Briefing Paper: MBIE Proposals to replace the Incorporated Societies Act

Dave Henderson, Hui E! Community Aotearoa: 23 May 2016

Milestones so far

  • The Law Commission commenced a review, at Government request, in 2010
  • Issues paper published June 2011, and received about 200 submissions
  • Law Commission final report published in 2013
  • See the report
  • Government in December 2013 agreed to 101 of the 102 recommendations in full or in principle, including to replace the 1908 Act with a new Act
  • Submissions on the Draft Bill close 30 June 2016 – send them to societies@mbie.govt.nz

 

What’s wrong with the current 1908 Act?

“The Act does not set out the obligations of those who are involved in the running of incorporated societies. It fails to give sufficient guidance to those many New Zealanders who volunteer to run societies. Moreover the statute says little about how disputes, which inevitably occur, should be dealt with. Much of what is legally necessary for the running of incorporated societies is also not expressly set out in the statute” (Law Commission, 2013)

 

None of the following questions are answered in the 1908 Act:

  • What are my duties as an officer of a society?
  • To whom do I owe those duties?
  • How do I know whether I have a conflict of interest?
  • If I do have a conflict, what do I do about it?
  • What should our committee do if we receive a complaint from a member?
  • What if a member feels aggrieved about a decision our committee has made, or the actions of another member?
  • What should our committee do if we receive a complaint from a member?
  • What if a member feels aggrieved about a decision our committee has made, or the actions of another member?

 

“In our experience, members generally want to do their best for their society, are happy to follow rules, and would welcome greater certainty both in terms of internal processes and rights of recourse outside the society” (Auckland District Law Society)

 

The Proposals

Underlying Principles:

  • Societies are private bodies that are operated by their members
  • Societies should not distribute profits or financial benefits to members
  • Societies should be free from inappropriate government interference
  • Societies’ governance should be based on Trust and Integrity

 

Provisions in the Draft Bill that reflect the main characteristics of an incorporated society

These are very much based on the Companies Act

  1. An incorporated society is a separate legal entity that operates for purposes other than the financial gain of its members
  2. A society continues in existence unaffected by the comings and goings of its members or office holders
  • A Society is a body corporate, from the date on its incorporation certificate
  • It has perpetual succession
  • It has the capacity, rights, powers and privileges of a legal person
  • It continues in existence until it is removed from the register
  1. Incorporation means that a society can enter into contracts and hold assets in its own name
  • It has full capacity to undertake any activity, do any act, or enter into any transaction, But
  • It must not break the general law
  • What it does will be limited to the powers etc. that are in its constitution
  1. Members of a society are not personally liable for any obligation or liability that the society incurs in its own name
  • A member is not liable for an obligation of the society by reason only of being a member
  1. Societies should not distribute profits or financial benefits to members.
  • A society must not be carried out for the financial benefit of its members
  • Not profit-sharing, no ownership by members in the form of shares or stock, or disposable interest

Note there are “safe harbours”. A society can;

  • Engage in trade
  • Pay a member for matters incidental to the purposes of the society
  • Reimburse a member for expenses related to the purpose of the society
  • Provide benefits to members or the public, e.g. scholarships
  • Pay a salary or wages or other payments for service, at a market rate or below
  • Provide a member with incidental benefits, e.g. prizes, trophies, discounts on services e.g. cheap meals at a Cosmopolitan Club

 

Officers’ Duties

“The current [Act] lacks any guidance as to the obligations of those running societies, although case law provides some help. The new statute should contain both a list of officers’ duties along the lines of directors’ duties in the Companies Act, and a set of rules governing the disclosure and management of conflicts of interest” (Law Commission, 2013)

 

The case law requires officers to place the interests of the society itself ahead of the interests of its members as individuals because… an incorporated society is a legal person that has perpetual succession, regardless of the comings and goings of members or officers. Officers have a duty:

  • To act in good faith and in what the officer believes to be the best interests of the society
  • To exercise a power for a proper purpose (i.e. to not favour a member or group of members)
  • To not act, or agree to the society acting, in a manner that contravenes the Act or the constitution of the society
  • To exercise the care and diligence that a reasonable person with the same responsibilities would exercise in the same circumstances
  • To not agree to the activities of the society being carried on in a manner likely to create a substantial risk of serious loss to the society’s creditors
  • To not agree to the society incurring an obligation unless the officer believes at the time on reasonable grounds that the society will be able to perform the obligation when it is required to do so.

There are 7 grounds on which a Court may make one or more orders against an officer or former officer if it is satisfied that the person has breached or is likely to breach a duty – remedies include enforcing the duty and compensating the society.

 

Other Provisions

A society can indemnify or insure an officer, member or employee, But an officer cannot be indemnified:

  • For criminal acts
  • For breaching the duties to the society itself
  • An indemnification can only be given if the society’s rules expressly authorise it.

