Co-operatives Bill: Cameron's Consolidation Plan for Co-op Law in Great Britain

On Thursday 19th January UK Prime Minister David Cameron said that he intends to introduce legislation "to consolidate more than a dozen outdated pieces of legislation governing co-operatives and mutuals into a single statute". He said that the new statute would be "put before Parliament before the next election".

Ed Mayo, General Secretary of Co-operatives UK welcomed the proposal as a "historic decision".

What Does Consolidation Mean?

A consolidation Bill brings existing legislation together into one consolidated piece of legislation, without any significant change. That is what the Prime Minister has promised. Such a Bill can pass through Parliament by a special fast track procedure under the Consolidation of Enactments (Procedure) Act 1949

Under the 1949 Act, the process starts with a memorandum from the Minister of Justice. The memorandum is considered by a joint Consolidation Committee of both Houses of Parliament. A Bill is then proposed in the House of Lords, where the only debate takes place. The Bill must reflect precisely the memorandum approved by the joint committee. Only “corrections and minor improvements” are permitted and they must be proposed in the memorandum in advance of the Bill.

Who Does It?

In modern times consolidation has only been carried out after referral to the Law Commission which drafts the Consolidation Bill and a report on any necessary amendments. That is pointed out in the Cabinet Office Guide to Making Legislation.

The Law Commissions for England and Wales and Scotland operate under the Law Commissions Act 1965 and as amended by the Law Commission Act 2009.

Under section 3 of the 1965 Act the Law Commissions each have the function of

"the repeal of obsolete and unnecessary enactments, the reduction of the number of separate enactments and generally the simplification and modernisation of the law"

and can receive tasks from the Minister of Justice. It is on that basis that they will look at the co-operative and community benefit society law consolidation proposal.

Because the Industrial and Provident Societies Acts 1965 to 2003 (to be renamed the Co-operatives, Community Benefit Societies and Credit Unions Acts 1965 to 2010) apply to Scotland as well as England and Wales, this will be a joint project by both the English and Scottish Law Commissions. The changes will not directly affect Northern Ireland, the Isle of Man or the Channel Islands.

What Will The Law Commissions look at?

The list of legislation on co-operatives and community benefit societies is long. There are nineteen separate pieces of legislation of which eighteen are in force and one (the Co-operatives, Community Benefit Societies and Credit Unions Act 2010) is waiting for a decision to bring it into force. Nine of the nineteen are Acts of Parliament and the others are secondary legislation (statutory instruments). However, of the ten statutory instruments, five amend the Acts of Parliament and so are directly relevant to the consolidation. This total does not include the Credit Unions Act 1979 or any secondary legislation made under it. The Co-operatives Community Benefit Societies and Credit Unions Act 2010 deals with Credit Unions as well so the 1979 Act should probably be part of the consolidation process.

Any Benefits from Consolidation?

The main benefits are:

• A Government supported Bill in Parliament

• Limited Simplification of the Law

• Raising the Co-op Profile

• Cheaper, More Efficient Legal and Secretarial Work

Lets' see why:

A Government supported Bill in Parliament From the point of view of the Co-operative Movement, getting a new Act of Parliament in the form of a Government Bill is important both to improve the legislation and to raise the profile of the co-operative business structure.

Since the early 1990's, first the United Kingdom Co-operative Council and then Co-operatives UK have been seeking law reform for co-operatives. The obstacle has always been pressure on the Parliamentary timetable. The consolidation route avoids that problem as the Ministry of Justice "does not need to bid for legislative slot for a Consolidation Bill as with other Government Bills" (Cabinet Office Guidance para 4.3.7.)

Limited Simplification of the Law The law on societies is complicated - mainly because private member's Bills and secondary legislation have been used to make changes to Acts of Parliament between 1980 and 2010. With the co-operation of Government, there have been deregulation orders for societies in 1996 and 2011, successful private member's bills in 2002, 2003, 2007 and 2010, two further pieces of secondary legislation permitted by those Bills in 2006 and 2009 and, in 2011, regulations under the Electronic Communications Act 2000. Many important reforms have been achieved but the cost has been byzantine complexity. That does not encourage use of the co-op structure

Raising the Co-op Profile Co-operatives and other mutuals will also gain something from the process of passing the consolidated Bill. Despite the limited amount of Parliamentary debate, the announcements at the various stages (Law Commission reference, Law Commission Report, joint committee, House of Lords Debate, and the final passing and coming into force of the new Act) will be opportunities to shout about the benefits of co-operative and mutual business structures.

Cheaper, More Efficient Legal and Secretarial Work With one Act in place of nine (or ten if the Credit Unions Act 1979 is included) and five sets of regulations, legal work should take less time and so cost less. The work of society secretaries should also be easier. Anyone dealing with societies should need to look in fewer places.

Limits of Consolidation?

There are some benefits that will not flow from the consolidation process.

