Big Changes for Incorporated Societies.
The old and new legislation incorporated societies should already be making moves for.
In 2022, after extensive consultation, the government passed new legislation for incorporated societies. This act is called the Incorporated Societies Act 2022 (2022 Act).
What was the old legislation that incorporated societies were bound to for their constitution?
Prior to the new legislation, the Incorporated Societies Act 1908 (1908 Act), the relevent case law, common law, natural justice, and administative law were the way in which incorporated societies should have formed the basis of their constitutions.
What are the key changes under the new 2022 Act?
The new regime has been designed with three (3) key factors in mind:
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, if not but for the fundamental lawful obligations imposed on the organisation by law and regulation.
The 2022 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. However, beyond the basic steps, there is a steep incline in knowledge required to ensure that a incorporated society is compliant with all of the fundamental lawful obligations provided by the law.
It is incredibly dangerous for officers of an executive committee and members of an incorporated society to rely on the assumption that most officers of an incorporated society understand their fundamental lawful obligations without first establishing what these are and taking actions to comply with them.
Whilst people who are elected to an executive committee of and incorporated society are placed there at the will of the membership, that does not necessarily mean that those executive committee officers will have all of the knowledge, skills or training to undertake the vast array of decisions that enable the incorporated society to be compliant with those fundamental lawful obligations.
Put simply, it's not what you know, it's what you know for sure that just isn't so that leads to trouble every time.
Are there any other laws an incorporated society must to consider?
Yes - Incorporated Societies has fundamental lawful obligations that extends from all legislation, however, it is useful for members and the executive committee to consider the following pieces of legislation and legal principles in the first instance:
Beginning with:
What is an Incorporated Society?
An incorporated society is typically a membership-based non-profit organisation that is currently registered under the 1908 Act.
By registering under the 1908 Act, the society becomes an incorporated body with a legal identity of its own, separate from the identity of its members. This creates a legal person with no body to incarcerate and no soul to save (refer Baron Edward Thurlow)
An incorporated society continues to exist as a legal entity or legal personhood (sometimes refered to as “perpetual succession”) even though the membership may change.
What are some of the benefits of an Incorporated Society?
An incorporated society’s members are not personally responsible for debts and other obligations that the society takes on.
An incorporated society can use all of its funds for the purpose of the society. (The purpose is typically set out in the purpose section of the incorporated societies constitution). Unlike a company, it does not need to pursue a profit.
Incorporated societies are democratic in nature and members typically have a say on the things the society can and can't do. The exception to the aforementioned is that the incorporated society and its officers must perform their fundamental lawful obligations pursuant to law and regulations. Officer training is essential to navigate these matters properly. Working For Workers provides this.
An incorporated society’s management committee is in charge of the administration, management and control of the society. This is commonly refered to as an Executive Committee.
How does a group of people register as an Incorporated Society?
The Incorporated Societies Act 1908 (the “1908 Act”) previously set out the rules an incorporated society needed to follow, but under the new legislation introduced in 2022 (the “2022 Act”) all incorporated societies have to apply to re-register with the Registrar of Incorporated Societies (the Registrar) by April 2026 if they want to continue to exist.
If an existing society doesn’t apply to re-register by April 2026, that society will stop being an incorporated society (“cease to exist”).
Applications for re-registration opened in October of 2023.
Information about the application process are set out in the regulations.
The 2022 Act creates changes to the registration process, and creates different requirements for incorporated societies.
What are some of the requirements?
If a society is an existing incorporated society then until that society re-registers under the 2022 Act, the aforementioned society continues to operate under the old rules from the 1908 Act until it has re-registered.
If a group of people are an unincorporated group looking to be incorporated, that group will then have to re-register under the 2022 Act.
If you are a charitable trust already registered under the Charitable Trusts Act 1957, you have the option of:
re-registering under the 2022 Act; or
continue to operate under the Charitable Trusts Act 1957.
If it’s a new registration, you’ll have to apply under the rules of the 2022 Act. No new charitable trusts can register under the old legislation.
