Key Changes to the Incorporated Societies Act

A New Act for Incorporated Societies

The new Incorporated Societies Act 2022, which received Royal Assent last month, is much more prescriptive than the 1908 Act it replaces.

This can be a good thing, as much of the legal duties of board or committee members was not in written legislation, but drawn by inference from the duties of company directors and scattered in the potential precedents of dozens of separate court decisions.

The old Act’s silence, gave organisations both greater flexibility, but also greater responsibility to know what they had to cover in their own constitution or policies. 

Comparisons between the 1908 Act and the 2022 Act

Topic 1908 Act 2022 Act
Minimum number of members 15 10
Internal Disputes No requirement to have internal dispute resolution procedures A society must have adequate dispute resolution procedures, and these must be specified in its constitution
Committee requirement Committee not required Must have a committee of at least 3 members
Independent members of committee N/A Unless regulations prescribe otherwise, majority of committee must be society members
Concept of an officer Not explicitly defined Includes all committee members, as well as others, for example, treasurer, CEO
Officers' duties Duties are not clearly articulated Six broadly expressed duties modelled on directors’ duties in the Companies Act 1993 to:
  1. Act in good faith and in the best interests of the society
  2. Exercise powers for proper purposes only
  3. Comply with the Act and the constitution
  4. Exercise reasonable care and diligence
  5. Not create a substantial risk of serious loss to creditors
  6. Not incur an obligation the officer doesn’t reasonably believe the society can perform
Annual General Meeting (AGM) No guidance Must be held within 6 months of the society’s financial year end
Financial statements filed with Register Must be filed annually Must be filed within 6 months of the society’s financial year end
Annual return No requirement to file an annual return Must be filed annually as outlined in section 109
Manner of preparing financial statements A society is not required to apply XRB accounting standards, unless it’s also a registered charity  Only a 'small society' not registered as a charity is exempt from using XRB accounting standards 
Distribution of surplus assets after winding up Surplus assets can be given to any party Surplus assets can be given to any party
Amalgamations No legislative framework for amalgamations of 2 or more societies Amalgamations can take place as outlined in the Companies Act 1993, but follow a more simplified process
Criminal Offences Generic offences set out in the Crimes Act 1961 Six offences that target egregious conduct including:
  1. Making false statements
  2. Fraudulent use or destruction of property
  3. Falsification of documents
  4. Defrauding of creditors
  5. Improper use of ‘incorporated’ or its Te Reo version ‘manatōpu’
  6. Breaching of a banning order

All Existing Incorporated Societies Will Need to Re-Register

The reregistration period will run for two and a half years - from October 2023 to April 2026.

You will continue to be subject to the 1908 Act until your reregister under the new Act.

In order to reregister you will need to meet all the requirements of the new Act (which includes adopting a new constitution).

If you do not successfully re-register, you will lose all the protection of Incorporation by the end of the transition period.

The Minimum Number of Members to Form a Society will by reduced to 10

The minimum number of members to form a society will be reduced to 10 (currently 15), but it is explicit that this new minimum must be maintained at all times (Section 74).

A Body Corporate that is a proposed member or is a member will be treated as being 3 members - think associate members (Section 14)

It is also made explicit that a person must consent to being a member (Section 76).

A Committee is Required, and the Committee Must Have at Least Three People

You may be surprised that the 1908 Act has no requirement that you have a committee (or board or whatever). Under the new Act a committee is required and the committee must have at least three people – who are referred to in the Act as Officers (Section 45).

The qualifications (and disqualifications) for Officers are spelt out in Section 47.  In a new requirement, a majority of Officers must be members.

The Society must also have a nominated contact person.  This can be a stand-alone position or in conjunction with any other office.

There are Many More 'Must Haves' in your Constitution (Rules)

There are twenty-seven particular requirements about what must be in your Constitution in (Section 26).

Your Constitution can’t give members rights or interests in the organisation’s property (Section 27), however, it may contain any other matter (not inconsistent with the Act), including how to make by-laws, how you wish to express tikanga, kawa, culture or practice, and even penalties you can impose on members (though they must be “reasonable”) (Section 28).

It must specify a minimum process for amending your constitution in the future, of at least a simple majority of members (Section 30), and allows for minor or technical amendments to be passed without calling a meeting on a “no objections” basis (Section 31).

