UK Co-op Law in 2010: A Summary
The original Industrial and Provident and Partnership Act 1852 became law at the request of the nascent British co-operative movement and for its benefit. The Act permitted co-operatives to register using a specific legal form designed for them instead of registering as friendly societies (mutual insurance bodies) of a type also permitted to trade. The successive Industrial and Provident Societies Acts of 1862 and 1867 effectively provided a full legal basis for the functioning of co-operatives and that legislation was consolidated in further Industrial and Provident Societies Acts of 1876, 1893 and 1965. This legal framework has remained largely unchanged ever since, subject to the significant but minor reforms of the twenty first century.
The Financial Services Authority (FSA) is responsible for industrial and provident society registration – a function similar to that performed by the Registrar of Companies for companies registered under the Companies Act 2006. Further information about the FSA and its role as the registry for mutual societies can be found on its website at http://www.fsa.gov.uk/ and in the information notes that it publishes on that site and in print.
Section 1 of the IPSA 1965 lays down the conditions to be satisfied for a society to be registered as an industrial and provident society. It must be a society for carrying on any industry business or trade (including dealings of any description with land) whether wholesale or retail. It must also show ‘to the satisfaction of the [Financial Services] Authority’ that either (i) it is a bona fide co-operative society or (ii) its business is being or is intended to be conducted for the benefit of the community. When section 1 of the Co-operative and Community Benefit Societies Act 2010 is brought into force it will be clear that the registration is as one or other of those categories of society.
The FSA Information Notes set out how the FSA’s statutory discretion under the IPSA 1965 will be exercised. “Registration of Co-operatives” requires a society wishing to register as a co-operative to meet the following conditions:
Community of Interest –“there should be a common economic, social or cultural need and/or interest amongst all members of the co-operative”
Conduct of Business – “The business will be run for the mutual benefit of the members, so that the benefit members obtain will stem principally from their participation in the business. Participation may vary according to the nature of the business and may consist of: buying from or selling to the society; using the services or amenities provided by it; or supplying services to carry out its business.”
Control – “Control of a society lies with all members. It is exercised by them equally and should not be based, for example, on the amount of money each member has put into the society. In general, the principle of “one member, one vote” should apply. Officers of the society should generally be elected by the members who may also vote to remove them from office.”
Interest on Share and Loan Capital – “Where part of the business capital is the common property of the co-operative, members should receive only limited compensation (if any) on any share or loan capital which they subscribe. Interest on share and loan capital must not be more than a rate necessary to obtain and retain enough capital to run the business..………..”
Profits – “If the rules of the society allow profits to be distributed, they must be distributed amongst the members in line with those rules. Each member should receive an amount that reflects the extent to which they have traded with the society or taken part in its business………..”
Restriction on Membership – “There should normally be open membership. This should not be restricted artificially to increase the value of the rights and interests of current members, but there may be grounds for restricting membership in certain circumstances which do not offend co-operative principles. For example, the membership of a club might be limited by the size of its premises or the membership of a self-build housing society by the number of houses that could be built on a particular site.”
Apart from the need to establish that a society meets the “bona fide co-operative” requirement on first registration, it is necessary that it continues to do so. The FSA has power to cancel the registration of a society for failure to adhere to Section 1.
When an application is made to register a co-operative, a copy of its rules is submitted to the FSA. That copy is checked to ensure that the rules do not violate co-operative principles so as to cast doubt on whether the society is a “bona fide co-operative”. That process is repeated whenever any application is made to register an amendment to the society’s rules and until the amendment is registered it has no legal effect. This system ensures that very considerable freedom is permitted to co-operatives to organise themselves as they choose, so long as the society’s rules contain the provisions required by Schedule 1 to the 1965 Act as amended and are consistent with the society’s status as a bona fide co-operative. The legislation does not prescribe the content of the society’s constitution even in respect of matters such as governance, share capital, distribution of surplus, or members’ voting rights. The question of whether particular provisions of the society’s rules are to be permitted is always decided on the basis of whether or not those provisions are consistent with co-operative principles as applied by the FSA. However, the use of model rules provided in advance by sponsoring organisations is encouraged by the availability of a very substantially reduced registration fee if such rules are used.
A number of points about the development of the UK legislation assist in understanding the UK regime. The division of industrial and provident societies into co-operatives and societies for the benefit of the community was first introduced by the Prevention of Fraud (Investments) Act 1939 to counteract the fraudulent use of the society form to evade the prospectus requirements of the Companies Acts. Before that, no reference to, or definition of co-operatives, was to be found in the legislation (see Snaith I, "What Is an Industrial and Provident Society?" (2001) 34 Journal of Co-operative Studies 34.1 April 2001 pp 37-42). However, the Co-operative and Community Benefit Societies Act 2010 reinforces that division by requiring registration as one or the other and adopts that terminology as the title of the UK legislation, partly to address the obscurity of the “industrial and provident society” label.
