New Zealand has over 23,000 incorporated societies, yet the legislation governing incorporated societies has barely changed in over 100 years. Recently the Government accepted the Law Commission’s recommendations to replace the Incorporated Societies Act 1908 with a more robust, modern Act. Consultation on a draft Incorporated Societies Bill is expected to commence by the end of 2015.
Overview of incorporated societies
An incorporated society is a popular structure for members pursuing shared cultural, sporting, recreational, community, religious or educational interests. Incorporated societies must have at least 15 members (note that a corporate body counts as the equivalent of three individual members). The key feature distinguishing an incorporated society from other business structures such as a company is that it must not distribute profits or financial benefits directly to its members. An incorporated society is allowed to run a business, provide benefits to members and the public and reimburse members for reasonable expenses, but the members should not have an ownership interest in the society or its assets.
Incorporated societies are currently governed by the Incorporated Societies Act 1908 (Act) and the society’s rules (or constitution). It is intended that societies should be largely self-governing and free from inappropriate state interference. Thus, the Act provides a broad framework, allowing each society the flexibility, through its rules, to operate in furtherance of its particular structure, culture and goals.
Recommendations for new Act
The proposed legislative overhaul will seek to refresh and modernise a very old piece of legislation (the current Act still refers to fines in terms of pounds and shillings) and fill some gaps where the Act is deficient. In particular, the Act lacks guidance about how disputes within societies should be resolved and about the obligations of the officers running societies.
We set out below some of the key recommendations for reform:
That the minimum membership requirement be cut from 15 members to 10.
That every society be required to have a committee of officers to make decisions and run its affairs, including one person to be the society’s statutory officer.
That the new Act contain a list of officers’ duties along the lines of directors’ duties in the Companies Act 1993 and a set of rules governing the disclosure and management of conflicts of interest.
That the new Act contain an expanded list of statutory requirements for the content of every constitution and the introduction of a model constitution containing all of those rules required by the new Act.
That every society must have rules in its constitution to provide procedures for the resolution of complaints about misconduct and discipline of members and about grievances brought by members concerning their rights or interests as members.
That members may resolve to liquidate a society at a single meeting, rather than the current double meeting requirement, but 30 days’ notice of a motion to liquidate would be required.
The deletion of the current provision that members will not be deemed to be associated for pecuniary gain merely because they are entitled to a share of society property on dissolution. This is in conflict with the fundamental rule that a society must not operate for the pecuniary gain of its members. The new Act should provide that any surplus assets on dissolution should be distributed to another incorporated society, charitable trust or not-for-profit entity that is prevented from distributing its surplus assets to an individual.
What this means for current societies
When the proposed changes come into effect, every current society will need to check that its constitution complies with the new requirements. Amending a society’s constitution can be a lengthy process, so there will probably be a transition period to allow those societies which require amendments to their constitutions sufficient time to comply. In the meantime, members setting up a new incorporated society should consider the Law Commission’s recommendations when drafting their constitution and considering their governance structure.
If you are interested in hearing more about incorporated societies or any other business law matters, please contact a member of our Business Team. Our Business Team members specialise in commercial contracts, start up businesses, business sales and acquisitions, restructuring and advising on business compliance.
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