Managing an incorporated society through a pandemic – what are the duties of officers?

This article was prepared for IoD members by our national sponsor MinterEllisonRuddWatts. 

Authors: 
Cameron Taylor - Partner
Richard Wells - Partner
Sacha Oudyn - Special Counsel

The COVID-19 pandemic presents a number of unique challenges from a governance perspective and has led to a renewed focus on the duties and obligations of those managing organisations. 

While much of the focus to date has been on companies and directors, there are more than 23,000 incorporated societies in New Zealand, some of which are large, and many of which have been adversely affected by Covid-19.  Just like company directors, the officers managing incorporated societies (officers) are concerned to ensure that they discharge their duties appropriately. 

Unhelpfully, there is some uncertainty around the exact duties and obligations of officers.  While there are reforms on the horizon, with the Government signalling plans to enact a replacement Incorporated Societies Act[1], the timing for this is currently uncertain and many incorporated societies need to make decisions now.       

This article provides a summary of some of the issues officers should consider as they navigate the COVID-19 environment.  Obviously, the key stating point will be to look at your society’s rules carefully to understand what they already say – in some cases rules will have already been updated to include specific officer duties in recognition of the pending reforms.

An officer’s duties are likely to be similar to those of a company director

With a company, the duties owed by a director (and the penalties applicable when duties are breached) are set out in legislation.  Under the Companies Act 1993 directors must:  

• act in good faith and in the best interests of the company use powers for a proper purpose (section 131);
• not act, or agree to act, in contravention of the Companies Act or the company’s constitution (section 134);
• not agree to the business of the company being run recklessly or to create a substantial risk to creditors (section 135);
• not agree to the company incurring obligations that the director does not reasonably believe will be fulfilled (section 136);
• exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances, taking into account (without limitation) the nature of the company, the nature of the decision, and the position of the director and the nature of the responsibilities undertaken by him or her (section 137); and
• comply with conflict of interest rules to ensure that their personal dealings are not in conflict with their duties owed to the company.

The current Incorporated Societies Act does not specify an equivalent code of duties that apply to officers.  Despite this, however, a prudent approach would be to proceed on the basis that officers will have the same (or at least very similar) duties to company directors.  It is worth noting in this regard that: 

• it is clear from case law (in particular, the decision of the Privy Council in New Zealand Netherlands Society "Oranje" Inc v Kuys and The Windmill Post Ltd [1973] 2 NZLR 163 (PC)) that officers have duties in relation to an incorporated society that extend beyond what is stated in the Incorporated Societies Act or the rules of an incorporated society;
• the Government is reforming the Incorporated Societies Act and has signalled that the replacement legislation (which is to be based on a draft Incorporated Societies Bill Exposure Draft that was released by Ministry of Business, Innovation and Employment (MBIE) in November 2015) will include a list of officer duties that are broadly equivalent to those already imposed on company directors (as set out above); and
• there is already a general acceptance that there is overlap between the duties of company directors and the duties of officers. In the commentary to the Exposure Draft, for example, MBIE noted that:

“… the 1908 Act is silent on officers’ duties, but case law imposes obligations on those governing or running incorporated societies. Consequently, officers of incorporated societies probably owe similar duties to their societies as company directors do to their companies.

…clauses 48-53 [of the Draft Bill] codify officers’ duties as they might be described if a court were to comprehensively list them. They are conceptually the same as directors’ duties in sections 131-137 of the Companies Act 1993.”

Officer duties could be incorporated into the rules of an incorporated society 

Every incorporated society must have a set of rules (similar to a company constitution) before it can be registered.  While the Incorporated Societies Act only requires that the rules include certain prescribed information, there is flexibility for the rules to relate to any matter as long as it is not inconsistent with law.    

While not a legislative requirement, many incorporated societies have sought to deal with the uncertainty surrounding officer duties by expressly providing for this in their rules.  Therefore, as an officer, it will be important to have a clear understanding of what the rules say and whether any officer duties have been imposed by them.   

It is worth noting that even where rules do not contain any specific officer duties, they are still likely to include certain provisions that will be relevant to those making decisions about the future of an incorporated society. This is likely to include provisions dealing with how the rules of the society can be modified, how funds of the society are to be controlled and invested, whether the society may borrow money and how property is to be distributed in a liquidation.

Director safe harbour rules do not apply to officers

As part of its COVID-19 response, the Government created a “safe harbour” for directors in relation to certain insolvency-related duties they have under sections 135 and 136 of the Companies Act.   Unfortunately, the safe harbours do not apply to officers due to uncertainty around whether officers have equivalent duties under common law.  

Officers are therefore left in the unenviable position of potentially having common law duties equivalent to those in sections 135 and 136 but not receiving any benefit of the safe harbour rules applicable to company directors.  The Select Committee responsible for the enacting safe harbour legislation acknowledged that this was a “gap” and a “potential source of concern” but ultimately chose not to address that through legislation.  Officers therefore need to tread carefully when taking on obligations and making decisions that could potentially impact on a society’s creditors and / or its solvency.

Certain COVID-19 relief legislation is relevant to incorporated societies

While the safe harbour rules do not apply, some of the other legislation enacted as part of the Covid-19 response is relevant to incorporated societies.  Under the COVID-19 Response (Requirements For Entities—Modifications and Exemptions) Act 2020, for example:

• an incorporated society may modify certain provisions in its rules if a majority of its governing officers believe in good faith that it is not reasonably practicable to comply with those provisions as a result of COVID-19;
• certain actions of the incorporated society are able to be undertaken electronically (even where not permitted under the rules of an incorporated society) if a majority of its governing officers believe in good faith that it is not reasonably practicable to carry out the action by non-electronic means; and
• the Registrar of Incorporated Societies may grant exemptions from certain statutory obligations under the Incorporated Societies Act (for instance, in relation to recordkeeping or the delivery of information) should it decide to do so.

In addition the Business Debt Hibernation scheme enacted pursuant to the COVID-19 Response (Further Management Measures) Legislation Act 2020 (under which an entity is able to obtain a moratorium on enforcement of debts by creditors in certain circumstances), is available to be used by an incorporated society.

[1] The intention to introduce a Bill into Parliament was signalled in a Cabinet Paper released by the Government in May 2019.  The Cabinet Paper proposed that the Bill be based on an “Exposure Draft” Bill released by the Ministry of Business, Innovation and Employment in November 2015, which, in turn, was a response to the Law Commission Report on incorporated societies (published on 21 August 2013), which had recommended an overhaul of the existing rules. 

See background documents