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.
Over the next three articles, we look at what the proposed reform holds in store. Firstly, we discuss generally the benefits of benefits of incorporation and the proposed reform. Secondly, we look at more detail into how the changes will affect the governance of societies, new annual obligations that societies will need to meet, and addressing conflicts of interest. Thirdly and finally, we look at the features of the proposed reform on procedures for dispute resolution, the distribution of societies' assets on termination and provide an overall wash-up as to the need for societies to review their rules to see how they fit with the proposed reform.
PART 1 – WHY INCORPORATE AND WHAT ARE THE CHANGES?
Benefits of Incorporation
The reason sports organisations set up as incorporated societies using the Incorporated Societies Act is because of the numerous benefits it affords. Those benefits are summarised below.
Like a company, incorporated societies are 'separate legal entities' from their members. This means that the society enters into contracts and obligations, not its members, so the society's members are not personally responsible for any obligation or liability that the society may incur in its own name.
An incorporated society has the benefit of perpetual succession. This means that a society continues in existence, unaffected by the comings and goings of its members. The society can hold assets in its own name and does not need to do anything where there are changes in its membership or office holders.
Incorporation also suggests permanence of a society, which helps reassure other organisations and entities with which it enters into contracts and otherwise conducts business, such as financiers and funding institutions, suppliers, sponsors, landlords and local authorities. The permanence that incorporation provides may also persuade the public to become members of the society (and pay annual subscriptions). Incorporation also allows funding from some sources, which would not otherwise be available.
An incorporated society must have rules to regulate its structures and objects. This is important for a society administratively, but also may be a persuasive feature for potential members. Unincorporated societies will (very likely) not have any written rules. This has the potential to lead to disagreement between members that can be very difficult to resolve.
For sports organisations, while incorporation is not a prerequisite for funding from Sport New Zealand, an organisation needs to have a 'legal status'. The best way in which to show a legal status is to incorporate. Incorporation also triggers obligations similar to eligibility criteria for Sport New Zealand funding. Therefore, the eligibility criteria becomes less of a hurdle for incorporated sports organisations.
With the benefits of incorporation under the Incorporated Societies Act in mind, we turn to the proposed key amendments to the legislation and look at the reasons for the proposed amendments.
The following, in no specific order, is a list of likely proposed legislative reforms:
Currently, a society wishing to incorporate needs 15 members. The legislative reform will likely reduce this number to 10. This reduction identifies potential difficulties in attracting 15 members for clubs in low population areas and clubs looking to establish in niche areas. The proposed reform aims to strike a balance between increased flexibility for small sport and hobby societies as well as larger social service organisations.
Societies will need to maintain their initial minimum number of members – surprisingly, not a feature of the current legislative. Societies will need to file an annual return to the Registrar confirming this. It is likely that if the number of members of a society falls below the minimum number, then the Registrar would give notice to the society to bring its membership up to the required level (failing which, the Registrar could remove the society from the Register).
The reform will do away with separate legislation for incorporation of branches of societies. A branch will be incorporated as a society in the normal way under the central legislation. A society's rules can deal more effectively with the relationship between parent and branch society, as applicable.
The legislation will likely specify powers that the society has, as well as stating that it has full capacity to carry on any business or activity, or enter into any transaction. This means that a society (and any party dealing with the society) may rely on legislation as to the specific powers that the society has rather than having to review its rules. This provides greater transparency and avoids ambiguity as to whether the society has specific powers if the powers are not otherwise specified in the rules. However, a society could reduce the statutory specified powers in its rules.
Following companies' legislation, any actions by a society which contravenes its rules is not invalid viz contracting third parties.
- A society will need to have (and notify the Registrar of) the address of a registered office.
- A society will need to maintain a register that identifies each member and members must expressly consent to being members. For many societies, this may mean an addition to their membership application forms. Existing members would also likely need to expressly consent to continue to be members on a renewal/roll over of their membership and subscription payments.
- While most large society's rules already deal with this, rules will now specifically need to provide for the number of committee members, their election, term of office and grounds for removal. It is likely that the statute will provide that a committee must be at least three members.
- Each society will need to have a "statutory officer" who will act as the society's contact person for the Registrar. The statutory officer would be a member of the committee who would need to meet minimum qualification requirements.
The requirement for the society to have a common seal will be removed. If a society has a seal it can still continue to use this. This change reflects widespread current practice of societies no longer using (or even knowing of the whereabouts of) a common seal. A society's rules will need to provide how a society enters into obligations/contracts, if a common seal is no longer to be used.
The new legislation will mandate meetings of societies, the timeframes for meetings, and the information a society will need to provide at meetings. The society's rules will need to cover minimum matters relating to general meetings, for example the quorum, notice and voting procedure for meetings.
A society will need to provide, at a minimum, an annual financial statement and the minutes of previous meetings at, and in advance of, each meeting. A society's rules could specify additional information which would also need to be provided. Information requests from members will also be dealt with in the legislation reform.
A society's rules will need to nominate either another incorporated society, a not-for-profit entity or charitable trust, to which a society's surplus assets may be distributed on liquidation or removal from the Register.
In order to amend a society's rules, a minimum of a majority vote of members attending and voting at a general meeting will be required. A society could increase the required majority in its rules.
A form of model constitution will be available.
Four further key elements are also being addressed in the reform. Those elements are:
governance of societies;
dealing with complaints;
annual obligations of societies.
We consider those in the following two articles. Click the links to be redirected: