The Incorporated Societies Act 2022 (2022 Act) passed into law earlier last year and makes significant changes to how incorporated societies operate in New Zealand.
We take a look at what those responsible for an incorporated society need to be aware of and the changes that will need to be made to a society’s governing documents.
When do the changes take effect?
The 2022 Act will not immediately apply to existing societies. Instead, existing incorporated societies will have from October 2023 to April 2026 to re-register with the Companies Office (which is the government entity responsible for the administration of incorporated societies). Until an existing society is re-registered the Incorporated Societies Act 1908 (1908 Act) will continue to apply to the society. If a society has not re-registered by the end of the transition period, then it will no longer legally exist.
What are the key changes?
The key changes to be aware of:
Under the 1908 Act, an incorporated society needed a set of “rules” – the 2022 Act provides a slight change in terminology so that a society requires a “constitution” (similar to what a company needs). At a basic level, the constitution must set out:
• the society’s name and purpose;
• the process for becoming and ceasing to be a member;
• the process for amending the constitution;
• the process for creating a governing committee;
• the officer’s key duties;
• the process for how the society’s finances and contractual arrangements are managed;
• a formalised dispute resolution process; and
• a process for what happens when the society is wound-up.
The 1908 Act specified that 15 members were needed on incorporation to form a society. The 2022 Act reduces this requirement to 10 members, but provides that this minimum number should be sustained over the life of the society (not just on incorporation). It is important that societies have clear processes for recording who is a member (with evidence of consent) to ensure that it complies with this continuous requirement.
Under the 2022 Act, an incorporated society needs a formal governing body – a committee. The committee will need at least three members and must be made up of a majority of the members of the society (or representatives of a body corporate that is a member of the society).
Under the 2022 Act, an “officer” includes any member of the governing committee or other senior individuals (like the treasurer or secretary). The requirements to qualify as an “officer” include:
• being 16 years old or older;
• not being an undischarged bankrupt;
• not being disqualified from being a director of a company; and
• not being convicted of an offence involving dishonesty in the last seven years.
Similar to the duties of directors of companies, officers also have defined duties. These include acting in good faith and in the best interests of the society, and not acting for an improper purpose. These duties existed under case law relating to the 1908 Act, but are codified under the 2022 Act. The 2022 Act provides that an officer remains liable for up to 6 years after leaving office for a breach of a duty committed when they were an officer.
Financial Reporting Standards
There are new reporting standards for “small” and “larger” societies. A “small” society is defined as one having operating payments less than $50,000 and current assets less than $50,000 in each of the previous two financial years. A small society must meet the minimum standards set out in the 2022 Act or adopt a standard that a “larger” society uses. “Larger” societies must use the External Reporting Board standards when preparing statements – there are four tiers that may apply depending on a society’s total operating payments.
In a departure from the 1908 Act, the 2022 Act specifies that a society’s constitution must specify the procedures for resolving internal disputes. The 2022 Act does include a template dispute resolution procedure, but a society can specify any process as long as it follows the “rules of natural justice”.
If an incorporated society is wound up, the constitution must specify one or more not-for-profit organisations that will receive any remaining surplus assets. The surplus assets cannot be distributed to the society’s members or otherwise used to benefit the society’s members.
The 2022 Act includes a number of new criminal offences relating to dishonest and fraudulent offences. The offences are:
• knowingly making false or misleading statements in relation to a society;
• fraudulently using or destroying society property;
• falsifying the society’s register, records or documents;
• operating fraudulently or dishonestly incurring debt;
• improperly using “incorporated” (or its Te Reo equivalent, “manatōpu”); and
• breaching a banning order (e.g. someone who is banned by the court from being an officer of a society).
Each of the offences attract a range of penalties, including fines not exceeding $200,000 or five years in prison.
What are the next steps?
While the end of the transition period to re-register is some time away, it is important for those responsible for running an incorporated society to understand where their society may fall short of the requirements of the new regime. Once these issues are identified, the society’s governing committee will need to work with its membership to understand how the majority of the membership want to address these gaps. With this work completed, the society can look to prepare a constitution to be voted on by the membership and then filed with the Companies Office.
If you have any questions about the 2022 Act or need assistance in preparing a new constitution, then please contact us.