In a series of three articles, incorporated societies expert Mark von Dadelszen will look at the proposed reform of the law relating to incorporated societies. This will involve a complete overhaul of the existing century-old legislation. Read part two and part three.
A brief history of the reform process
An 1895 New Zealand statute was the first to provide for the incorporation of a wide range of community societies in New Zealand, and it was replaced on the consolidation of all statutes in 1908 by the present Incorporated Societies Act 1908. It has effectively remained unchanged for over a century (in 1920 it was amended to allow for branch societies, further minor amendments were made in 1923 and 1953, and on the introduction of decimal currency in 1967 a shilling fine was changed to 10 cents). In contrast, our companies’ legislation has been totally re-enacted six times since the Joint Stock Companies Act 1860 (1868, 1882, 1901, 1903, 1933 and 1993), all with regular amending Acts.
The Law Commission’s 2013 Report 129, “A New Act for Incorporated Societies”, recommended a complete overhaul of the Incorporated Societies Act 1908. The 2015 Exposure Draft of the Incorporated Societies Bill largely followed the recommendations in the 2013 Law Commission Report, but progress has been stalled for the last four years.
The reforms as now proposed are still underpinned by the principles set out in the Law Commission’s 2013 report.
First, incorporated societies are organisations run by their members, and those members have the primary responsibility for holding their societies to account, and a group without members to hold it to account should consider an alternative form of incorporation (such as a trust).
Second, incorporated societies should not distribute profits or financial benefits directly to members (who join to achieve a shared purpose, and not for any personal financial profit from the activities of the society) – a key feature setting incorporated societies apart from other forms of incorporated entities.
Third, incorporated societies are private bodies that should be self-governing and largely free from inappropriate State interference.
Finally, the legislative regime should give incorporated societies some flexibility to adapt their operating environment to suit their purposes and their culture.
The new Incorporated Societies Act – as now proposed
The Minister of Commerce and Consumer Affairs’ June 2019 Cabinet Paper records that “incorporated societies make a significant contribution to New Zealanders’ wellbeing”, and confirms that the present legislative proposals are to completely replace the Incorporated Societies Act 1908, provide a modern and clearer statutory framework for incorporated society governance, align the definition of incorporated society officers with the definition in the Charities Act 2005 (a somewhat narrower definition than was previously proposed), require better processes for how societies deal with member grievances and complaints, and make significant changes to provisions relating to trade unions.
It is also now proposed to give existing charitable societies registered under the Charitable Trusts Act 1957 the option to migrate to the new incorporated societies regime (rather than, as previously proposed, requiring them to migrate to the new Incorporated Societies Act regime), and to give existing incorporated societies the option to move to the new register (ie, under the new Act) “only if they confirm that they wish to be so moved and that they have achieved compliance with the requirements of the new statute (such as amending their constitution to include dispute resolution provisions).” These aspects of the current proposals are likely to attract criticism as it can be argued that, because charitable societies enjoy some privileges, they should not be exempt from the greater rigour proposed to be required of those governing other incorporated societies.
The present intention is to reduce the originally proposed four-year transition period for societies to comply with the new statute to 30 months. However, it is also proposed that existing societies will be allowed to elect whether or not to transition to the new legislative regime. Those that do not transfer to the new regime will cease to enjoy the benefits of being incorporated entities (the Cabinet paper recognises that this proposal may “become subject to criticism”, and the author of this article fears that many societies that are poorly governed will elect not to transition, to the potential detriment of their members and third parties). This option is likely to be taken by smaller societies for which the added administrative burdens imposed by the new statute are considered to outweigh the benefits of incorporation.
During the transitional period of two years and six months, every existing society will need to check that its constitution complies with the new requirements (I anticipate that few existing constitutions will comply with the new requirements, and where constitutions fail to comply with the new requirements societies will need to amend their constitutions).
The substance of the reform proposals approved by Cabinet in June 2019 are unlikely to change significantly as the reforms are not considered to be politically controversial. However, a number of societies and interest groups are likely to make submissions on the bill (particularly during the committee stages of the bill’s passage through Parliament).
The new requirements proposed to be placed on incorporated societies by the new Act (the trade-off in return for the benefits of incorporation) will be onerous for some and may prompt some fundamental reconsideration about existing societies:
- Why do we have a society, what need is it meeting, and are we fulfilling the wants and needs of our members – fundamentally what is our “purpose or “mission”? Do we need a society (with voting members) or might some other type of organisation (perhaps a trust) meet our needs?
- To lessen the new legislative burdens, might there be merit in considering combining forces with some other organisation or organisations providing similar community services (such as forming a combined sports club or cultural society)?
- Do we actually need to be incorporated (the main benefit of incorporation for most societies being to protect members from most personal liability for society activities)?
- If we choose to remain incorporated, how will we meet the greater reporting and accountability requirements of the new Act? Will we need to pay or increase committee honoraria or engage some external professional help?
Existing societies reviewing their constitutions should seek to anticipate the changes by adopting constitutions that comply with the provisions expected to be included in the Incorporated Societies Bill. This will avoid the pressure of having to revise a society’s constitution during the transitional period after the new Incorporated Societies Act is enacted, as well as saving some effort and cost.
Mark von Dadelszen email@example.com is a consultant with Bannister & von Dadelszen. He was a member of the Reference Group advising the Law Commission in the preparation of its report on the proposed reforms, and was engaged by the Ministry of Business, Innovation and Employment to advice on the proposed model constitution as originally recommended by the Law Commission.