The perils of working with incorporated societies: a cautionary tale

November 2013


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Murrays Bay Intermediate principal COLIN DALE discusses the challenges that emerged when an incorporated society, designed to run a music school attached to the school, viewed its role beyond what was intended. With the matter reaching High Court, Dale’s compelling account reveals an aspect of school management that other schools should heed with caution.

For over fifty years, the Education Board, and from 1989, the Ministry of Education, have funded staff and provided musical instruments for the benefit of the children attending schools in a geographical area. The Mid-Bays fifteen schools on the North Shore is one such area.

In 2001, the principal of Murrays Bay Intermediate at the time arranged the establishment of an incorporated society: Bays Music Centre Incorporated. This followed the introduction of Tomorrow’s Schools. The idea was to have an infrastructure that could manage the finances of the attached music school so that the host school, Murrays Bay Intermediate, would be able to have their finances separate from the music school, meaning that there was a clear accountability of financial transactions for the benefit of the other schools contributing to the music school. One such concern was that the depreciation of the instruments became a credit and advantage for the music school, not the host school.

Cracks beginning to show

Challenges became apparent very early on in the years following 2001. A number of issues arose such as difficulties with the supervision of the music school, the storage of instruments, and day-to-day problems emanating from the unavailability of staff other than the host school staff, to manage the issues that constantly arose. Different scenarios were implemented ad hoc to cope with the increasingly difficult aspects of the attached music school. A fire in the school hall resulted in a number of instruments owned by the Ministry of Education being lost and replaced by insurance claims.

When I became principal in 2002, a number of issues presented themselves to me. There were no employment contracts, no policies, no quality communication between the school and the music school, no appraisals, and I was slow at getting to know staff in the music school and attending to business that was outside the normal hours of school. The director of the music school accepted all the recommendations I made and we worked together to ensure ongoing changes to systems to make the music school less open for criticism. I fielded many complaints on a weekly basis. The most pressing complaint centred on the inability to have calls returned and action taken for concerns.

A major incident over the auditing of the accounts for the society arose shortly after I arrived and lasted three years. The accounts had not been audited for a number of years, and when I investigated why, I found many of the receipts missing. There was all manner of explanations, but it was impossible to reconcile. This put the school in a precarious position – who takes the responsibility for this: the board of trustees who employ the staff and are responsible for the care of the children attending the music school? The incorporated society was deregistered in 2004 as it had not met its obligations. The school did not receive notification of this, and if the society did, it was never conveyed to us.

We realised that the relationship between the incorporated society members and the board of trustees was untenable because the board could not take responsibility for the society’s actions without any input into the decisions that were being made. The incorporated society members did not report to the board as the rules of the society dictated. So, in effect, they became an island unto themselves and thought that they were the people who ran and made the decisions for the music school, which was, in fact, not the case. This has been verified by letters from and conversations with Mrs Fay Mason (principal 1989–2002),

Mr Martin Dare (supervisor 1981–1984), and Mr Edwin Tolmie (supervisor 1985–1990). They also verified that the instruments belonged to the Ministry of Education and not to any committee or society.

Serious challenges

A fundamental problem was that the executive of the incorporated society came to control a disparate group of people who had no allegiance to the host school. The annual general meeting comprised a few interested people who turned up on the day, and the school had no way of knowing who they were, their background, or in fact, any aspect of who became in charge of the society. This, of course, presented challenges as the host school is responsible for the staff and students and yet had no satisfactory connection to the executive, except at an occasional meeting. Meetings rarely, if ever, attracted more than a handful of people.

In effect, the board of trustees were taking responsibility for the decisions made by the executive of the society and the consequential actions resulting from these decisions. So the emotional and physical safety of the children attending the music school, the lack of police checking for the members who thought they were running the music school, and the accountability of the staff (as they did not know who they answered to) became too much for the school to accept. Issues of complaints, confidentiality of staff information, accountability of the director of the music school, and the policies of the school and the subsequent relationship of those policies to the music school, all contributed to very serious concerns about how tenable the situation was for the governors and the principal of the school.

So the question arose: how can the board of trustees, with paid staff through the Ministry of Education payroll, effectively take responsibility for the welfare and operation of the music school and yet have no representation or even a report from such a disparate body of trustees?

