Beware the changes to the Incorporated Societies Act

The Incorporated Societies Bill had its third reading in Parliament on 31 March and received royal assent on 5 April, thus passing into law. The new act replaces the old law which has stood since 1908, and sets out a new modern framework for incorporated societies and those who run them. However, some of the new changes could have very negative effects.

There are around 24,000 incorporated societies in New Zealand, covering an enormous swathe of public groups, associations and federations. They vary in size from the New Zealand Rugby Union, which has more than $100 million worth of revenue, to your local gardening club, which may manage funds of less than a thousand dollars. If you belong to a club, it’s likely that it will have been established as an incorporated society to look after the general interests of the club’s members, with a set of rules (called the constitution) that governs how the club is run, by whom (the club’s officers, executives and committee) and how finances, assets and property are managed. Many of our sport and recreation clubs, kindergartens, performing arts, and leisure groups are incorporated societies, as are some marae, animal welfare groups, trade unions and industry associations. A register of incorporated societies is maintained by the NZ Companies office and is publicly available online.

There is no doubt the old act required an overhaul. One of the new improvements is that it requires a society to have an internal dispute resolution process written into its constitution. This is an issue as an electorate MP where I have often been asked for guidance – where club members have disagreed on a certain aspect of how the club is run. It could be spending on new property, disposing of assets, appointing new officers, or even whether the club should be wound up or not. Often these disputes have had to head to the courts to be decided – a lengthy and costly process which can sour relationships between club members. Another improvement is that the act beefs up the requirements of large societies (those with $60 million in assets or $30 million in annual revenue) to prepare their financial statements in accordance with nationally recognised accounting standards (those of the External Reporting Board, or XRB). This is so that society members can more easily understand the society’s financial position and performance, and will also assist potential donors to more easily compare the society with others when considering providing funds. Smaller societies will still only have to prepare financial statements according to generally accepted accounting practices, and there is no requirement for them to be audited.

However, one of the new changes could have serious implications. The new act includes a set of duties for society officers which are similar to company directors’ duties. Clauses 53 and 54 of the Incorporated Societies Act are modelled on sections 135 and 136 of the Companies Act, which require directors not to trade in a manner likely to create a substantial risk of serious loss to creditors, and not to agree to incur obligations if they do not have reasonable grounds to believe that the company will be able to honour them – known as reckless trading. Giving incorporated society officers duties that are akin to company directors is fraught with issues. Firstly, the people who often take up the roles of chairperson, secretary or treasurer in an incorporated society are typically well-meaning volunteers who, while they might have lots of goodwill and the time to devote to running a club and want to contribute to its success, might not necessarily have the legal knowledge to understand the ramifications should the society run into financial strife.

Clauses 53 and 54 of the act are designed for corporate structures, where there is a limited liability status for directors. Incorporated societies, on the other hand, are unlimited structures, which raises the issue of unlimited personal liability of officers.

The duties under sections 135 and 136 of the Companies Act place a substantial burden on directors, with serious, and sometimes ruinous, consequences for breach. We have seen this in recent decisions by the courts, which have highlighted the reality of directors being liable for all debts incurred by the company in trading after a specific point. The Supreme Court is currently reviewing directors’ liability law, with the Mainzeal case being considered. The construction company collapsed in 2013 and its directors are appealing the decision that they have been ruled personally liable for $36 million after they allowed Mainzeal to continue trading while technically insolvent. If the Supreme Court decides the directors are personally liable, this could have a serious effect on our clubs and other groups, causing people to reconsider taking on the duties of an officer of an incorporated society. During the public submission stage of the bill, the Queenstown Tennis Club wrote: “The proposal that officers of an incorporated society assume greater responsibilities and obligations akin to those of company directors is likely to have an adverse effect on such small incorporated societies, as many such officers will struggle to balance the requirements of full-time work, family and the increased pressure placed on them by the bill … The danger is that they will decline to serve as officers, and with no willing replacements, the clubs may wither and die, to the obvious detriment of their communities.”

The bill already provided adequate protection in clause 49, requiring society officers to act in good faith and in the best interests of an incorporated society when exercising powers or performing duties as an officer. The addition of clauses 53 and 54 has added some worrisome fishhooks which could have chilling effects.

I took up this issue with Commerce Minister David Clark, pointing out the possible outcomes, but he has said that because the new duties for officers don’t come into force for some time, the Government has the opportunity to review the Supreme Court’s judgment in the Mainzeal case. Let’s hope this does not become yet another piece of legislation from the Minister that has unintended consequences.

In the meantime, all existing incorporated societies will have to re-register with the Registrar of Incorporated Societies, and review and update their constitution so that it complies with the requirements set out in the new act, especially the inclusion of procedures for resolving disputes. A copy of the updated constitution must be sent with the application for re-registration.

This in itself is a big undertaking for any incorporated society, large or small, and its officers. However, there is no immediate rush as there is a transition period of several years to allow societies to prepare. Information will be available soon on the Incorporated Societies Register website.

Authorised by Andrew Bayly, MP for Port Waikato, 7 Wesley Street, Pukekohe