In the third 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 two.
Governance of societies
Under the proposals, every incorporated society will be required to have a committee of at least three “natural persons” with responsibility for the affairs of the society. Incorporated society constitutions will be required to contain rules setting out the composition, roles and functions of the society committee, including the number of committee members, the election or appointment of committee members, the terms of office of committee members, the qualifications for appointment of committee members, and the grounds for removal of committee members from office.
Every incorporated society will be required to have a statutory “contact officer” (with whom the Registrar may communicate) who is a member of the society’s committee, and that person must be eligible to be a committee member, must be 18 years of age and resident in New Zealand, may hold any other office as a committee member or in the society, and the contact officer’s name and address, and any changes, must be notified to the Registrar.
A society committee member will be disqualified from holding office if he/she is an undischarged bankrupt, is prohibited from being an officer of an incorporated society under the new Act, is prohibited from being a director or taking part in management of an incorporated or unincorporated body under the Companies Act, the Securities Act, the Securities Markets Act, or the Takeovers Act, is subject to a property order under the Protection of Personal and Property Rights Act 1988, or does not comply with any qualifications for officers in the society’s constitution.
The new statute will provide that a contact officer, committee member or other officer of a society must retire if he/she becomes disqualified, but if a person is disqualified or banned from being an officer of a society but acts as one then they will still be deemed to be an officer. The actions of any person as a society contact officer, committee member or other officer will not be invalid merely because the person’s appointment was defective or the person was not qualified for appointment to the relevant office.
Statutory duties will be imposed on society officers, and owed to the society. Those duties will include duties to act in good faith and in the best interests of the society, to use powers for a proper purpose, to comply with the statute and with the society’s constitution, to exercise the degree of care and diligence of a reasonable person with such responsibilities, not to allow society activities to be carried on recklessly or in a way likely to create a substantial risk of serious loss to the society’s creditors, and not to allow the society to incur obligations that the officer does not reasonably believe will be fulfilled.
A professional adviser will not be considered to be a society officer merely because the adviser gives advice to a society.
Conflicts of interest
Officers of an incorporated society with a direct or indirect financial interest in a matter will be required to disclose, as soon as practically possible, that interest to the society’s committee and to record that interest in the society’s conflicts of interest register. An officer who has disclosed a financial interest in a matter must not vote on that matter, but may continue to be counted as part of the quorum.
A register of officers’ disclosures must be maintained, and be open for members’ inspection, with a summary presented to each AGM.
Statutory enforcement of society obligations
The new Act will provide that a society, a member, or a former member may apply to a court for orders to enforce the constitution, and will empower the Registrar to apply to a court for orders to enforce the constitution if that is in the society’s interest and the public interest. To guide the Registrar as to what constitutes the public interest (bearing in mind the society’s general right to be free to manage its own affairs), the Registrar will be expected to consider the size of a society, the income and assets of a society, the source of the society’s income and assets, the society’s ability or intention to act, and the impact failure to act would have.
The new Act will provide for applications to a court for orders for redress for officers’ breaches of duties. It is proposed that such applications may be made by a society member or by the Registrar.
A member or a former member will also be empowered to apply to a court for orders on the grounds that conduct of the society has been, is being, or is likely to be oppressive, unfairly discriminatory, or unfairly prejudicial to him or her.
The new Act will provide that applications may be made to a court by a society, and a member (with the leave of the court), or the Registrar for orders to restore to the society money wrongly paid to members in breach of the prohibition against monetary gain.
The new Act will also provide for infringement offences, and a range of new offences with meaningful penalties. In addition to any other penalty, a court will have power to ban a person from holding a position of governance or management of an incorporated society or from being the contact officer of a society, upon convicting that person of an offence under the new Act.
The Registrar will also have powers to require a society to supply information about its business, operation, or management, to require audits, to enter and search society premises, to investigate a society, to advise and assist, and to “freeze” property and funds for 21 days.
Terminating, restructuring and rescuing societies
There will be a new statutory power for the Registrar to remove a society from the Register on request of a society or its liquidator, and new procedures to restore removed societies to the Register.
The new Act will provide that, generally, a resolution of the majority of members voting at a single general meeting is sufficient to appoint a liquidator or to request the Registrar to remove a society from the Register. The new Act will provide that notice of a proposal to appoint a liquidator or to request the Registrar to remove the society from the Register must be given to members in accordance with the constitution, and not less than 30 days in advance of the meeting to consider the proposal.
The new Act will provide that a society’s constitution must nominate a particular not-for-profit entity, or a type of not-for-profit entity to which any surplus assets will be distributed on liquidation or removal of the society from the Register, and the final meeting of a society may (by a valid constitutional amendment) approve a different distribution to a different entity from that proposed in the constitution.
The new Act will enable financially distressed societies to enter into compromises with creditors.
The new Act will facilitate amalgamations and mergers of societies.
Transition to the new Act
The new Act will provide for a transitional period of two years and six months, during which transitional period every existing society will need to check that its constitution complies with the new requirements (many existing constitutions may comply with the new requirements, but where a constitution lacks a rule required by the new statute, or does not comply with the new constitutional content requirements societies will need to amend their constitutions).
Reflections on the reform process
The Law Commission produced its report in June 2013 after some 30 months of work, and an Exposure Draft Incorporated Societies Bill was issued in October 2015. A wide variety of people and organisations have had significant input into the reform process over the last eight years, and they are likely to take a keen interest in the form of the bill the Minister will introduce into Parliament in a few months’ time. Many (including the New Zealand Law Society) can be expected to make submissions and the new statute should be enacted in 2020.
Societies around the country will expect the legal profession to be capable of rising to the challenge of advising societies what they should do once the new statute is enacted.
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.