Another serious challenge was the issue of remuneration. The director of the music school was paid a large honorarium and the secretary and the treasurer were paid a much smaller one. The director’s was adjusted from time to time but with no reference to what she was paid by the Ministry of Education. Some staff were also awarded ‘top-ups’ to their wages from the Ministry of Education, and so were, in effect, getting two cheques for their work at the music school.

Of more concern were the issues of ownership of the assets. The Ministry of Education originally owned the instruments. However, it is fair to say that the society has purchased instruments on behalf of the music school for the benefit of the children attending the music school. This is because the intention of the society was to manage the expenses for the music school.

The cause of the disharmony and court action

At a meeting during 2012, I presented a draft document of a possible establishment of a new charitable trust, based on a similar one, for similar reasons, established by Marshall Laing Primary School for their attached music school. I reiterated that we were keen as a school to have feedback, which they would be seen as to be representative of trustees for the music school, but that the school had determined that it was very necessary that we made some changes to the way the music school was managed. We had a meeting between two of the executive of the society and the chairperson of the school board of trustees, which we felt went very well.

The very same day, a letter arrived stating that the society were divorcing themselves from the school and going to do what they wished with the assets. They had removed all the instruments from the school without our permission and we found that the rules to the society were changed in September 2011 without our permission, or indeed, any reference to us.

Areas of contention

The society stated in writing on 18 July this year, “It is not intended that the society is wound up, but that instead it fulfil its purposes in an alternative arrangement of the committee’s choosing.” In fact, the purpose of the society was to provide a mechanism in which to manage the school’s funds. The society is not independent of Murrays Bay Intermediate.

As a member of that committee, I believe that my deliberate exclusion from advice and notification around this activity was manipulative and had an intention of removing the funding foundation that leads to the successful operation of the music school. The many years that this money has been accumulated should not have been exploited by the society executive without the express affirmation of 75 per cent of the members as stated in the rules of the society. They were given a copy of the intended trust and were invited to contribute ideas to the board on that matter, but they did not do so.

A huge problem centres on who is a member of the society and who is not. Discontinuing their association with the host school (a decision made by very few people) effectively removes the numbers and potential members for any AGM meeting where decisions are ratified.This means that the numbers required in the management of incorporated societies are not there for any reasonable source of accountability. In effect, they could create members any way they like, limiting it to very few so that they have total control of the assets.

The legal reality

We felt that as a responsible group of governors, we could not ignore our responsibility to challenge this state of affairs. Unfortunately, the society’s executive chose to take our database of the student contacts which we had entrusted to them. This meant that instead of informing them directly of what was going on, we had to publish, at two different times, papers of explanation. We decided that we had no choice but to challenge their re-writing of the rules unconstitutionally as unlawful, hence our invitation to the three executive members to the High Court to defend their actions.

The court case focused on who was a member and whether the court should return the society back to 2011 before the rules were changed. The court did not return the society back to 2011 inspite of the fact that the executive did not comply with the rules of the society or even record their actions in their own minutes of the society. The judge did not, in her ruling, find enough evidence of how the incorporated society was set up; so the reasons for the establishment had no bearing on her decision.

A major, well-argued aspect of her decision not to return the society to the rules of 2011 was around the fact that she believed, correctly in my view, that there have never been any members of the society since its establishment, except for the executive, who by the very act of their being elected, made them members. The judge contended that to be a member of a society, one has to do something more than just pay a fee for tuition, as was the case at our music school. They would need to understand the constitution and what being a member meant. While legally this is acceptable, the practicalities are problematic – who at the music school cares?

Never have an incorporated society

The message is to never contemplate using an incorporated society to be a way of managing an organisation attached to a school or for any other purpose where it may seem to be an option. If you have an incorporated society, work towards changing it into a trust, or manage the situation as a school without any legal entity being involved. Never involve people who are not part of the culture of the school in an attached arrangement. They do not know, respect, or even understand the school’s beliefs or way of operating. Murrays Bay Intermediate is a well functioning school that is exciting and successful; only the Bays Music School challenged us and impacted on our core work.

This has been a very worthwhile exercise. We now have a music school that the school controls completely; an income that more than compensates for this and we can manage the affairs, challenges and successes ourselves. . The music school has doubled in numbers in one year. We have learnt a great deal from the experience.

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