone else agrees otherwise. The Officer can take part in discussion relating to the mater and be present when the Committee are making a decision (unless they decide otherwise). We suggest it often gives greater confidence if the conflicted Officer actually leaves the room while the matter is discussed, and this can be recorded in the minutes. The new Act does take the additional step of requiring, if half or more of the Committee members are conflicted, that the matter be referred to a Special General Meeting of members of the Society to determine. If the proper procedure is not followed, the Committee must notify members of the Society as soon as practicable after becoming aware of the failure.

8. Generally, Incorporated Societies will be required to keep financial records in order to be able to annually report according the Generally Accepted Accounting Practices (GAAP) set by the External Reporting Board (XRB) – the same as if the organisation were a Registered Charity. So, for example, Incorporated Societies with annual operating expenditure over $140,000 will need to prepare accrual accounts. There will be an additional exceptions for Incorporated Societies that are not “donee” organisations, if their annual operating expenditure is less than $50,000 and their total current assets is also less than $50,000 (Clause 103 (2-5)). These very small Societies will need to comply with requirements (yet to be) prescribed by regulations. In addition, Incorporated Societies “of a kind prescribed by the (yet to be published) regulations” must have their annual account audited each year by a qualified auditor. This is a retrograde step, though we don’t know yet who it will apply to. Because of their use of Charity standards for financial reporting, these might also end up applying to auditing requirements. If they did it would mean that organisations with annual operating expenditure over $1.1 million would need to be audited by a qualified auditor, while those with annual operating expenditure over $550,000 would need to be audited or reviewed by a qualified auditor. There is still a slim space to lobby the government to stop these restrictions applying before regulations are promulgated.

9. Amalgamation with another Incorporated Society will become possible under Subpart 2 of the new Act, which sets out the new procedure. Previously one or both societies needed to wind up and arrange to pass assets and obligations, including employment relationships on to another existing or new Incorporated Society.

10. Subpart 6 of Part 4 sets out several criminal offences making it much easier to impose fines, imprisonment or banning orders – for making false statements, fraudulent use or destruction of Society property, falsification of register, records, documents, or other fraudulent operations. Imprisonment of up to five years or fines of up to $200,000 can be imposed. Part 4 of the new Act also sets out provisions for civil enforcement. That is where courts can make orders to enforce a Constitution, Bylaws, or Officers’ duties, or make orders where a society operates oppressively unfairly discriminatory or prejudicial to a  member, or to recover a financial gain from a member for the society. An application for a court order can be made by the Society, a Member, a former Member, an Officer, or the Registrar (only if in the public interest – see Clause 150). While the court is not required to consider an application, it is difficult not to see an increase in litigation. This could take up considerable time, potentially legal expenses and liability for costs under this new regime.

Renovate or relocate?

We actually don’t have a choice unless we want to change our legal form. We are stuck with this house and we have to live in it – even though it may not be our ‘dream home’. It definitely pinches and is a bit tight in places. We may have wanted to exercise our independence, but we will have to do the best to make it our home!

If your board or committee would like support in facilitating a meeting to consider what changes you will need to make as an organisation - to your policies and practices - and especially your Constitution; LEAD may be able to help. We have experienced facilitators available for in-person sessions in Auckland and Christchurch (or elsewhere with travel costs), and we can facilitate on-line workshops across the motu.

Contact info@lead.org.nz to discuss what support may be available. Our fees are very affordable.

There are also some very helpful resources available online from our friends at ParryField Lawyers at https://www.parryfield.com/resources-for-the-new-incorporated-societies-act-2022/