By: Jonathan Pow
Published: 29/10/2014 | Updated: 29/10/2014
Introduction

The vast majority of local, regional and national sports organisations are set up as incorporated societies under the current Incorporated Societies Act 1908 (the "Act").  The Law Commission proposed reforms for this uncomfortably old piece of legislation which were tabled in Parliament on 21 August 2013.  On 28 February 2014, the Government accepted almost all of the recommendations in the Law Commission's report.  The recommendations will provide a very strong foundation for the Government to progress much needed reform of the Act and are unlikely to provoke any political controversy.  The new legislation should come into force soon. 

Whilst it may create little political controversy, it will be very important for sporting organisations (and societies generally) to understand the reform as it will very likely have an impact on their rules, governance and administration matters.

PART 2 – GREATER RESPONSIBILITY FOR OFFICERS

Governance of societies

The governance of a society is the running of a society.

Until now, the legislation was silent on a society's governance, specifically the duties and obligations owed by officers to societies.  This is set to change.  It is likely that officer's duties in the reformed legislation will be specified and will be similar to company director's duties under the Companies Act.  An officer would therefore be under a duty to:

1.      Act in good faith and in the best interests of the society;

2.      Exercise a degree of care and diligence that a reasonable person with the same responsibilities in the society would exercise in the circumstances;

3.      Not allow the society to be carried on recklessly or in a manner that is likely to create a substantial risk of serious loss to creditors; and

4.      Not allow the society to incur obligations the officer does not reasonably believe will be fulfilled by the society. 

Note: any provision in a society's rules which contravene those duties will have no effect.

This is an important change.  Officers are now subject to clear statutory duties.  If they fall foul of those, there will be repercussions.  Most likely, civil remedies will be available to the society or the members (or the Registrar) to seek redress of an officer's breach.  This could include monetary awards against officers, particularly if they have received a monetary benefit through any transaction of the society which arose because of a breach of an officer's duties.

While it cannot limit its officer's liabilities, a society, if expressly provided in its rules, will be able to indemnify an officer for costs incurred in defending a proceeding bought against it by a third party, if the officer is ultimately found not to have breached his or her duties.  It may also indemnify an officer against liability to third parties, except for criminal liability or liability arising from a breach of a duty to act in good faith and in the best interests of the society.  Again, those indemnities are very similar to those allowed in the Companies Act. 

The introduction of officer's statutory duties will likely create concerns for many current or future officers.  For example, officers of sports organisation will need to be careful that entering into sponsorship agreements with any particular sponsor is in the best interests of their organisation.  Officers could also potentially be exposed to a claim for a breach of duty if a sporting event they have procured and organised runs at a significant loss for the organisation.  Further, officers may become reluctant to enter into long-term supply agreements (say for equipment, apparel, catering and venue hire) because they may have no basis to reasonably believe the organisation will be able to fulfil its obligations under those agreements in later years. 

However, there is most likely no need for alarm.  The statutory duties reflect duties that officers already owed based on equitable principles.  As long as an officer puts the interests of his or her organisation first, then it is likely they will not fall foul of the statutory duties.  Vigilance is required however.

A society may also provide insurance for its officers if this is specifically expressed in its rules.  Officers of larger sports organisations, which enter into complex and valuable contracts and organise large-scale events, may feel more comfortable in taking up an officer's role if they are aware insurance cover is in place if they were ever to find themselves facing a claim for a breach of any one or more of these duties. 
 
Annual obligations of societies

As identified earlier, the reform will most likely require societies to hold a general meeting once every 15 months, at which annual and financial reports will need to be presented, and any officer's conflicts of interest would need to be disclosed.

The reform recognises that it is in the interest of members, as well as to the public (for large organisations), to be informed of the financial status of the society.  Financial reports will need to be filed with the Registrar together with 'Annual Returns'.  Companies already have to file annual returns which provide key information on the society.  The annual return will need to include confirmation a general meeting has been held, the number of current members, the names of the committee and their contact details, addresses and contact details for the society, and a certificate that the society is continuing to operate in accordance with its rules.

The annual obligations should not be onerous; however they will need to be adhered to.  The Registrar will be able to issue infringement notices for breach of a society's obligations and to take any further action necessary because of that breach. 

Conflicts of interest

Conflicts of interest are likely to be dealt with in the reformed legislation.  Because of the wide range of interests of a society's members and officers, there is often potential for a large number of conflicts of interest.  The reform will likely only address financial conflicts.  This follows the rules applying to company directors.  An officer will need to disclose a financial interest to the committee.  The interested officer may not vote on a matter where he or she has a conflict of interest, but can contribute to the quorum needed for a vote.  However, the committee will be able to exclude the officer from forming part of the quorum if it feels necessary.

There may be many cases in which a number of a society's officers have conflicts of interest.  The reform intends to deal with this so that where more than 50% of committee members are conflicted the remaining committee members will have to call a special meeting of the members to determine the matter.  Remote or insignificant financial interests, which would not reasonably be likely to influence an officer when carrying out his or her responsibilities, will not be regarded as conflicts.

It is recommended that societies have specific procedures in place in their rules to deal with conflicts of interest.  The procedures may be more onerous than what the proposed reform will likely be.

In the final article, we look at dispute resolution procedures, the distribution of societies' assets and provide some thoughts on the need for sports organisations (and also societies) to have a good look now at their rules. Click here to read part 3 in this series.
 

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