• No Full Review of Co-op and Mutual Law

• No Reforms
  

• No Simplification or Modernisation of the Acts

No Full Review of Co-op and Mutual Law The Companies Act 2006 and the Charities Act 2006 did not just consolidate law for companies or charities. They also came out of a thorough and careful review of what was needed for those sectors and how the law should be changed and developed to meet modern needs. There has been no such review for co-operatives and mutuals since the nineteenth century. The consolidation will not lead to one.

No Reforms Even after the changes of the period 1996 to 2010, a number of reforms are needed. Insolvent societies do not get the benefit of corporate rescue procedures such as administration and voluntary arrangements with creditors that companies have. Since 2002 the Government has had power to change that by regulations. It has not done so. The duties of company directors are now codified in the Companies Act 2006. For societies the old common law cases still apply. The rules around company shares and capital are governed by the Companies Act. Societies are subject to the old common law case law. So, for example, societies cannot buy back non-withdrawable shares from their members. That limits the use of the removal, from January 8^th 2012, of the £20,000 limit on holdings of such shares in societies as people may not be able to get their money out easily.

No Simplification or Modernisation of the Acts The consolidated Act of 2013, (....or 2014 or 2015.....?) will still use the 1876 and 1893 consolidations of the Industrial and Provident Societies Acts. (The 1965 Act was itself passed by use of the 1949 Act consolidation procedure.) That is because the process of consolidating under the 1949 Act procedure does not allow for the redrafting of the wording of the legislation to simplify and modernise it. That has to be done using the normal Parliamentary process. So the legislation will not be as clear and modern in its language as the Companies Act 2006. It will just all be in one place.

Useful But More Still Needed

The consolidation is useful but more changes are still needed. Insolvency reforms are very urgent but changes to the rules on capital are also vital if co-ops and mutuals are to reach their full potential. A full overhaul of this area of law would be even more helpful.

© Ian Snaith 2012 This work is licensed under the Creative Commons Attribution-NonCommercial-Noderivs 2.0 England and Wales Licence. To view a copy of this licence visit http://creativecommons.org/licenses/by-nc-nd/2.0/uk/ or send a letter to Creative Commons, 559 Nathan Abbott Way, Stanford, California 94305, USA

Thoughts on European Court 2011 Co-op Case

The Narrow Specifics

In terms of its strict legal effects, Joined Cases C-78/08 to C-80/08 Ministero dell’Economia e delle Finanze v Paint Graphos Sarl are very narrow. It deals with one particular aspect of the EU State Aids regime. The choice about whether to provide tax benefits or other assistance for co-operatives is one for national governments. The role of EU Law is only to deal with any potential distortion of competition that may be involved in such a national rule. This case provides guidance about how that EU regime should be applied if states do choose to provide such support for co-operatives on the basis of their business structure.

However, within that narrow scope the case does recognise particular features of those co-operatives which lock assets in to the society and prevent any distribution to members. Such co-operatives may be provided with tax concessions as far as the State Aid rules are concerned - as long as they are genuine.

It is less clear how far this would extend to other types of co-operative. The Italian tax provisions required that a certain proportion of transactions must be with members. Is this a necessary condition for the tax benefit to be justified or is it enough that the return on capital is limited so that it becomes more difficult to raise funds and impossible to make much use of the equity markets?

The answer appears to lie in the two sources consulted by the court in reaching its decision. They are the Commission Communication of 2004 and the Preamble to the SCE regulation. The wider implications of the case for the existence or development of a specifically European Co-operative Law hinge on the importance attached by the court to those two documents.

The Key Co-op Features defined in the case

In its judgment the ECJ listed a number of features of co-operatives which led it to see them as distinct from other economic operators due to low profit margins and limited access to capital markets (paragraphs 55 to 59):

• The principle of the primacy of the individual as stated in recital 8 of the Preamble to the SCE Regulation

• Distribution of assets on winding up to another co-operative pursuing “similar general interest purposes”

• Management in interests other than those of outside investors

• One member one vote

• Reserves and assets commonly held and not distributable but dedicated to the common interest of members

• Activities conducted for the mutual benefit of members as users, customers, or suppliers so that benefit goes to each member in accordance with his participation in co-op activities and transactions with it

• Payment of limited interest on loan and share capital.

This suggests there are some co-operatives which meet the definition for registration in national co-operative law and fall within the ICA statement of Values and Principles but do not meet the conditions laid down in this judgment.

It is important to recognise the context of the judgment to decide how it might affect any state tax benefits or other assistance provided to co-operatives. Since the purpose of the State Aid rules is to prevent the distortion of competition in the EU, it is necessary to find some disadvantage or problem which justifies more favourable treatment for co-operatives which then has to be proportionate to the problems they face. The ECJ identified the obvious and central issue which is the difficulty in raising capital.

That mainly arises, as the court suggested, from the vesting of control in individuals equally and not according to capital contribution as in investor controlled companies. The principle that capital should enjoy a limited return rather than a right to the whole of any surplus on dissolution or by way of periodic distribution of profits is also crucial to the problems co-ops have in raising capital. Those features generally prevent the use of the capital markets and can justify some countervailing assistance without distorting competition.