Officers are disqualified if they are under 16, are an undischarged bankrupt, or are disqualified already under another Act, e.g. Charities, Companies, Financial Markets. The Registrar can provide waivers.

If you are an officer and have a conflict of interest – detailed provisions lay out how this must be handled.

 

What a constitution must contain

  1. Name
  2. Purposes
  3. Becoming a member
  4. Ceasing to be a member
  5. Keeping register up to date
  6. Access to register
  7. Committee’s composition, roles and functions
  8. Entering into legal obligations
  9. Control and use of common seal (if it has one)
  10. Procedures for resolving internal disputes
  11. Arrangements and requirements for general meetings
  12. Method for amending constitution
  13. Nomination of a NFP entity or class of NFPs for distributing surplus assets

Most constitutions will already have most things except j and m. The Draft Bill has detailed provisions and will include standard clauses for all these.

 

Transition for societies and branches that are registered at the time the Bill is enacted

  • Royal assent is not expected on the final Bill/Act until 2018 at the earliest
  • All existing societies will be deemed to be registered under the new Act in 2020 at the earliest
  • If you do not update the constitution by 2022, the Registrar will impose the standard provisions. Guidance material will be placed on her website.
  • New Societies will have to register under the new Act, after a date about 6 months after Royal Assent, when the Registrar has established an online registration system.

 

Hui E! Community Aotearoa: Response to the Draft Bill

What we like:

  1. The core principles established by the Law Commission and confirmed here, particularly the third:
  • Societies should be free from inappropriate government interference
  1. The clarity around “financial gain” and what can be done if a Society fails to meet the criteria;
  1. The long introduction period, with a series of transition dates that give everyone the chance to do what is needed;
  2. The reduction from 15 to 10 in the number of members a society must have to register, and the requirement to maintain at least that number, although international discussions suggest the minimum number of founders should be as little as 3;
  3. The decision to provide “standard clauses” rather than a model constitution, recognising:
  • the diversity of the sector, and
  • the principle that civil society organisations are created to meet the needs and aspirations of communities, and writing a constitution is an opportunity to document what those are;
  1. The proposal that the minimum age for officers of a society be reduced from 18 to 16 years – there are some great rangatahi groups and rangatahi should be part of their governance;
  2. The emphasis that officers’ responsibility in decision-making is to the society. It is clear from case law that officers owe their duties to the society, but there is a widespread misunderstanding;
  3. A simpler procedure for the amalgamation of two or more societies;
  4. Constitutions will be required to contain rules setting out the composition, roles and functions of the committee.

 

What we question (1)

Clause 83: The proposed requirement that all Incorporated Societies meet the same accounting standards as registered charities

  • An unnecessary compliance burden for very small societies – Members should decide what reporting they need, and Government should accept that;
  • Charities get a significant tax benefit, as do their donors – what’s in it for incorporated societies?
  • Undermines the basis of civil society by creating a disincentive to formation of societies
  • Undermines an internationally recognised principle of NZ’s legislation – ease of establishment of a community-based legal entity
  • Increases risk of misappropriation of funds – a group that decides to not register will have trouble opening a bank account due to the Anti Money-Laundering legislation

 

Hui E! Proposes:

Small incorporated societies – under $15,000 total operating payments in either or both of the previous financial years – should be exempt from having to report according to the reporting standards.

  • Societies that have Donee Status should report according to the standard, as they receive a tax benefit and therefore have accountability beyond their members
  • However many small societies come together around a shared activity or aspiration – reporting to government is not on their radar at all
  • They should be encouraged and valued for their potential e.g. IHC grew from a small local parents’ support group
  • Many may stay small, but we should not discourage them by imposing needless requirements
  • Can always choose to report according to the standard but that decision belongs to the members, not to government.

 

What we question (2)

Sub-committees: There is little mention of the ability of incorporated societies to form sub-committees – most often a Finance Subcommittee of the main governance group

  • Do we need a provision that requires a sub-group of the governance to report regularly to the main body?
  • The most common complaint is that people feel disempowered by the actions of a subcommittee – “they make all the decisions and I get no say, but as an elected officer I am legally responsible”
  • Should this be addressed in the Bill, or by societies in their constitutions?

 

What we question (3)

Appeals from decisions of the Registrar have to go to the High Court within 15 days, although this can be extended by the Court if you apply

  • We have found with the Charities regulator this is an expensive process, almost impossible for most organisations
  • It’s hard for a community organisation to gather material, get advice, meet, decide to lodge an appeal and lodge it within 15 days
  • Effectively have to go to court twice – get an extension and then get the appeal heard
  • Hui E! recommends:
    • More time be allowed for an organisation to process the decision to seek a formal review of a decision
    • a lower level review process, before going to the High Court.

 

Materials Available

On the Hui E! website

On the MBIE website

Background

Remember, submissions close 30 June – send them to societies@mbie.govt.nz

Hui E! encourages groups to make submissions, particularly giving your views on the three areas we question.

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