In Advocacy: Submission on Incorporated Societies Bill

June 1, 2021

Franks Ogilvie have incorporated society clients across a range of industries. Our lawyers have set up and advised scores of societies, including on constitutional arrangements, disputes and compliance.

SUBMISSION

Introduction

The Incorporated Societies Act 1908 [“Act 1908”]would be better with some refinement. However, by aligning the law for incorporated societies with company law, the Incorporated Societies Bill 2021[“Bill”] may negate important choices between the models. Both offer standard form templates to facilitate cooperation and to empower collective endeavour.

Incorporated societies are generally chosen for voluntary (non-profit) organisation where pay or profit is not the uniting or principle purpose. Indeed they have rules forbidding private profit, so that the work in societies is largely altruistic. There may be personal interest and benefit, but the work is expressly for the collective and personal benefit incidental or commonly disproportionate to the investment of time and other resources by the organisation officers. Despite subscriptions, members are often ‘free-riders” on the efforts of the committee and the providers of association capital.

In companies predominantly the purposes or incentives are on the other side of the altruism/profit spectrum. Service as an officer or capital provider in a company may still involve significant collective benefit without full compensation for risk, but the default assumption is that company participants seek reward commensurate with their commitment and risks.

The Bill undermines or removes the key features reflecting that distinction. In our opinion the Bill should not proceed without change. It is too infused with conceptual contradictions and legal traps, it may destroy its main purpose – mobilising volunteers in a convenient and easy to understand legal structure to support non-profit cooperation and collective enterprise in New Zealand.

New Zealand’s culture has been strongly infused with volunteerism. The law has embodied the wisdom of ordinary people, that volunteer liability must respect the altruistic aspect of their service. In essence, most of us recognise that when relying on or dealing with volunteers we accept the risk of their honest mistakes, because otherwise why would they serve. The fair and appropriate default accountability standard is “all care –no liability”. Excluding dishonesty.

That is the proper balance point for incorporated associations. We believe the new law could see acceleration of a reported decline in voluntary service. People who take on or continue to serve as officers in the vast majority of our existing clubs and societies may already be exceptionally selfless. If they stay after this Bill proceeds, they genuinely will be mugs – necessary, commendable, but legally mugs.

This Bill will accelerate the loss of a unique feature of our society – the prevalence of clubs and associations providing services, skills and facilities that in many other western countries are available only to those who can afford commercial charges. It is normal for commercial providers to be the dominant providers of instruction in activities as various as swimming, tennis, golf and flying. In NZ much of that is more democratically available from your local club. We foresee this Bill as a nail in the coffin of many such clubs.

It is a fair question whether this Bill changes the current law dramatically. There are some grounds for argument that the existing exposures of committee members may be evolving toward company director-like duties on volunteers.  The scope of any protection for liability for society debts and the absence of protection for negligence is unclear. The Bill could usefully clarify the current law, and setup express protections.  Incorporated societies are not companies for very good reason. People who might be wary of involvement with a private company, or taking up a directorship may nevertheless be willing to take an active role in their local club for common or community benefit.  They will receive no financial reward for doing so (in fact that can be one of the attractions of volunteering). They should not be forced into the same compliance/liability assessments that company directors must regularly make.

The Bill’s elaboration of officer duties in company law terms will automatically lead courts to interpret them in line with company law precedent. We think that will substantially increase apprehension even if existing obligations on society officers are in some circumstances more onerous than for officers with the benefit of limited liability.  

Accordingly this submission urges that the Bill expressly show that the burdens for volunteering for an Incorporated Society will normally be significantly less than for a company.  The Government’s Wellbeing Framework states that social connectivity and identity are key drivers for improved mental and physical health, and are fundamental to overall community wellbeing. We think that the incorporated society should be a vehicle for sustaining much of that wellbeing.

Without community leaders, many volunteer organisations will cease to exist. This will be particularly felt in regional and rural areas where commercial enterprise for these services is unsustainable, and for low socio-economic groups for whom access to such services would be unattainable.

If this Bill were to pass in its current form, the long term principle winners could be lawyers.

This submission examines the parts of the Bill that will have the most significant effect on volunteer-led organisations and their ability to attract and maintain volunteers in leadership positions. We have not set out where we agree with parts of the Bill as the need to modernise these requirements is already well established.

 

Definition of Officer

The definition of ‘officer’ in Clause 5(1) of the Bill is central to many provisions, but it is open to interpretation.

It is not clear whether officers are limited to committee members or not. On one reading the definition could capture more than those who volunteer their time, and consent to be on a society’s committee. As a result, advisors and community leaders who become involved in an unofficial but substantial capacity could unknowingly be caught by provisions governing officers.  For example, lawyers who provide a pro bono service to an incorporated society are frequently treated as authorities on many matters. We think they could often fall within the definition.  

This interpretation would also make the consent requirement under Clause 42(1)(a) unworkable.

The expansive definition under subparagraph (ii)allows for de facto officers to be caught, much like persons “deemed to be” directors under the Companies Act section 126(1)(b) and (c) but goes even further. A society’s chief executive may be considered an officer. But their company counterparts are not automatically recognised as directors under company law.

