From local rugby clubs and pest eradication groups to unions and the New Zealand Automobile Association, tens of thousands of incorporated societies will grapple with impending and significant changes to how their membership-based organisations function in the 21st century.

Yet the truncated consultation period for the proposed regulations to sit alongside the Incorporated Societies Act 2022 is exposing a lack of awareness by societies and lawyers of what lies ahead. And that could leave societies on the back foot as the new regime is embedded.

Other issues identified by those working with the new legislation include a lack of understanding about the new statutory duties and level of risk for officers of incorporated societies and the amount of time and upskilling needed to comply with the new legislation.

Because few lawyers are specialists in this area, there are also fears that many societies will struggle to be compliant by April 2026 when the new legislation comes into force. Others spoken to by LawNews point to the tight consultation period on the regulations, saying many of these organisations are at the same time trying to prepare submissions on the Charities Amendment Bill.

The background 

At least 24,000 incorporated societies exist in Aotearoa New Zealand, representing a rich tapestry of community activities. Most operate in the non-profit sector, making a direct impact on New Zealand’s social and economic development by pursuing cultural, recreational, social and philanthropic purposes.

For the past 114 years, these organisations have been governed by the Incorporated Societies Act 1908. But as societies have multiplied in number and as New Zealand has evolved, the 100-plus-old statute’s deficiencies have become apparent. It gives little practical guidance on how members handle operational matters, how internal disputes are resolved and what obligations society officers must observe. The Act has shown its age. Kicked off by a Law Commission review in 2010, reforms lingered on successive legislative programs for more than a decade until Parliament in April this year passed the Incorporated Societies Act 2022.

Governance

The new statute aims to promote high-quality governance and lawmakers have looked to company law for guidance. The sorts of duties required of directors under the Companies Act 1993 – to act in good faith and to exercise care and diligence, for instance – have been prescribed to society officers.

However, this has collected some strong criticism. In a submission on the Incorporated Societies Bill, Chapman Tripp partner Roger Wallis argued societies and their officers shouldn’t be burdened with such onerous duties, especially given their not-for-profit mandates and scant resources and skill. Nonetheless, Parliament codified the responsibilities. The 1908 Act remains effective until reregistration opens in October 2023. Societies will cease to exist if they don’t amend their constitutions by April 2026.

In the next year, the Ministry of Business, Innovation and Employment (MBIE) will formulate new regulations to flesh out the 2022 Act on issues ranging from fees for compliance failures to the kinds of information that annual reports must contain. Consultation opened on October 11 and closes November 22. Submitters have only four weeks to respond, but the shortened timeframe exacerbates a more fundamental issue, says Craig Fisher, a consultant at specialist audit and assurance firm RSM and an ADLS council member.

A lot of incorporated societies aren’t as aware of the changes and the implications as they should be so they might not know enough to submit, he says. In turn, MBIE might not get much feedback. “And then, what will typically happen is the New Zealand disease of ‘hang on, we’ve got regulations and now they apply. I don’t like this, I wouldn’t have agreed with this had I known. How could they do this to us?’”

Most societies are poorly resourced, struggle to attract competent leaders and are operated by volunteers who join because they are eager to contribute to the society’s altruistic purpose rather than its day-to-day affairs. Fisher says even achieving quorum for annual general meetings is a yearly challenge. “It’s kind of like the frog in the hot water. The water is getting hotter and life seems to be getting harder, but the frog doesn’t jump out. Eventually the frog in the hot water boils.”

That organisations are good at complaining, but reluctant to do anything to improve their situations is a conundrum, says Fisher, who links it to a broader apathy infecting civil society. Voter turnout at the most recent local elections was a smidge over 40%. “It’s easier to complain sometimes than it is to engage.”

Consultation influx

The regulations consultation isn’t the only document confronting the for-purpose sector. According to charities lawyer Sue Barker, one mental health and addiction charity she knows is juggling at least another four feedback processes – and all are due in November. In addition to providing feedback on the incorporated societies regulations, the organisation’s consultation to-do list includes submitting on the government’s Charities Amendment Bill 2022.

