A Shake Up on the Horizon for Incorporated Societies

Posted on May 06, 2021 in Commercial , Private Client , Trusts , Property (Tags:)

A shake up is on the horizon for incorporated societies. The Incorporated Societies Bill 2021 which was introduced to Parliament in March of this year is set to bring about large-scale reform of the not-for-profit sector. The goal of the Bill is to put in place a modern framework of legal, governance, and accountability obligations for incorporated societies and those who run them.

A number of the changes impact those who run incorporated societies, referred to in the Bill as “officers”. Officers include committee members and those who exercise significant influence over the management or administration of the society, such as the treasurer or the chief executive officer. Individuals who have an ability to wield significant power over the day-to-day running and decision-making of the society are likely to be deemed an officer. Many people in governance roles in clubs and societies have a poor understanding of what they must do to comply with the law. The Bill codifies the key duties imposed on officers to provide clearer guidance to societies. The duties are modelled on directors’ duties in the Companies Act 1993 and include the duty to act in good faith and in the best interests of the society, to exercise powers for a proper purpose, and to comply with the requirements of the Act (if implemented). Officers should be aware of their duties as there is potential for officers to be personally liable for any loss or damage suffered by the society where they breach a duty.

A key change from the existing 1908 Incorporated Societies Act is the introduction of rules and procedure relating to conflicts of interest. The Bill sets out circumstances when an officer may have a conflict, borrowing terminology from the Companies Act 1993 by referring to when an officer is “interested” in a matter. If an officer or someone close to them may obtain a financial benefit from the matter in question, they must disclose their interest to the committee and abstain from voting or taking part in any decision of the committee related to the matter. The committee is also required to keep an interests’ register where all disclosed conflicts are to be recorded. The fallout from failing to disclose a conflict can be significant as the committee is required to notify all members of the society of the officer’s failure to disclose the conflict, or where a conflicted officer has voted on an interested matter. More significantly, a failure to disclose also opens the door for any decision made in relation to the matter to be challenged by judicial review. Officers should be aware of their responsibilities to the society and any other requirements under the Bill as the consequences of non-compliance could be severe.

One change that will require immediate action by many societies once the legislation is passed is the requirement for societies to have a constitution which meets the new standards imposed by the legislation. The constitution must contain certain provisions including a procedure for resolving disputes between members, and between members and the society more broadly. The procedure must be consistent with the rules of natural justice and provide for investigating and dealing with complaints and grievances. All societies should proactively take steps to review their current rules and adopt a compliant constitution once the final Bill becomes law.

Under the 1908 Incorporated Societies Act, upon the dissolution of a society members are entitled to divide the society’s surplus assets in whatever manner their rules provide. This could include to the members themselves. In contrast, the Bill now requires any surplus assets to be disposed of to not-for-profit entities. The Society should specify in the Constitution the entity or entities nominated to receive assets and the manner of distribution.  In 2012, the Otago Bowling Club hit the headlines after $350,000 from the sale of the club’s Dunedin premises was not given to community interests (as provided for in the club’s rules), but rather distributed to individual members of the club. It took three years to retrieve some of the $350,000 and in the process, two former members of the club were declared bankrupt after failing to return monies. This highlights the importance of officers being aware of their duties to the society, the society’s constitution, and the provisions of the Bill when enacted to ensure good governance of the society.

Clubs and Societies which are incorporated under the 1908 Act should take the time to review the Bill to ensure they understand how it will affect their organisation.  They may wish to have their say and write a submission on the Bill. What we do know is that the current outdated legislation will be updated which will affect societies and officers alike, and societies need to be prepared.

Sally Peart, Partner