What is Conflict of Interest and how must an Incorporated Society manage it?
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.
See our article on the big changes here.
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.
This article will discuss what changes and requirements there are for registering conflict of interest in your Incorporated Society and what that means for your Incorprorated Society in general.
What are the immediate issues our Incorporated Society needs to attend to with regard to conflict of interest within my Incorporated Society?
Approach to new regulations require dilligence and planning. One such component if the requirements pursuant to conflict or interest and the registration of conflict of interest Under the 2022 Act,
Incorporated Societies are required to consider a number of areas when registering conflicts of interest under the new 2022 Act, this article will address six (6) of them:
When an Officer has Interest in a Matter.
Duty to Disclose.
The Interests Register.
Consequences of an Officer’s Interest.
Notice to Members in Certain Circumstances.
Permissible Amendments to the Conflict of Interest Disclosure Procedure.
What Cannot be Changed.
In this article we will do a deep dive into one of the many changes in the new 2022 Act, namely the conflict of interest disclosure procedure. This will be important for Incorporated Societies to get right to ensure those involved are not conflicted, or if they are that the conflicts are disclosed.
When an Officer has Interest in a Matter.
The new 2022 Act requires an officer to disclose when they are interested in “a matter”. A matter is defined in section 62(4) of the new Act as meaning an Incorporated Society’s performance of its activities or exercise of its powers, or a transaction made or entered into, or proposed to be entered into, by the Incorporated Society.
Under section 62 of the new 2022 Act, an officer is interested in a matter if they or one of their relatives may obtain financial benefit from the matter, or they or one of their relatives may have a financial interest in a person to whom the matter relates, or they are interested in the matter because the society’s constitution says so. However, an officer is not interested in a matter:
simply because they receive indemnity, insurance cover, remuneration, or other benefits authorised under the new Act; or
if the officer’s interest is the same or substantially the same as the benefit or interest of all or most other members of the society due to their membership; or
if the officer’s interest is so remote or insignificant that it cannot reasonably be regarded as likely to influence the officer in carrying out their responsibilities under the Act or the society’s constitution; or
the officer’s interest is of a kind that is specified in the society’s constitution for the purposes of section 62(2)(d).
The starting point then is to work out if there is a conflict using those criteria. Not everything is a conflict.
Duty of Disclosure
If an officer is interested in a matter relating to the society, under section 63 of the new Act they must disclose the details of the nature and extent of the interest (where possible including monetary value of the interest) to the committee and record it on the interests register (discussed below). This disclosure must be made as soon as practicable after the officer becomes aware of their interest in the matter.
The Interests Register
The interests register is a register of all of the disclosures made by officers under section 63. It is kept and maintained by the committee, and may be inspected by an officer at any reasonable time as set out in section 73 of the new 2022 Act.
Consequences of an Officer’s Interest
As a result of their interest in the matter, the officer cannot vote or take part in a decision of the committee relating to the matter or sign any document relating to the entry into a transaction or the initiation of the matter, as set out in section 64(1)(a)-(b) of the new Act. However, the officer can take part in discussion relating to the matter and be present when the committee are making a decision (unless the committee decides otherwise). All of the officers who are not interested in the matter can consent to the interested officer doing the acts set out in section 64(1)(a)-(b), thereby allowing the interested officer to do any of these acts. Despite this, if half or more of the officers are interested in the matter and therefore cannot vote, the committee must call a special general meeting to determine the matter under section 64(3).
Notice to Members in Certain Circumstances
If an officer does not disclose their interest in a matter under section 63 or is interested in a matter but still takes part in a vote, decision making or signing of documents in relation to the matter in contravention of section 64, then the committee must notify the members of the society in accordance with section 65(1) of the new Act. This notice would be of the failure to comply with section 63 or 64 and should list any transactions affected, and be sent out as soon as practicable after the committee becomes aware of the failure.
Where an officer is interested in a transaction, section 68(1) of the new 2022 Act allows a society to avoid the transaction up to three months after the society has notified its members under section 65(1). It’s not as easy as that, though – there are further limitations set out below.
Permissible Amendments to the Conflict of Interest Disclosure Procedure
There is some flexibility here. The new 2022 Act gives a society the ability to negate, limit or modify the above (except for section 62, which explains when an officer has an interest in a matter). Under section 67 of the new 2022 Act, an Incorporated Society’s constitution may negate, limit or modify any provisions of sections 63, 64, 65(1) and 73 as long as the changes still satisfy the conditions prescribed by the regulations (if any).
The Incorporated Society’s constitution may also negate or limit the Incorporated Society’s ability to avoid a transaction under section 68(1) as long as the changes still satisfy the conditions prescribed by the regulations (if any). This means, for example, an Incorporated Society could require two thirds (2/3) of officers to be interested in the matter before a special general meeting is called to determine the matter rather than half (1/2).
What Cannot be Changed
There are some parts of the new Act that cannot be altered by the Incorporated Society’s constitution:
Section 65(2)-(3), which explains that any failure to comply with section 63 or 64 does not affect the validity of the new act, but this does not limit a person’s right to apply for judicial review.
Section 66, which says that regulations may require every member of the society to be notified or for notification to be made to the members as a group.
Section 68(2)-(4), which says that a transaction cannot be avoided under section 68(1) (discussed earlier) where the society received fair value under it. Fair value is defined in section 69 and the onus of proving fair value is set out in section 70. Additionally, a transaction can only be avoided on the ground of the officer’s interest, and a constitution cannot allow a transaction to be avoided in any circumstances other than those set out in the new 2022 Act.
Section 71, which explains that if a third party has acquired property from a person other than the society for valuable consideration and without knowledge of the circumstances of the transaction under which the other person initially acquired the property from the society, the avoidance of a transaction will not affect the third party’s title or interest to or in the property.
Section 72, which reiterates that the conflict of interest procedure does not apply in relation to salary, wages or other payments paid to officers in accordance with section 24(1)(h), or an indemnity given or insurance provided in accordance with subpart 6.
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 in relation to the their conflict of interest?
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 with regard to the conflict of interest?
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.
Working For Workers can set up your Incorporated Society to ensure that you can achieve a successful decleration of conflicts of interest through complying with the regulations for your Incorporated Society.
It can feel daunting and challenging to comply with the new act, 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.