RSM New Zealand

Incorporated societies act | Time for an overhaul

In 2013 The Law Commission released their report on their comprehensive review of theIncorporated Societies Act…and a sensible well considered report it is too!   We look at what this is likely to mean in summary for New Zealand’s 23,000 + Incorporated Societies.

Law Commission review of the Act

The Incorporated Societies Act 1908 is legislation that has served New Zealand society well.  It has been the legal structure of choice for a large number of community organisations over the past century.  Considered world leading and innovative when released, it has stood the test of time in that it has essentially not been amended since its 1908 enactment.  However our society is more complicated now as regards the responsibilities and requirements of legal entities and especially the operation of any commercial or social enterprise.  Hence it has been becoming increasingly obvious that the Act has some significant deficiencies especially around governance, administration of organisations and dispute resolution mechanisms.  All of these issues are not really covered in the 1908 Act.

As a result the Law Commission, an independent Crown Entity that reviews areas of law in New Zealand, commenced a comprehensive review of the Incorporated Societies Act 1908 back in June 2011 with the release of an issues paper.  This generated a good level of response with the Commission receiving over 200 submissions.  The Law Commission also proactively met with a cross section of groups within the sector to gain further views and feedback first-hand.

Big picture issues

The original issues paper contained a few radical concepts such as; do we need incorporated societies as a legal structure at all? However, the good news for incorporated societies is that the Commission concluded that such a legal structure for membership based organisations is required in New Zealand.

Also pleasing are the clear guiding principles that the Commission established in formulating their recommendations being;

  • Societies are organisations run by their own members – a group without members should consider an alternative form of incorporation.
  • Societies should not distribute profits or financial benefits directly to members.  People join societies to achieve a stated purpose and not to personally profit from the activities of the society.
  • Societies are private bodies that should be self-governing and largely free of inappropriate state interference.

So what changes are recommended?

The Commission’s formal report which is now submitted to the Minister is a very comprehensive analysis weighing in at just under 200 pages.  Helpfully they have also released a 30 page summary and recommendations paper.  These are available from www.lawcom.govt.nz    However to summarise even further here are the main conclusions and recommendations.

Legal structures

  • For legal clarity Incorporated Societies should not be also able to incorporate a board under the Charitable Trusts Act 1957.

Members

  • Should not be allowed any monetary gain (other than valid payment for services) or have any ownership interest in society assets.
  • Minimum number of members reduced from 15 to 10

Liability

  • Members shouldn’t be personally liable for the society’s obligations similar to Companies Act provisions

Governing Committees

  • There should be a requirement for a committee to govern the society
  • There should be a statutory officer who would be the Register of   Incorporated Societies main point of contact.

Act should provide clear duties of officers and rules for managing conflicts of interest.

Financial reporting

  • All societies should be required to prepare financial statements and file these with the Registrar.
  • Financial statement requirements  determined by the External Reporting Board which will differ depending upon entity size,  complexity or accountability as with other entities.

Constitutions

  • Required contents expanded
  • Society name
  • Purpose
  • Registered office
  • How people become and cease to be members & maintaining members register
  • How committees function including election, terms, qualifications, functions, grounds for removal, how statutory officer will be elected
  • How society enters into legal obligations
  • How it controls it finances
  • Dispute resolution procedures
  • How general meetings are run including how often, how called, quorums, content, minutes, voting etc
  • Method for altering the constitution
  • How society assets distributed on wind up or liquidation (Have to go to another similar society, charity or not-for-profit entity prohibited from distributing assets to an individual)- A basic model constitution will be provided in regulations as a default

 Complaints

  • Every society required to have complaint resolution procedures in  constitution.
  • Civil – provisions in Act for member to apply to a court to enforce constitution.
  • Criminal – provisions to cover dishonesty and abusing position of power

Registrar

  • Maintains the register of all incorporated societies and their annual return
  • Oversees the sector in a light-handed way

These all appear very sound and sensible recommendations to us and essentially if enacted will help codify in law what is best practice for operating an incorporated society as well as provide greater clarity and protection for members.

Where to now?

On receiving the Law Commission’s report the then Minister responsible for the Incorporated Societies Act, the Minister of Commerce, and the Ministry of Business, Innovation and Employment (MBIE) are now tasked with considering the report and the Government’s response.  In his release after tabling the report to Parliament the then Commerce Minister the Honourable Craig Foss noted as follows:

“The Law Commission has produced a comprehensive report, outlining a number of recommendations to modernise the Incorporated Societies Act 1908. The recommendations seek to improve guidance for people who run incorporated societies, including how to manage disputes.  The Government has agreed to all but one of the 102 recommendations either in full or in principle.

A new Act based on the Commission’s recommendations will codify best practice for operating an incorporated society, as well as provide greater clarity and protection for members. While much of the detail in the Commission’s recommendations is yet to be fully tested, we will be seeking public comment on an exposure draft of the Bill and a model constitution in 2015.”

Since then the Ministry has been busy drafting a new bill which is likely to result in the 1908 Act being repealed and replaced by an updated Act in the next few years.

We understand that the draft bill is progressing well and is on track to be released for public exposure in mid-2015.

However, the timing of any resulting law change is determined by this process, as well as Parliament’s timetable, as well as any legislation usually providing a period of grace before its requirements are effective to allow the sector time to ready themselves for compliance if appropriate.  Therefore we could be some years away from revised legislation being in place and effective.  However it’s been a hundred and seven years since the 1908 Act became law so like they say in the cheese advertisement; Good things take time!

What should you do?

If an entity you are involved with is an incorporated society we suggest immediate action is not required but recommend that you remain cognisant of developments as it is likely that changes will occur and that your organisation may be affected by future legislative reform.

If your organisation is contemplating any changes to your constitution and rules in the near future before the legislation is modified then we would suggest reference to the findings of the Law Commission review and likely changes as it would make sense to make modifications only once.

Would you like to discuss this topic further?

Please email us to submit a question or click on the author below to directly discuss this article

CONTACT us

Authors

Craig Fisher
Consultant