What must be in your constitution

Duties of Officers

Sections 54-61 now spell out the duties of Officers.  In summary officers have:

  • a duty to act in good faith and in the society’s best interests,
  • a duty to exercise powers for a proper purpose,
  • a duty to comply with the new Act and the society’s constitution,
  • a duty of care (the care and diligence that a reasonable person with the same responsibilities would exercise in the same circumstances, taking into account, but without limitation, (a) the nature of the society; and (b) the nature of the decision; and (c) the position of the officer and the nature of the responsibilities undertaken by them),
  • duty not to create substantial risk of serious loss to creditors, and
  • duty not to agree to the society incurring obligations that it cannot perform.

These last two duties were subject to some criticism in the final reading of the Bill, with some MPs arguing that they are more appropriate for commercial contexts where directors are well compensated.  However, they have now been adopted here, so we have to apply them. This, perhaps, provides even more reason for societies to consider taking out Directors’ & Officers’ Insurance, especially given the wide definition of Officers.

Constitution Must Include a Procedure for Receiving Complaints and Resolving Disputes

Widely defined as any dispute between or among any combination of Members, Officers, and/or the Society, on any misconduct, breach of duties, breach of Constitution or By-Laws or the Act, or damage to members rights or interests (Clause 26(1)(j)).

Must be consistent with the principals of natural justice (fairness).

The procedure in Clauses 2-8 of Schedule 2, provides an organization with a ‘safe harbour’.

If such a procedure is adopted, it is presumed to meet the requirements of natural justice (section 41).

Officers are Required to Disclose Conflicts of Interest

Officers must disclose a conflict of interest in any matter the Society is dealing with where they (or certain relatives or organisations they are involved in) may get a financial benefit (Section 62).

This disclosure must be made as soon as practicable after the Officer becomes aware of it and must be recorded in an Interests Register.

Once declared, the conflicted Officer cannot vote or take part in a decision of the Committee on, or sign a document initiating, the matter. – unless everyone else agrees otherwise.

The new Act does take the additional step of requiring, if half or more of the Committee members are conflicted, that the matter be referred to a Special General Meeting of members of the Society to determine.

Keep Financial Records in Order to be able to Annually Report According to Generally Accepted Accounting Principals

Once a society reregisters, it will have to start using External Reporting Board (XRB) accounting standards in its financial statements, unless it qualifies as a ‘small society’. For example, imagine a society (that is not a small society) is preparing financial statements for a financial year of 1 July 2023 to 30 June 2024 (FY 2023-2024). If it reregisters in August 2024, then it will have an obligation under the 2022 Act to file its financial statements for FY 2023-2024 by 30 December 2024 (6 months after its balance date). Those financial statements will need to comply with XRB standards.

A 'small society' is defined in (Section 103). Under this provision, in any given financial year, a society is considered small if the following criteria apply:

  1. it spent less than $50,000 in each of the 2 preceding financial years, and
  2. it had current (that is, liquid) assets of less than $50,000 at the end of the 2 preceding financial years, and
  3. it is not a 'donee organisation' for tax purposes and/or a registered charity.

Under the 1908 Act, societies that are not registered as charities do not have to have their financial statements checked by an independent auditor. Under the 2022 Act, that will change — a society not registered as a charity will have to have its financial statements for a given year 'audited' if, in each of the 2 preceding years, its total operating expenditure exceeds a certain threshold. That threshold will be set by regulations in 2023. 

Procedure for Amalgamation with Another Society Outlined

Amalgamation with another Incorporated Society will become possible under Subpart 2 of the new Act, which sets out the new procedure. Previously one or both societies needed to wind up and arrange to pass assets and obligations, including employment relationships on to another existing or new Incorporated Society.

New Offences Outlined

Subpart 6 of Part 4 sets out several criminal offences making it much easier to impose fines, imprisonment or banning orders – for

  • making false statements,
  • fraudulent use or destruction of Society property,
  • falsification of register, records, documents, or other fraudulent operations.

Imprisonment of up to five years or fines of up to $200,000 can be imposed.

Part 4 of the new Act also sets out provisions for civil enforcement. That is where courts can make orders to enforce a Constitution, Bylaws, or Officers’ duties, or make orders where a society operates oppressively, unfairly, discriminatory or prejudicial to a member, or to recover a financial gain from a member for the society. An application for a court order can be made by the Society, a Member, a former Member, an Officer, or the Registrar (only if in the public interest – see Clause 150). While the court is not required to consider an application, it is difficult not to see an increase in litigation. This could take up considerable time, potentially legal expenses and liability for costs under this new regime.