Since the mid-1990’s a number of modest changes have been introduced to UK co-operative law which have cumulatively served to update its provisions. In 1996 The Deregulation (Industrial and Provident Societies) Order 1996 SI 1996/1738 used the powers available to government under the Deregulation and Contracting Out Act 1994 to amend primary legislation by the use of regulations to reduce the minimum number of members needed to register a society from 7 to 3, to ease the formal documentary requirements for registration, to increase the time limit for registering charges and filing annual returns, and allowing societies the same rights as companies to opt out of full audit requirements.
The Industrial and Provident Societies Act 2002 amended the IPSA 1965 so that the conversion of an industrial and provident society into a company required not only a 75% majority of those voting but also a turnout of at least 50% of those eligible to vote. The Act also empowered the Government to update industrial and provident society legislation to bring it into line with Company Law after any change in company legislation, so long as those parts of the IPSA 1965 which define a co-operative were not changed. That power has been used to further relax the accounting rules applicable to industrial and provident societies with limited turnover (see The Friendly and Industrial and Provident Societies Act 1968 (Audit Exemption) (Amendment) Order 2006 SI 2006/265).
The Co-operative and Community Benefit Societies Act 2003 empowered the Government to develop an “asset lock” for community benefit societies but not for co-operatives. It also brought the provisions about the capacity of the society and of its agents to act, and about executing formal documents into line with those applicable to companies. This levelled the playing field for the co-operative sector in those respects and so reduces their costs.
Since 6th April 2006 the new asset lock regulations for community benefit industrial and provident societies have been in force and available for use (see The Community Benefit Societies (Restriction on Use of Assets) Regulations 2006 SI 2006/264). They implement the provisions of the 2003 Act to "lock in" the value of the assets and resources of a community benefit society. This means that by amending their rules or incorporating a rule from the time of registration, any community benefit society, except a registered social landlord or a charity, may, by unalterable rule, prevent the payment of any amounts of value out to members or others except to pay members, or their successors on death or bankruptcy, the nominal value of any withdrawable shares plus interest. Otherwise any surplus has to go to another society with a similar restriction, a community interest company, a registered social landlord, or a charity - all of which lock value in for their purposes. The FSA is given power to enforce such restrictions on surplus distribution by enforcement notice and can order restitution from society officers if the society suffers loss. It can also seek a court order to prevent or end violation of such a rule.
For co-operatives, 2006 saw the liberalisation of FSA policy on the use of “investor shares” for non-user investor members. The FSA document permits co-operatives to have non-user investor members who hold “Investor Shares”, subject to restrictions to protect the interests of user members. These include restricted voting rights for investor members, compliance with applicable regulatory requirements under FSMA 2000, and an overriding requirement that the society remains, in the FSA’s view, a “bona fide co-operative” (Investor Membership of Co-operatives registered under the Industrial and Provident Societies Act 1965 A Policy Note by Michael Cook and Ramona Taylor, Financial Services Authority, 2006). This change was uncontroversial among those consulted by the FSA as it addressed the need of co-operatives to raise capital.
In March 2010, the Co-operative and Community Benefit Societies Act 2010 became law although it will not come into force until a date to be fixed by the Government. The 2010 Act applies the director disqualification provisions applicable to companies to societies, clarifies the separate registration of community benefit societies and co-operatives under the legislation, gives power for the provisions about the investigation of companies, company names, and dissolution and restoration to the register to be applied to societies by government order, and permits the law applicable to credit unions to be updated by order.
Further reforms under the Legislative and Regulatory Reform Act 2006 have been the subject of consultation by HM Treasury and deliberation by Working Groups on both Credit Union Law and Co-operative Law. Currently, a 2010 Legislative Reform Order under that Act is passing through the legislative process. It will, if passed, abolish the minimum age for society membership, reduce to 16 the minimum age for becoming an officer of a society, remove the limit (currently £20,000) on the amount of non-withdrawable share capital a member other than another society may hold, increase the amount a society may charge a non-member for a copy of its rules, allow societies (like companies) to choose their own financial year ends, remove the requirement that societies (but not companies) have interim accounts audited and allowing dormant but solvent societies to use an easier dissolution procedure (see HM Treasury, Legislative Reform (Industrial and Provident Societies and Credit Unions) Order 2010 Explanatory Document March 2010 http://www.hm-treasury.gov.uk/consult_credit_union.htm). The £20,000 limit on holdings of withdrawable share capital is likely to be raised in line with inflation under statutory powers available under IPSA 1965 as amended.
Currently, the Financial Services Authority, as the regulator for UK co-operatives is engaged in preparing Codes of Practice in collaboration with Co-operatives UK, the apex organisation on the information to be provided to persons holding shares in co-operatives. In addition, they hope to develop further such non-binding Codes on matters such as the governance of agricultural co-operatives with the relevant stakeholders. In each case this is an attempt to deal with existing problems. The collapse of the Presbyterian Mutual Society in Northern Ireland raised concerns about whether the shareholders in the society understood that they were shareholders with funds at risk if the society became insolvent rather than investors in a savings bank protected by a deposit protection scheme. The concerns about governance in agricultural co-operatives arise from the recent collapse into insolvency of Dairy Farmers of Britain, an agricultural marketing co-operative in which members appeared to be badly informed about the financial circumstances of the co-operative.