The Incorporated Societies Act 1908 (the Act) is over 100 years old; it still sets fines of 1 shilling per day. The long-awaited Incorporated Societies Bill (the Bill) was introduced to the House on 17 March 2021 and is making its way through Parliament.
Franks Ogilvie represents a number of clients who are incorporated societies, and this Bill could have a significant impact on how they operated.
The Act needed reform but Franks Ogilvie considered the Bill missed the mark in many respects and risked turning people away from volunteer involvement in not-for-profit societies. Many of the Bill’s provisions would bring requirements of incorporated societies in line with those of companies, which are driven by profit rather than altruistic motives.
Franks Ogilvie made a submission to the Select Committee about key issues with the Bill. Some of these are reflected in the Committee’s report which unanimously recommended the Bill be passed with a series of changes. The Bill passed its second reading on17 November 2021.
The Franks Ogilvie’s submission encouraged the Economic Development, Science and Innovation Committee to preserve the distinctions between companies and societies that promote community cooperation.
The Bill imposed duties on officers of societies that were similar to directors’ duties under the Companies Act 1993. Company directors are typically paid for their services; officers of incorporated societies are not. In broad terms, a company director’s job is to run the company well so that it makes money for the shareholders. Their duties reflect this context. Officers of incorporated societies on the other hand are typically volunteers. Their job is to run the society to the best of their ability to make sure it performs its objectives, like running a club so members can play sport.
The added complexity and scope of company director-like duties will make it much harder to convince people to take up leadership roles in community organisations particularly when the Bill’s offence provisions imposed hefty fines for non-compliance. The term ‘officer’ in the Bill is also vaguely defined, so people could be caught unawares if they provided advice in an official capacity. Franks Ogilvie recommended tightening the definition of officers and limiting their duties to acting honestly, in good faith and in what they believe to be the best interests of the society.
The Act does not include any rules or guidance for dealing with conflicts of interest. Societies typically manage this themselves through their rules. However, the Bill introduced a complicated new set of rules for determining when an officer has or doesn’t have a conflict of interest and what happens if they do. This reads like drafters looking for a problem, rather than the other way around. Instead, the Bill should have included clear practical rules for managing interests, including confirmation that those with conflicts still get to participate in discussions, if not the final vote.
The Bill requires all incorporated societies to have a disputes resolution regime that complies with the rules of natural justice. This is a goldmine for lawyers but not very practical for volunteers dealing with people who have elected to be members of a society and are free to leave at any time. The court will also have jurisdiction over disputes, which could make dispute resolution more expensive and time consuming that it needs to be.
A society’s reputation depends on efficient and final resolution of disputes. Introducing legal concepts like natural justice creates uncertainty and gets in the way of swift full and final outcomes. Franks Ogilvie recommended references to natural justice be removed.
Officers of incorporated societies generally don’t have accounting qualifications. Under the Act, a society must file annual financial statements setting out the society’s income and expenditure, assets and liabilities and all mortgages, charges and securities over its property in the last financial year. This can be done on a relatively simple spreadsheet. But the Bill would make this process much more complicated, particularly for large societies (i.e. those with operating payments over $10,000 and assets over $30,000). Most societies would have to use generally accepted accounting practices (which are difficult for non-accountants to define and understand) and large ones would need to have their statements audited. The definition of large societies would capture many sports clubs that own their own clubrooms or playing fields and would be yet another barrier to volunteer involvement. Franks Ogilvie recommended amending the Bill to raise the threshold for small societies and loosen the reporting standards to something more workable.
Some of Franks Ogilvie’s suggestions have been reflected in the Committee’s changes. For example, societies can now negate, limit or modify the extensive conflict of interest resolution regime that we said would discourage leadership roles.
The threshold limit for small entities has also been increased to$50,000 total operating payments and $50,000 current assets (which don’t include fixed assets like land and buildings). This provides relief for sporting clubs that own fixed assets like clubrooms and playing fields. Now, they are likely to fall below the threshold.
Small entities below the threshold also won’t have to change the way they do their financial reports. The Committee specifically changed the reporting requirements for small societies to make sure they aligned with current practice under the Incorporated Societies Act 1908.
However, more entities may be caught by the auditing requirements than the Bill envisaged. Large societies were defined by reference to ‘large’ entities in the Financial Reporting Act 2013, which the Committee considered to be too large for incorporated societies. Instead, the Minister may make regulations specifying when entities must audit their financial statements.
Franks Ogilvie considers there are still fundamental flaws in the Bill. The Bill still requires societies to have a dispute resolution process that satisfies the rules of natural justice. We think this creates an unnecessary burden on voluntary organisations where unhappy members can simply leave the society.
Officers’ duties weren’t changed either. These could be problematic for volunteer members who aren’t familiar with the law and could deter people from accepting leadership positions.
The Bill will now be considered by the Committee of the Whole House. It’s unlikely that further substantive changes to the Bill will be made at this stage, given the Select Committee’s recommendations were unanimous and Labour’s majority in the House.
To understand more about incorporated societies or the Bill, or for help running your incorporated society, please contact Brigitte Morten.