What!? There is a new Incorporated Societies Act and a new Regulation?
The Incorporated Societies Act 2022 (the “new Act”) recently received Royal Assent, resulting in significant changes for the twenty four thousand (24,000) Incorporated Societies in Aotearoa New Zealand.
The new Act replaces the Incorporated Societies Act 1908 (the “old Act”), which has been long overdue for an upgrade.
All incorporated societies will be required to reregister under the new Act, so it is a chance to revisit all aspects of these organisations. Section 26 of the new Act sets out what a society’s constitution must contain. This is important as the society’s constitution must comply with the new Act in order to reregister.
The key requirements for your society’s updated constitution are prescribed by section 26 of the new Act.
In addition, there is also a new Incorporated Societies Regulations 2023. This regulation is complementary to the new 2022 Act and provides how one registers or applies once they have completed the fundamental lawful obligations required to create a constitution.
What do I need to look out for when creating an incorporated society under the new Incorporated Societies Act 2022?
Working For Workers is engaged with many incorporated societies. It is our experience that many incorporated societies were already not compliant with a number of duties and fundamental lawful obligations prior to the change in legislation.
Executive committees are required to comply with all laws, rules, and regulations. However, executive committees, once elected, often likely do no have the training to identify, organise, and comply with their fundamental lawful obligations. This is where the consequences tend to kick in.
What are the consequences of not being a compliant Incorporated Society?
There are many:
Closure of the society by the government and the courts.
Fines, fees, and penalties for non-compliance or inconsistency with the law and/or regulations.
Civil challenges brought against the society for breaches of law, natural justice and administrative law.
Incidents and accidents leading to serious harm of workers, members, volunteers, and stakeholders.
No. or unlawful contracts, employment agreements, or volunteer agreements leading to fines, fees, and penalties by regulators and the courts.
Withdrawal of, or refund of, funding provided by bodies and donors.
Dysfunction in the society itself leading to decision paralysis or dysfunctional decision making that in-turn destroys confidence in the society or worse, leads to the societies forced closure.
How can I be sure that the incorporated society I am in is compliant with the relevant legislation and regulation?
This is quite simple:
Training officers of the Executive Committee and sub committees to understand their fundamental lawful obligations beginning with:
Evaluation of the existing institutional settings and membership demands.
Evaluation of existing compliance to legislation.
The promulgation of a revised and compliant constitution.
The establishment, and consultation with members on by-laws, rules, tikanga, policies, health and safety compliance, employment agreements, and volunteer agreements.
The establishment of interest registers, risk registers, and incident registers.
Installing required controls for protection of workers, volunteers, stakeholders, and members.
The creation of action items extending from the aforementioned and creation of working groups to get these items actioned.
The creation and maintenance of communication methods (including having a website to promulgate information and changes).
Having an audit of financial information and tracking all transactions and aged receivables and other transactions.
Identifying conflicts of interest and reporting these to the relevent register.
Ensuring robustness of disputes proceedures.
Transparency in reporting to members.
Working for Workers can provide assistance in getting your organisation with all of these and more.
Are there any legal cases that determine how the courts are likely to rule on specific matters that would create actions that a Incorporated Society would have to take?
At this time there are very few under the new Incorporated Societies Act 2022 or pursuant to the Incorporated Societies Regulations 2023 and it is more useful to consider the rules as laid out by the new 2022 act.
The Incorporated Societies Act 2022 (2022 Act) was passed into law on 5 April 2022 and came fully into force in October of 2023, replacing the Incorporated Societies Act 1908 (1908 Act).
In many ways the 2022 Act will brings together the most useful elements of the 1908 Act, and the subsequent judgements made during the time of the 1908 Act and make explicit the legal principles which were previously found only in case law, and fill any gaps where the legal requirements have been unclear or ill-defined.
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. The longer you leave this the more difficult it will become to achieve compliance.
What key changes do Incorporated Societies need to focus on in order to ensure they are beginning to comply in the event of being party to any case law at a later stage?
