Incorporated Societies Act replaced after more than a century

The Incorporated Societies Act 2022 (Act) was passed into law on 5 April 2022 and will come fully into force in October 2023, replacing the Incorporated Societies Act 1908 (1908 Act). It will draw together the most useful elements of the 1908 Act, make explicit the legal principles which were previously found only in case law, and fill any gaps where the legal requirements have been unclear.
 
If you are involved in the management or administration of an existing incorporated society, or intend to register a new society in the coming months, now is the time to familiarise yourself with the new regime and prepare for compliance.

When will the new rules apply?

Any new society that registers for incorporation in New Zealand after 5 October 2023 will be subject to the requirements of the new Act. Societies that are already incorporated will remain subject to the existing requirements (ie those of the 1908 Act) until they re-register, which they are required to do at some point between 5 October 2023 and 5 April 2026. The lengthy window for re-registration is intended to ensure existing societies can trigger the application of the new rules at a time that works best for them. If an existing society is not re-registered by the April 2026 deadline, it will cease to exist.

Key changes for incorporated societies

The new regime has been designed with three key factors in mind:¹

• societies are organisations run by their own members;

• societies should not distribute profits or financial benefits directly to members; and

• societies are private bodies that should be self-governing and largely free from state interference.

The Act is accordingly intended to provide sufficient detail to enable members to confidently take many of the basic steps in the incorporation and administration of a society, without needing to engage external advisors.
 
With that in mind, some of the key changes are:

Minimum number of members

Under the new Act, a society must have at least 10 members in order to be eligible to incorporate.² This is a reduction from the previous requirement for at least 15 members, and is intended to provide greater flexibility for smaller societies.

The new Act also specifies that people can only become members of a society with their consent.³ While this was always the law, it has now been made explicit.

Governance

A society will now be required to have a committee, comprised of at least three "officers", who will be responsible for managing, directing, or supervising the society's operations and affairs.⁴

To be eligible for appointment to the committee, a number of basic requirements must be met, including being a natural person (ie, an individual) over the age of 16, not being an undischarged bankrupt, not being disqualified from being an officer under the Charities Act, and not having been convicted of various specified offences or subject to banning orders.⁵

Officers' duties

The new Act specifies six duties that will apply to the officers of every society. For the purposes of these duties, "officers" includes the individuals who sit on the society's committee, along with any person occupying a position "that allows the person to exercise significant influence over the management or administration of the society", including a treasurer or chief executive.⁶

The duties have been modelled on those that apply to directors under the Companies Act 1993. They include:

• the duty to act in good faith and in the best interests of the society,⁷

• the duty to exercise powers for a proper purpose,⁸

• the duty to comply with the Act and the society's constitution,⁹

• the duty to use reasonable care and diligence when exercising powers or performing duties as an officer,¹⁰

• duties relating to activities that create a substantial risk of serious loss to creditors,¹¹ and

• the duty not to agree to the society incurring an obligation without believing on reasonable grounds that the society will be able to perform that obligation.¹²

Importantly, none of these duties are new; each has been incorporated into the law applicable to societies via case law for many years. The explicit incorporation into the new Act is intended to make them clearer to officers, however, as is the Act's unequivocal confirmation that the duties are owed to the society itself, not to its members.¹³

Conflicts of interest

While the 1908 Act did not include any framework for managing conflicts of interest, the new Act contains a number of relevant provisions, including specifying when an officer will have a conflict of interest,¹⁴ what the officer should do if interested in a matter,¹⁵ the consequences of having such an interest¹⁶ and of failing to disclose it.¹⁷

These additions are intended to bring the Act into line with the requirements of the Companies Act and with comparable legislation relating to not-for-profit organisations in other jurisdictions. However, while an officer with a financial interest in a matter being considered by the society is required to disclose that interest and is not able to vote on any decision on the matter, they are permitted to take part in discussions relating to the matter and be present at the time of the committee's decision (unless the committee decides otherwise), and their presence may still be counted for the purpose of determining whether there is a quorum at any relevant meeting.¹⁸ These latter entitlements are intended to reflect the fact that, given the small size of many societies, it may not always be practical for a conflicted person to be removed from the process entirely.

Financial reporting

Societies will be required to prepare annual financial statements and to provide them to the Registrar of Incorporated Societies for registration within six months after the balance date of the society.¹⁹ While the 1908 Act also required delivery of an annual financial statement to the Registrar, the standard to which those statements are to be prepared, and their minimum requirements, are now specified in greater detail.²⁰

Societies, other than charitable entities, must also ensure that an annual return is given to the Registrar for registration.²¹

Constitution

Under the 1908 Act, societies were required to have "rules" which included certain minimum requirements.²² In effect, those rules amounted to a society's constitution, though that term was not used. Under the new Act, every society must have a constitution, which must include a far more extensive list of items.²³

New information that must be stated include the composition, roles, functions, powers and procedures of the society's committee; arrangements for keeping the society's register of members up to date; details regarding the arrangements and requirements for general meetings; and procedures for resolving disputes (as below).

Dispute resolution

Constitutions must also set out the dispute resolution procedures that a society will follow, including an explanation of how a complaint can be made.

Members of societies have always been entitled to bring disputes to court, either on the basis of alleged breach of contract, or via an application for judicial review. A key purpose of the new requirement to include dispute resolution procedures in every constitution is to give societies and their members a clear and efficient pathway to resolving disputes, which does not necessarily require resorting to the courts. This should increase the likelihood of disputes being resolved before they escalate, and help societies ensure that the procedures they use for the management of disputes are legally sound (ie, comply with the rules of natural justice).²⁴ While societies are able to tailor their own processes (provided certain minimum standards are met), Schedule 2 of the new Act sets out optional dispute resolution procedures which a society may choose to adopt.²⁵

Enforcement

The new Act specifies various pathways for enforcement, depending on which requirement is alleged to have been breached, and who intends to pursue the claim. This includes:

• A number of civil orders which may be sought from the court by the society or one of its members or officers, a former member of the society, or (where an application is in the public interest) the Registrar.²⁶

• A number of criminal sanctions which may be imposed, including in relation to the making of false statements;²⁷ fraudulent use or destruction of property;²⁸ falsification or destruction of certain registers, records or documents;²⁹ operating fraudulently or dishonestly incurring debt;³⁰ improper use of the terms "Incorporated", "Inc", or "Manatōpū" (the te reo equivalent of "incorporated");³¹ and acting in contravention of certain banning orders.³² The penalty for conviction of one of these offences ranges from a fine of up to $10,000 or imprisonment for a term of up to one year (or both); to a fine of up to $200,000 or imprisonment for five years (or both).

• A number of more minor offences, which have been categorised as infringements. This includes the failure to call an annual general meeting, and failure to maintain a register of members.³³ The penalty for such infringements is a fine of up to $3,000, or payment of a fee to be prescribed by the regulations.

Regulations

Even with all the detail set out above, there remain some final specifics to be grappled with, which will be set out in new Regulations. These will supplement the Act and provide further detail on its operation (likely including, for example, further specifics on the information to be provided in an application for incorporation, and prescribing the types of changes in officer information that must be notified to the Registrar). Finalised Regulations are expected to be published in September.
 
Please get in touch with one of our experts if you would like to discuss what these changes mean for your organisation.

This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.