One-third of societies are registered charities too, Barker says, and the proposed amendment to the Charities Act 2005 is a crucial opportunity to take stock. “Charities, by definition, exist into perpetuity and it’s not often these issues come up for parliamentary time. It’s been 20 years since the Charities Act was enacted. This is the first time we’ve had a proper look at it.”

The Social Services and Community Committee has extended the submission deadline to December 9, although Barker notes the extra month eats into the committee’s own time to report back to Parliament on the Charities Amendment Bill. Lawmakers seem focused on completing the process before the 2023 general election, rather than getting the legislation right. Barker thinks that’s a mistake, saying the Bill deserves better attention and time than has been provided.

The influx of consultation, across multiple sectors and in such a short space of time, is Barker’s biggest concern as it compromises incorporated societies’ ability to give the meaningful feedback they otherwise could provide. “Democracy is the kaupapa of the not-for-profit sector,” she says. “I wouldn’t want them not to consult but what worries me is they are doing it all at the same time.”

Health check 

Incorporated societies are comprised of members and run by them for their benefit. But like any democratic body, they are prone to division, says Parry Field Lawyers partner Steven Moe. “Nobody is going to argue that democracy is a bad idea. But inherent in democracy is that everyone has a voice and therefore voices can take over an entity like an incorporated society.”

Reregistration will last two-and-a-half years, so there’s enough time for societies to get familiar with the changes, Moe says. But a more existential question confronts them: whether incorporation remains the best legal structure for their purposes. “This is a chance to refresh everything. This is a totally unique event where all 24,000 of them have to look in the mirror.”

Moe is fielding inquiries from a dozen societies and some are contemplating how best to enshrine their purpose across future generations, for fear their organisations could be taken in altogether different directions under newly elected committees. Others are wondering what alternatives are available as they aren’t legally big enough to remain incorporated, having fewer members than the current minimum eligibility requirement of 15 (under the new Act, at least 10 members are needed for incorporation).

For those societies, big picture considerations have already landed in their in-tray. “Every organisation should be asking this more frequently than they do: ‘Are we in the best legal vehicle to achieve our mission and purpose?’,” Moe says. “That’s just a health check every legal entity should go through.”

Upskilled lawyers? 

There may be 14,000 or so lawyers practising in New Zealand, but very few specialise in incorporated societies. Over the 25 years that Hastings barrister Mark von Dadelszen has been talking to lawyers about this area of law, he says he can count on one hand the number who learned about societies at university. Even then, their encounters with incorporated societies were brief.

“It’s a bit like saying ‘what do you know about patents?’,” von Dadelszen says. “Ninety-nine per cent of lawyers would say ‘very little’. It’s only those who’ve had some reason to specialise in that area of law who would know anything about patents.

Von Dadelszen isn’t too concerned about the nature and content of “perfectly reasonable” six-week consultation period and the regulations themselves didn’t surprise him. His most pressing worry is that the legal profession will face “a truckload of work” as societies seek advice on the effects of the changes. And yet those instructions will most likely be the first time lawyers encounter the 2022 Act.

Conveyancers and commercial lawyers are best placed to meet the impending workload and von Dadelszen urges them and the wider profession to ready themselves. “It’s going to be challenging for lawyers to upskill themselves in time to do that work properly and competently.”  Most society members will expect lawyers to know about the Act and its implications. But that’s unrealistic, says von Dadelszen, who worries that lawyers who haven’t kept abreast of the changes will be caught short. He understands the predicament. “I’ve been there, I’ve done that, I know what it’s like to have new laws thrust upon you, which you have to comply with,” he says.

But the gap between client expectations and lawyers’ knowledge can be huge, and practitioners shouldn’t underestimate the “considerable” amount of time and energy it’ll take to come up to speed. Once they’ve prepared, though, lawyers should proactively contact their society clients to kickstart reregistration “sooner rather than later. Most of the upcoming legal work will focus on amending societies’ constitutions to ensure they comply with the new requirements. Getting them right will set societies up for the future, says Barker.

Until then, they have just four weeks to submit on MBIE’s proposed regulations. Fisher says the time to act is now, “to understand what’s being proposed because if it’s going to be modified, this is the time to modify it, not once the regulations are in place”. Link to On Demand seminar here ■