This article was prepared for IoD members by our national sponsor MinterEllisonRuddWatts.
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, 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.
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:
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:
“… 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.”
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.
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.
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:
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.
 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.