18.10.2023

Key change to rules on distribution of surplus assets under the new Incorporated Societies Act 2022

On 5 October 2023, the new Incorporated Societies Act 2022 (2022 Act) came fully into force, replacing the Incorporated Societies Act 1908 (1908 Act).

One of the key requirements under the 2022 Act is for all existing incorporated societies to reregister with the Companies Office.  As part of reregistering, incorporated societies will need to have a constitution that complies with the requirements of the 2022 Act.  Under the 2022 Act, there is a new requirement to nominate a not-for-profit entity (NFP) (or a class or description of NFPs) to which any surplus assets should be distributed on liquidation, or to enable removal from the register of an incorporated society.  In our view, this may present a problem for some societies. 

Requirement to nominate an NFP to receive surplus assets

Under the 1908 Act, any surplus assets owned by an incorporated society on dissolution would devolve in accordance with the rules of the incorporated society.

The Law Commission identified a conflict in the 1908 Act with allowing members to receive the property of an incorporated society on dissolution.  Under the 1908 Act, incorporated societies were prohibited from incorporating for the pecuniary gain of its members.  This prohibition continues under the 2022 Act, and is one of the defining characteristics of an incorporated society.  However, the 1908 Act provided that members will not be deemed to be associated with pecuniary gain merely because they are entitled to divide between them the property of the incorporated society on its dissolution.  The Law Commission suggested that, to remedy this perceived conflict, the new statute should not allow society property to be distributed to members on its dissolution. 

Now under the 2022 Act, all incorporated societies are required to nominate an NFP/NFPs to receive any remaining assets upon dissolution of the incorporated society. An NFP is:

  • a society incorporated under the 2022 Act;
  • a charitable entity; or
  • any other society, institution, association, , or trust that is not carried on for the private benefit of an individual and whose funds are used for benevolent, philanthropic, cultural, charitable, sporting, or public purposes in New Zealand.

This requirement poses a problem for incorporated societies that wish to distribute any surplus assets (including property) to their members on liquidation.   

Impact of this change

Incorporated societies are commonly used for sports and social clubs, and cultural and religious groups, and it may be that their members will be comfortable with the society’s surplus assets being distributed to an NFP on dissolution.  However, if the society’s rules previously provided for the distribution of surplus assets to its members, the requirement for its new constitution to remove this right is a fundamental change and it will be crucial to ensure all members are aware of this prior to any new constitution being adopted.

Further, in our experience, incorporated societies are used more widely than for sports and social clubs, and cultural and religious groups.  For example, they are a popular entity used by property developers to hold and manage communal facilities such as gymnasiums, pools, garden areas, access ways and other infrastructure for the benefit of those in a development or subdivision, as well as for the promulgation of rules relating to construction design, signage, permitted use and general occupier conduct – matters that would come under the domain of a body corporate had the development or subdivision been a unit title.  Purchasers of allotments within the subdivision become members of the incorporated societies and thereby acquire an interest in the communal facilities.  Access to communal facilities is frequently considered when assessing the value of a development. 

Residents’ societies are not typically formed for the benefit of NFPs or charitable entities, and the property involved is usually incongruous with NFP purposes.  The effect of this new requirement under the 2022 Act could include ownership passing to an NFP of a private road following a redevelopment, or of a water infrastructure because the development now has town supply or connection to council sewerage.  As such, residents’ societies may need to consider whether an alternative structure is more appropriate going forward (such as a company), rather than reregistering as an incorporated society under the 2022 Act.

Key takeaways

Given under the 2022 Act, incorporated societies must nominate an NFP to receive property on a liquidation of the incorporated society, societies should consider whether an incorporated society is still appropriate for them.  For example, residents’ societies should consider whether they continue to be an appropriate entity to manage communal facilities.  

Hesketh Henry is well-placed to assist incorporated societies in navigating the new Act.  If you have any questions about the new Act, including the requirements for reregistration, please get in touch with our Business Advice 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.

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Kerry
Media contact - Kerry Browne
Please contact Kerry with any media enquiries and with any questions related to marketing or sponsorships on +64 9 375 8747 or via email.

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