Buying supplies from the treasurer’s shop, leasing land from the chairman’s clan, giving the secretary’s son the contract: these are the transactions that destroy trust in community organisations. Sections 40 to 42 give members and the Registrar the tools to deal with them.
What is a “material interest”
Section 3 of the Associations Incorporation Act 2023 defines it as “a financial interest of a committee member or a relative of a committee member in an action or transaction that would reasonably be expected to impair the objectivity of the committee member’s judgment”. “Relative” is defined widely: parent, child, brother, sister, step-relations, spouse or de facto partner, the parent, child, brother or sister of a spouse or partner, and a nominee or trustee for any of them. A financial interest held through a company the committee member controls is an indirect interest and is caught by the words “whether directly or indirectly” in section 40(1).
A committee member “must not exercise any power as a committee member if the committee member has a material interest, whether directly or indirectly, in the exercise of the power”, unless before the power is exercised (a) the committee member makes full disclosure of the material interest, or (b) the rules expressly permit the exercise of the power despite the interest.
How disclosure is made
Under section 40(4) a committee member makes full disclosure by disclosing “the nature and extent of the interest in writing” to all the members, where the action requires member approval, or to all the other committee members, provided they are not also interested. Disclosure must be in writing and must come before the power is exercised; a confession after the contract is signed is not compliance. The disclosure should be minuted and, under section 76(d), the particulars of every material interest disclosed during the year must appear in the annual report. The rules may add further restrictions on transactions between the association and its committee members (section 40(5)).
What happens after disclosure
Once disclosed, the prohibition in section 40(1) lifts, and the Act leaves it to the rules and the committee whether the interested member may vote. Section 40(6) allows an interested committee member to attend and be counted in the quorum of the meeting that authorises the contract. Good practice, and many rules, go further and require the interested member to leave the room and abstain. The other committee members remain bound by their own duties of care and good faith in deciding whether to proceed; a disclosed conflict does not make a bad bargain a good one.
Exceptions
- Ordinary course transactions. Section 40(3) excludes a transaction between the committee member and the association “in the ordinary course of the incorporated association’s business and on usual terms and conditions”: a committee member paying the standard membership fee or buying a ticket to the association’s fundraiser at the public price.
- Committee remuneration. Section 40(7) provides that, unless the rules say otherwise, setting the compensation of committee members for services is not deemed to involve a material interest; the control there is section 29, which requires the rules or a special resolution to authorise any pay. See can committee members be paid.
Unwinding the transaction
Section 41 allows the association to avoid a transaction in which a committee member had an undisclosed material interest “at any time before the expiration of one month after the transaction is discovered”. It cannot be avoided if the association received fair value, judged on the information known when the transaction was made; a good-faith transaction in the ordinary course on usual terms is presumed to be fair value. The burden of proving fair value lies on a person seeking to uphold the transaction who knew or ought to have known of the interest; otherwise the association must prove it did not receive fair value (section 41(5)). Section 42 protects a third party who acquired property from someone other than the association, for value, without knowledge of the circumstances. A transaction can be avoided for a committee member’s interest only under section 41 or the rules (section 41(6)).
Penalties and other consequences
A committee member who fails to comply with section 40 commits an offence punishable by a fine of up to K50,000 or two years’ imprisonment, or both (section 40(8)). Failure to disclose a known material interest is also a ground on which the Court may remove a committee member under section 45, and it is one of the four exceptions to the unpaid committee member’s immunity from damages in section 38(4)(c). An association may not indemnify a committee member against liability arising from section 41 unless the rules provide otherwise (section 49(3)(b)). Public officers are under a parallel duty in section 59, which requires disclosure to the committee and the committee’s express permission before the public officer acts.
Rules should require every committee member to give written notice of any material interest before the meeting, to abstain from discussion and voting unless the committee resolves otherwise, and to have the interest recorded in a register of interests kept with the minutes. That register is what the auditor, the Registrar and the annual report will draw on.
Sources
- Associations Incorporation Act 2023 — ss 3 (“material interest”, “relative”), 29, 38(4), 40, 41, 42, 45, 49(3), 59, 76(d)
- Companies Act 1997 — ss 118–123 (directors’ interests, on which these sections are modelled)
Before relying on anything here, read the current text of the Associations Incorporation Act 2023 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.