The threshold for significant influence is also unclear. Many people have significant influence over a definable area, such as fundraising, with no influence over other parts. It may be drafters intended only those with titled positions (Chair, Secretary, Treasurer etc.) should be officers, with general committee members not applicable.  

We are aware of no good policy reason (or analysis) prompting this law change. It seems to have been largely a desire for “tidiness” vis à vis company law, and to support the new provisions for liability.

Recommendation

Officers should be only those who are formally members of the executive. If that is not done, clarify the relationship between subparagraphs (i) and (ii), removing or amending subparagraph (ii). Another amelioration could be to apply an extended definition only to large incorporated societies (clause 98).

If subparagraph (ii) is not removed, it should apply only to significant influence over the day-to-day management or administration of the society. Whatever is done should be part of changes so that those who do not consent to being officers under clause 42 are not unwittingly captured by an extended definition. Members of small societies should not have to worry that their voluntary help could impose duties and liabilities they never intended to assume.

 

Officers’ duties

The officers’ duties in clauses 49 to 56 are modeled on the list of director’s duties in sections 131 to 138B of the Companies Act1993. As stated above we think the liability position of officers of incorporated societies has been misunderstood and legally ambiguous for sometime. But the clarification should have been in the direction of comforting officers that absent dishonesty or bad faith or some egregious personal default, they would not be liable. Without distinguishing society officer status from company director status, the Bill negates a key inherent difference between a company and an incorporated society and ‘cures’ a problem by exacerbating it. Typical not-for-profit societies, run by unpaid or only nominally paid volunteers are recognised to be often problematic in credit terms. The members and people who deal with associations know that. They should be deemed to accept the risk that those whose volunteer efforts are accepted, may be deficient. They may often not be diligent. They may be poorly skilled and learning as they go. They may be distracted by internal politics.

The risks to third parties (and members in particular) are risks those third parties can take into account. The alternative, universal duties which deter people from agreeing to take on what appears to be a risky governance role, will likely impose costs (a decline in volunteerism and in the number of incorporated societies) that far exceed any social cost from the occasional loss to third parties from officer in competence or negligence.

At most a positive duty to act in good faith and in what the officer believes to be in the best interests of the society (clause49) would be sufficient without being unnecessarily burdensome or potentially acting as a deterrent to would-be volunteers. The Bill already contains a series of offences for dishonest or fraudulent conduct which would capture deliberate bad behaviour of officers.

Recommendation

Clause 49 remain. Clauses 50 to 55 be deleted. Provision be added positively affirming protection from liability.

 

Interests Register

The Act and Bill set out the fundamental principle that incorporated societies do not operate for the pecuniary benefit of its members.  However, the Bill goes further and sets out an extensive conflict of interest resolution regime in Clauses 57 – 67. This reads as if the drafters had a solution seeking a problem, rather than the other way around.

The problem of the definition of ‘officer’ as described in paragraphs 14 - 19 of this submission has an effect on these provisions. Additional confusion is also caused by clauses 57, 58 and 60 – 67 relating to officers, and clause 59 relating to any member of the committee. The overall effect of these provisions coupled with extensive penalties (discussed in paragraph 50 of this submission) will discourage people to take up leadership roles in societies.

Recommendation

The provisions are transformed so people have clear, practical rules to follow in managing interests.  The main principle should be that committee members, and members, get an opportunity to decide (separately from the person with a conflicting interest) whether the decision is in the interests of the association.  That rule could be that simple.  The law should not preclude the involvement of people with interests in discussion, debate or other aspects of decision-making. Often they are the people with the best knowledge and the greatest incentives to help the association. Usually members and the committee will be well aware of the interests. It is common for the person with such interests to be sought for a committee because of the interests.

 

Dispute Resolution Provisions

Clause 26 (1)(j) of the Bill will require societies to have an established dispute resolution procedure in their constitution to deal with disputes between members and between members and the society. This covers a lot of ground and would impose a significant burden on societies and make them open to vexatious and time consuming claims that divert resources away from the purpose of the society. In other words it will impose an elaborate formal process on situations where the best interests of the society and most of its members should prevail, even if they are wrong, with departure of the unhappy member.  

Officers of an incorporated society must act in the best interests of the society. This may require them, in practice sometimes, to follow dispute resolution procedures. But this should not be the default. Mandatory provisions will force many societies to waste unpredictable and therefore unbudgetable proportions of their resources, including the emotional energy of office holders, in seeking remedies for complaints that should often be dealt with by the unhappy individual leaving the voluntary organisation. Many disputes have no costless remedies. In our experience they are often the result of intractable personal conflict and ambitions. In practice all parties may be better served by speedy and appeal proof ‘no fault’ separation. Disaffected members should not be encouraged to think that legal remedies will overcome the fact that a majority of the association or the body concerned, no longer want to associate with them.

