In the second in a series of three articles, Mark von Dadelszen looks at the proposed reform of the law relating to incorporated societies. This involves a complete overhaul of the existing century-old legislation. Read part one and part three.
Society constitutions
The new Incorporated Societies Act is proposed to require that society constitutions include, as a minimum, the name and purposes of the society, how people become members and cease to be members, provisions to keep an up-to-date register of members. There will need to be provision for the composition, roles and functions of committees, how the society enters into legal obligations, controls and manages its finances, and keeps financial records, arrangements and requirements for general meetings – including the intervals between general meetings, when minutes are required to be kept, the manner of calling meetings, the time within which, and manner in which, notices of general meetings and notice of motion must be notified, the quorum and procedure for general meetings, and voting procedures for general meetings.
A society will be empowered to include rules in its constitution (consistent with the constitution and the statute), to make bylaws (no longer subject to the Bylaws Act 1910), to express its tikanga or culture, and to provide for any other matter relevant to the society’s affairs.
The new statute will require that all constitutional alterations be notified to the Registrar within 30 days, taking effect from registration or a later specified date. Courts will have new discretionary powers to amend a society’s constitution if a constitutional amendment was not made in accordance with the constitution or the Act, if it is not practicable for a society to amend its constitution itself as required by its constitution, if a society’s constitution is operating or would operate in an oppressive, unfairly discriminatory or unfairly prejudicial manner, and in any other circumstances considered just and equitable.
While the Law Commission recommended that a model constitution be provided, the June 2019 Cabinet Paper suggests that societies are “too diverse for standard constitutional provisions or model constitutions”. However, some Government ministries may pick up on the Law Commission’s alternative suggestion (in paragraphs 7.58-7.59 of its report) of a society constitution-builder.
Membership of societies
Under the Incorporated Societies Act the minimum membership of an incorporated society will reduce to 10 (from the present 15), with corporate members still being equivalent to three individuals. The minimum of 10 will apply at the time of, and after, incorporation (with annual reporting of membership numbers to the Registrar), and if the minimum drops below 10 the Registrar may give notice to a society to increase membership to the minimum or be deregistered. New members must explicitly consent to becoming members of a society (possibly subject to some minor exceptions).
The new statute will continue to prohibit societies from operating for the financial gain of their members and from distributing any gain, profit, dividend, or other financial benefit to their members. However, a society that ceases to exist may distribute surplus assets to a member which is itself a not-for-profit entity which does not provide for distribution of surplus assets to its members, and as part of an amalgamation, may distribute any gain, profit, dividend or other financial profit to a member which is a body corporate and is the entity into which the society and member are amalgamating. However, a society will be empowered to reimburse members for reasonable expenses related to the society, pay members for services on a normal “arm’s length” basis, and provide benefits and incidental prizes and discounts to the public including members and their families.
Society members will have statutory rights to access financial reports presented to the annual general meeting, to access minutes of previous AGMs, to access a register of committee interests, and those rights will be supplemented by the right to request other information, which a society may decline to provide in defined circumstances.
Members will still not be liable for a society’s obligations, and the new provision will be generally aligned to that in section 97 of the Companies Act 1993. Societies will also be empowered to indemnify members and employees who act in good faith in pursuing a society’s activities, and to take insurance for the purposes of that indemnity.
Societies with branches
Branch/parent society relationships will be defined by those entities, not by legislation (at present under the 1920 Amendment Act). There will be no separate provision for incorporation of branches, but a branch may be incorporated as a society in the normal way, and existing registered branches will be “grand-parented”. However, further consideration will be given to the implications relating to the inter-relationship between the proposed new Act and the Employment Relations Act 2000 and its application to societies whose members are other societies or who have a multiple branch structure.
Society administration
Every society will continue to be required to have a registered office in New Zealand, and will usually be able to change its registered office (and may nominate that this takes effect on a date after the Registrar is notified of the change).
Societies will be required to file annual returns (online filing will be facilitated), with prescribed information. Larger societies will be required to file annual financial reports (the format to be determined by the External Reporting Board). The minister’s proposals will lessen the burden for smaller societies not registered as charities (those with annual expenditure of less than $10,000, or assets less than $30,000 or which do not have “donee” status under the Income Tax Act 2007). The new “Accounting Standards Framework” altered the form of financial statements (Financial Reporting Act 2013 and External Reporting Board) for accounting periods commencing from 1 April 2015.
Complaints and grievances
Every society constitution will be required to include procedures to deal with internal disputes. Societies must maintain procedures for complaints concerning misconduct of or discipline of members, and grievances raised by members concerning their rights or interests as society members. However, societies will be free to continue, develop or adopt complaint, disciplinary or grievance procedures to meet their needs, as long as their procedures and practices satisfy relevant specified natural justice minima defined in the Act (eg, the right to be heard and to prepare a defence).
Decision-makers in all classes of dispute will be required to be impartial and able to consider the issues without a predetermined view.
A society will be empowered to elect not to consider or continue considering a complaint or grievance if the issues are trivial, if no material misconduct is disclosed by the complaint or grievance, if the complaint or grievance appears to be without foundation, if the complainant has an insignificant interest in the matter, or if the issue has already been investigated and dealt with.
Societies will also be empowered to meet their obligations in dealing with complaints or grievance procedures by referring them to an external arbitrator or arbitral tribunal, by appointing a visitor (or referee), or through binding arbitration.
Legal capacity of societies
Incorporated societies will be deemed to have full capacity to carry on or undertake any business or activity, do any act, or enter into any transaction, and the new provision will be generally aligned to section 16 of the Companies Act 1993. For avoidance of doubt, the new statute is likely to make it clear that an incorporated society generally has wide powers (unless expressly negated in its constitution) to buy, sell, exchange, develop and mortgage property, borrow money and give security for it and to issue negotiable instruments, receive and make gifts, enter contracts and leases, employ people, and belong to other similar societies or associations. How societies may enter into legal obligations is likely to be spelt out (see clauses 91-92 of the 2015 Exposure Draft Bill).
Ultra vires actions
The new statute is expected to provide that no act of a society and no transfer of property to or by a society is invalid merely because the society did not have the capacity, the right, or the power to do the act or to transfer or take a transfer of the property. It will protect third parties who are unaware of any incapacity when they deal with a society.
Costs in legal proceedings
The new statute will not include a provision relating to security for costs in legal proceedings (existing court rules are considered adequate).
Mark von Dadelszen mark.vondadelszen@bvond.co.nz 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 MBIE to advise on the proposed model constitution as originally recommended by the Law Commission.