Minimum number of members
Under the new 2022 Act, a society must have at least ten (10) members in order to be eligible to incorporate. This is a reduction from the previous requirement for at least fifteen (15) members, and is intended to provide greater flexibility for smaller societies.
The new 2022 Act also specifies that people can only become members of a society with their consent. 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 (3) "officers", who will be responsible for managing, directing, or supervising the society's operations and affairs.
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 Charitable Trust Act 1957, and not having been convicted of various specified offences or subject to banning orders.
Officers' duties
The new 2022 Act specifies six (6) 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.
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,
the duty to exercise powers for a proper purpose,
the duty to comply with the Act and the society's constitution,
the duty to use reasonable care and diligence when exercising powers or performing duties as an officer,
duties relating to activities that create a substantial risk of serious loss to creditors, 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.
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.
Conflicts of interest
While the 1908 Act did not include any framework for managing conflicts of interest, the new 2022 Act contains a number of relevant provisions, including specifying when an officer will have a conflict of interest, what the officer should do if interested in a matter, the consequences of having such an interest, and of failing to disclose it.
These additions are intended to bring the 2022 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.
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.
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.
Societies, other than charitable entities, must also ensure that an annual return is given to the Registrar for registration.
Constitution
Under the 1908 Act, societies were required to have "rules" which included certain minimum requirements. 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.
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.
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).
While societies are able to tailor their own processes (provided certain minimum standards are met), Schedule 2 of the new 2022 Act sets out optional dispute resolution procedures which a society may choose to adopt.
Enforcement
The new 2022 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.
A number of criminal sanctions which may be imposed, including:
in relation to the making of false statements;
fraudulent use or destruction of property;
falsification or destruction of certain registers, records or documents;
operating fraudulently or dishonestly incurring debt;
improper use of the terms "Incorporated", "Inc", or "Manatōpū" (the te reo equivalent of "incorporated");
acting in contravention of certain banning orders.
The penalty for conviction of one of these offences ranges from a fine of up to ten thousand dollars ($10,000) or imprisonment for a term of up to one (1) year (or both); to a fine of up to two hundred thousand ($200,000) or imprisonment for five (5) 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
the failure to maintain a register of members.
The penalty for such infringements is a fine of up to three thousand dollars ($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 are set out in new regulations.
These new regulations will supplement the 2022 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).
Again, these regulations are provided in the Incorporated Societies Regulations 2023.
The Name
Similar to the old 1908 Act, the new 2022 Act requires the society’s constitution to include its name.
The new 2022 Act also explains the Registrar must refuse to incorporate a society under a particular name in the circumstances set out in section 11 of the new Act, such as:
The use of the name would contravene legislation;
the name is identical or almost identical to the name of another society, company or body corporate; or
where the name does not include the word “Incorporated”, “Inc”, or “Manatōpū” (or 2 or more of those words) as the last word or words of the name.
Considering Purposes
The new 2022 Act requires the Incorporated Society’s constitution to include its purposes, which is similar to the requirements of the old 1908 Act. Under section 12 of the new 2022 Act, the Registrar must refuse to incorporate a society if its purposes include an unlawful purpose or a purpose of carrying on the society for the financial gain of any of its members.
Control and Management of Finances
Similar to the old 1908 Act, the new 2022 Act requires the constitution to provide for how the society will control and manage its finances.
New legislative changes can be difficult to navigate.
Working For Workers is proficient and cost effective in assisting Incorporated Societies to manage the changes required under the new Incorporated Societies Act 2022 and the Incorporated Societies Regulations 2023.
Working For Workers has the scale and expertise to ensure that your organisation will navigate their fundamental lawful obligations successfully and with confidence.
It can feel daunting and challenging to comply with navigation, often leaving you feeling alone without the ability to confidently take the next step.
You are not alone.
Working For Workers advocates, representatives, and evaluators have the skills and expertise to help you out.
Please contact us today to discuss the matters and start turning things around for you and your organisation.