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Fundamental changes to the Incorporated Societies Regime - it's time to review your constitution

Fundamental changes to the Incorporated Societies Regime - it's time to review your constitution

Written by:
Linda Packer

The new Incorporated Societies Act 2022 ("Act") received Royal Assent on 5 April 2022, in replacement of the Incorporated Societies Act 1908 ("old Act") and is coming into force in stages. The Act significantly changes governance and accountability obligations for incorporated societies. Re-registration under the new Act is required for all existing incorporated societies to continue to exist.

The lead in time for existing incorporated societies to re-register is between October 2023 and the transition date (which is the latter of 1 December 2025, or two and a half years after Clause 4 of Schedule 1 of the Act comes into force). The New Zealand Companies Office suggests that the transition date will be in April 2026.

Until an existing incorporated society re-registers, it continues to operate under the old Act. However, if an incorporated society fails to re-register within the time frame in the Act, it will cease to exist.

To re-register involves compliance with the requirements of the Act, which significantly differ from the old Act. Some of the critical changes in the new Act are:

Constitution  

There are specific matters that must be included in the incorporated society's Constitution. Existing Constitutions should be reviewed and (if required) amended, to ensure they comply with the new Act requirements, prior to applying for re-registration.

Internal Disputes

An incorporated society must now adequately determine its own dispute resolution procedures and include them in its Constitution. The Act prescribes what must be covered and the procedures must be consistent with the rules of natural justice. The Act provides safe harbour provisions for inclusion into a Constitution (refer Schedule 2 of the Act) to ensure the society's Constitution will comply with the rules of natural justice.  

Officers' Duties

The Act specifically sets out six duties of the society's officers (refer Sections 54-59 of the Act) (similar to directors duties in the Companies Act 1993).

These duties include:

• To act in good faith and the best interests of society;

• To exercise their powers for a proper purpose;

• Not to act or agree to the society acting in contravention of the Act or the society's Constitution;

• To exercise reasonable care and diligence;

• Not to allow society's activities to be carried out in a way likely to create a substantial risk of serious loss to the society's creditors;

• Not to agree to a society incurring an obligation without reasonably believing that society can perform it when required.

Officers of the incorporated society can be held personally liable for breaches of these duties. If the society wishes to indemnify or insure its officers for breach of officers' duties, its Constitution must expressly authorise this (refer Section 98 of the Act). The wording of these duties is very similar to the director duties under the Companies Act 1993 and existing cases under the Companies Act 1993 will provide a lot of guidance to interpreting these duties in an incorporated society context.

Financial Reporting

An incorporated society must keep formal accounting records, file annual financial statements and file annual returns.

The type of financial statements to be filed for the particular type of incorporated society (a specified not-for-profit, small or other) are now specified in the Act (refer Section 102 of the Act).

Committee Requirement

An incorporated society must have a Committee of at least three members, who are qualified to be elected or appointed. The Committee members must also consent in writing to be an officer and certify that they are not disqualified from being elected or appointed, or otherwise holding office as an officer of the incorporated society.

Conflicts of Interest

An officer's details of any conflict of interest must be disclosed to the Committee and appropriately managed and kept in an interests register (unless the Constitution provides otherwise (refer Section 67 of the Act)) and there are consequences for being interested in a matter. An interested Committee member:

• must not vote or take part in a decision of the committee relating to the matter;

• must not sign any document concerning the conflict;

• may participate in the discussion of the matter by the Committee and be present at the time of the Committee's decision.

Again, this is similar to provisions in the Companies Act 1993 relating to "interested" directors.

Financial Gain of Members

An incorporated society must not be carried on for the financial gain of any of its members (refer Section 22 of the Act).

If an incorporated society fails to comply with Section 22 of the Act, its officers (on conviction) can each be liable for a fine of up to $50,000.00. Also, if the society carries on operations where a member receives financial gain contrary to the provisions of the Act, the High Court may put the society into liquidation (refer Section 210 of the Act).

Fines and Criminal Offences

Subpart 6 of the Act sets out some infringement offences for failing to comply with duties (for example, the duty to notify the Registrar of amendments to the Constitution). These minor offences expose the incorporated society to a fine not exceeding $3,000.00, or an infringement fee for breach, as prescribed by the regulations.

Subpart 6 of the Act also sets out offences of misconduct which could (on conviction) result in fines of up to $200,000.00 and/or terms of imprisonment of up to five years. Offences include:

• False statements;

• Fraudulent use or destruction of property;

• Falsification of register, records, or documents;

• Operating fraudulently or dishonestly incurring debt;

• Improper use of "Incorporated", "Inc", or "Manatōpu";

• Banning order contravention.

What's the Next Step?

The Act has introduced a significant number of changes from the previous legislation, only some of which are mentioned in this article.

Existing incorporated societies should be proactive in planning in advance and reviewing their Constitutions to ensure compliance with the new Act before the transition date and applying for re-registration.

If you have any enquiries relating to this topic or article, or require assistance with amending your Incorporated Society Constitution please contact:

Andrew Knight on (09) 306 6730 (aknight@mcveaghfleming.co.nz)

Linda Packer on (09) 905 2575 (lpacker@mcveaghfleming.co.nz)

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Company & Corporate Structuring

Written by: Linda Packer

© McVeagh Fleming 2022

This article is published for general information purposes only.  Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice.  If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.

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