The Incorporated Societies Bill (Bill) had its second reading on 17 November 2021. The Bill seeks to repeal and replace the 113 year old Incorporated Societies Act 1908 (1908 Act), in a well overdue law reform.
The purpose of the Bill is to establish a modern framework and guidance for everyone involved in running one of the many thousands of incorporated societies in New Zealand. It is anticipated that the new law will come into force sometime in 2022.
How will incorporated societies be affected?
Incorporated societies will need to review and amend their constitutions to comply with several changes proposed by the Bill. Some steps that societies will need to take are:
- Re-register in the same way companies were required to do under the Companies Act 1993. If a society fails to re-register, it will cease to exist, and a restoration application would be needed to reinstate the entity.
- Adopt a constitution that complies with certain provisions. A constitution must include, for example, the composition of the society, how the society will control and manage its finances, and dispute resolution procedures.
- Have a minimum membership of 10 members (reduced from the current 15). If a society has fewer than 10 members, the Registrar of Incorporated Societies will give notice requiring a society to comply with this provision within 6 months.
- Establish a governing body that must comprise 3 or more officers who are qualified to be elected or appointed. The Bill disqualifies persons from becoming an officer of a society in certain circumstances, such as those under the age of 16 or a person who has been convicted of certain crimes.
Existing incorporated societies must implement these requirements before the transition date proposed by the Bill, which is 1 December 2025 (or two and a half years after the new legislation comes into force, whichever is the later). That may sound like a long time, but drafting a constitution that is acceptable to members could take longer than expected. We suggest societies take proactive steps to observe these requirements as soon as possible after the new legislation is enacted.
Additional implications for incorporated societies
Other proposed changes included in the Bill that may affect a society include:
- new financial reporting standards;
- codification of fiduciary obligations or duties owed by officers to their society;
- tightened prohibition on financial gain provisions;
- strengthening of privacy protections; and
- clarification of dispute resolution procedures.
We elaborate on each of these aspects below.
Under the proposed Bill all societies must prepare and file financial statements in accordance with new standards. The size of the society will determine which standards must be met. In addition, large societies will need to have their financial statements audited.
Codification of fiduciary obligations owed by officers to their society
The Bill includes a list of specific duties that a society’s officers must abide by. While case law recognises that officers owe fiduciary duties to their society, there is currently no single piece of legislation that codifies these basic duties. The proposed change is therefore welcome and would provide greater clarity and certainty around the governance obligations of societies. The core duties include:
- to act in good faith and in the best interests of the society;
- to exercise their powers for a proper purpose;
- to comply with the Act and the society’s constitution;
- to exercise reasonable care and diligence when exercising their powers or performing their duties;
- not to agree to, cause or allow activities likely to create a substantial risk of serious loss to the society’s creditors; and
- not to agree to the society incurring obligations that it cannot perform when it is required to do so.
Prohibition on financial gain
Provisions relating to financial gain are fleshed out to clarify the circumstances in which a society will or will not be considered in breach of the rule prohibiting financial gain. The new threshold proposed by the Bill would assess whether a distribution of gain, profit, dividend, or similar financial benefit has been made to any members. Societies who fail to comply with these rules will face a fine of up to $50,000. The Bill does, however, also introduce a number of exemptions to these rules. This includes reimbursement for reasonable expenses legitimately incurred on behalf of the society.
Strengthening of privacy protections
The proposed Bill would establish a publicly accessible register of incorporated societies that includes basic information such as the society’s purposes and activities. The Bill proposes that details such as the names of a society’s current and former officers are also publicly available. However, the Bill would strengthen privacy protections by allowing information to be removed or omitted in certain situations. This could include where the information might prejudice the privacy or personal safety of any person.
Dispute resolution procedures
The proposed Bill would require incorporated societies to determine their own dispute resolution procedures in their constitution, including providing for how a complaint may be made. This is a welcome change as the 1908 Act does not currently provide for dispute resolution procedures with the result that members may face significant challenges if they have complaints about how the society is run. Societies would be free to choose which type of dispute resolution best suits their membership. Dispute resolution could, for example, include mediation or arbitration, or approaches based on Tikanga or other cultural practices.
We will keep you updated as the Bill progresses through the legislative process. In the meantime, if you have any questions about the amendments proposed by the Bill or any other queries in relation to incorporated societies in general, please get in touch with our Business Advice team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.