The reputation of a society and the trust of its members depends on its ability to enforce membership standards quickly, efficiently and finally. Unresolved complaints can destroy societies and can discourage volunteers because involvement in governance becomes too hard. Time spent worrying about whether the uncertain requirements of natural justice are met, or evaluating exactly who was at fault, can break apart a society, whereas swift and efficient complaint mechanisms can provide certainty and finality for all. In our experience that is often in the best interests of a complainant who will otherwise consume a much greater part of the lives in seeking validation.

A requirement for natural justice doesn't fit well for this reason. It is often lawyer conceit that it must be good. Fairness might be a desirable  consideration for effective leadership of a group. But natural justice is actually code for “second guessing of procedure by lawyers”. In our view speed and finality are often more appropriate than natural justice in most small group/community/organisations.  People should be encouraged to recognise that the interests of the group/community should generally prevail, when the individual has the alternative of withdrawing from the association, however hurtful or unfair that might seem.

Associations forced to live with unwanted members can simply evaporate around them, as the volunteers crucial to continuing existence melt away from expensive conflict.

The law should expressly recognise that ensuring remedies for unhappy individual can have a disproportionate collective cost. These provisions will put whole societies as risk. They will   burn off volunteers and donors who do not feel they are furthering the purpose of the society by being caught up in or funding relationship disputes. The provisions could benefit mainly lawyers and professional dispute resolution services

Recommendation

Remove these provisions from the Bill.

If these provisions are left in the Bill, associations should have the benefit of a range of standard form mechanisms to draw on.  They should include express power for associations to recover the costs of dispute resolution proceedings from persons who necessitate them.

 

Requests for Information

Clause 75 provides grounds for refusing to provide information to members. It sets out that one ground is prejudicing the commercial position of the society. This is out of step with most incorporated societies who do not have a commercial position.

Clause 122(2)(c) is also unclear. The ‘public policy of New Zealand’ is not a defined term and would be difficult for most volunteers to determine.

Recommendation

Grounds for refusal should include reference to the ability of the society to perform its objects and purposes. This better reflects the purpose of most incorporated societies.

The reference to public policy of New Zealand should be removed or clarified.

 

Small v Large Societies – Financial Reporting

Clauses 96 to 98 of the Bill set out the criteria between small and large societies for the purposes of financial reporting. The determination of an organization as either category triggers the substance of the reporting requirements. A distinction is needed but the current thresholds(operating payments under $10,000 and total assets under $30,000) are too low.

A local tennis or rugby club is likely have some capital assets such as a field or clubrooms that would push them above the asset threshold.  They are small operations but because of the assets they hold could be required to annually audit their accounts. Auditing usually costs in the realm of a few thousand dollars. It would require too many Bunnings sausage sizzles to pay for this.

Audit should for most associations something that occurs only in extraordinary circumstances – on suspicion. Existing anti-money laundering and fraud provisions protect against some mistreatment of assets i.e. officers selling the tennis courts for personal gain.  

There is an implicit ‘medium’ society provided in the Bill. The gap between the thresholds for a small and a large society is significant. But it is not explicitly set out what the requirements are for these medium societies. For an ordinary person, ‘generally accepted accounting practices’ does not provide sufficient information to understand their obligations. We think it opens up the risk that accountants, no doubt in good faith, will progressively crank up requirements. That version of ‘grade creep’ is frequently driven as a response to particular bad conduct cases, without taking account of the costs imposed on the vast majority of the innocent.

We therefore urge that Parliament prescribe for a standard at the level most members would normally ask for, in their own affairs. It is likely most societies fall within this category and explicit requirements would make the law more accessible.

We note this provision is likely modelled on similar provisions in the Charities Act. However, these provisions are for bodies where there is rarely any ‘beneficiary’ in a position to monitor the accounting. Charities rarely have an active membership involved in appointing trustees. They are typical ‘absentee owner’ entities, more vulnerable to fiduciary looting than most associations. Stronger rules counter the potential for fiduciary misappropriation.  They should not be the reference point for association accounting.

We find subpart 7 of Part 3 troubling. Many associations are successful for many years with amateur treasurers and limited use of professional accountants. Clauses 95 to 101 do not tell us which entities will need to engage professional accountants for practical compliance, and which must need not. Professional accounting advice will likely be needed to understand the effect of those provisions. We think the law should be clear enough for most committees to be able to know, for example, whether their subscription income is “operating payment” and what the thresholds mean to them.

The penalties for an organisation getting this wrong are significant. Societies who fail to provide the requisite financial statement may incur infringement fees prescribed by regulations or a court fine of up to $3,000.

Recommendation

Parliament should raise the threshold for small societies, set out explicit requirements for medium societies and amend the definition of large societies to recognise the non-profit nature of incorporated societies.

 

Offence Penalties

Clauses 146 to 160 establish an offence regime that impose significant penalties on officers and the society. Whether this make sense with large incorporated societies, the one-size-fits-all model is likely to have a chilling effect on volunteers in smaller, community minded societies. For example a fine of $200,000 could exceed the total of all subscriptions and fees paid to the society since incorporation.

Recommendation

The penalties prescribed in respect of these offences be reduced to a reasonable amount.

If you would like to understand more about this Bill and how it may affect your organisation, please contact Director Rob Ogilvie.

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