However, it is less clear that it is necessary to prevent all distributions of assets or surplus to members on dissolution. Surely, a distribution to members in accordance with their transactions over a particular period (fixed by the rules) before the winding up would be sufficient? Such a provision would sever the link between the level of investment and the return to the member just as a patronage refund from a periodic surplus on trading does?

It seems that the court's inclusion of the “disinterested distribution” on winding up requirement comes from the Preamble to the SCE regulation and the Commission Communication rather than the logic of the argument about lack of access to capital markets.

In that sense, one can argue that state aids might be justifiable in EU Law for a wider range of co-ops as long as the ECJ relied on the logic of market disadvantage and did not slavishly follow the Commission Communication and the SCE Regulation Preamble which had their own contexts and purposes.

© Ian Snaith 2012 This work is licensed under the Creative Commons Attribution-NonCommercial-Noderivs 2.0 England and Wales Licence. To view a copy of this licence visit http://creativecommons.org/licenses/by-nc-nd/2.0/uk/ or send a letter to Creative Commons, 559 Nathan Abbott Way, Stanford, California 94305, USA

European Court Recognises Co-op Business Structure: The Judgment

In a judgment of 8th September 2011 the European Court of Justice recognised the distinctive nature of co-operatives and their difference from other businesses - see Joined Cases C-78/08 to C-80/08 Ministero dell’Economia e delle Finanze v Paint Graphos Sarl

In this post I'll give an outline of the case and the text of the relevant part of the judgment. In the next post I'll discuss the implications of the case.

The case concerned the famous tax concessions available in Italy for co-operatives but dealt with them as they stood between 1984 and 1993. Those tax breaks included exemption from local income tax for agricultural and small-scale fishery co-ops and workers' and producers' co-ops; reductions in corporation tax for co-ops and an exemption for worker's co-ops.

The benefits depended on co-ops having full mutuality with undistributable reserves locked in and impossible to distribute to members either during the co-op's life or on its dissolution.

The disputes in the case involved allegations by the tax authorities that the conditions requiring mutuality had been breached by these particular co-ops so that no tax exemptions should be allowed.

The cases had been within the Italian national court system for up to 18 years. They reached the European Court of Justice by a reference from the highest Italian court, the Corte suprema di cassazione. The reference by the Italian court was under Article 234 of the EC Treaty on the question of whether the tax concessions for co-ops under Italian Law were compatible with EU Law or amounted to unlawful state aids from the Italian Government contrary to Articles 87 and 88 of the EC Treaty.

As article 234 EC provides, the European Court of Justice gave an opinion on EU Law to help the national court to decide the case.

The European Court's decision focused on the 3 conditions that all have to be satisfied before a national tax break or other state measure amounts to a state aid:

• Is it financed by state resources?
• Does it affect trade between member states and distort competition?
• Is it "selective"?

Unsurprisingly, the court found that a tax break is financed by the state - see paragraphs 44 to 47.

The test about the effect on trade and distortion of competition is easy to pass. There is no need for the business in question to be involved in international trade and it is enough to show that the aid could affect trade and competition. It need not actually do so. So the court found that these tax breaks passed that test - see paragraphs 77 to 82.

That left the issue of "selectivity". The court's case law lays down that, in the case of a tax measure, it has to be compared with the country's "normal" or "common" tax regime. This is done to decide whether the measure in question discriminates between economic operators who are actually in a comparable factual and legal situation given the objective of the national tax system. Here the use of net profit to assess corporation tax applied to the co-ops and to other firms but the co-ops had the benefit of exemptions not available to other firms because of their legal form. So the question was whether the co-ops were in "a comparable factual and legal situation" to the other firms.

The Court ruled that in principle they were not in a comparable situation and so the tax exemptions could be justified. This was because they operated for the mutual benefit of their members who are users, suppliers, or employees who benefit in proportion to their transactions with the co-op. In addition, the co-ops' limited access to equity markets and the limited return offered on share and loan capital make it harder for them to raise capital. The lower profit margin that flows from those characteristics makes their position not comparable with that of commercial companies - ECJ judgment paras 55-61 (below).

However, societies which do not "truly pursue an objective based on mutuality" in accordance with the EU Commission Recommendation on the promotion of cooperative societies in Europe of 23rd February 2004 COM (2004) 18 final would be treated differently and might be regarded as being comparable to commercial companies so that any tax benefit could amount to a state aid - ECJ judgment para 62 (below).

Text of Relevant Paragraphs of the Judgment:

"55 Cooperative societies, the form taken by the legal entities at issue in the main proceedings, conform to particular operating principles which clearly distinguish them from other economic operators. Both the European Union legislature, in adopting Regulation No 1435/2003, and the Commission, in its Communication on the promotion of cooperative societies in Europe, have highlighted those particular characteristics.

56 As stated in particular at recital 8 in the preamble to Regulation No 1435/2003, those characteristics essentially find expression in the principle of the primacy of the individual, which is reflected in the specific rules on membership, resignation and expulsion. Moreover, recital 10 in the preamble to that regulation states that net assets and reserves should be distributed on winding-up to another cooperative entity pursuing similar general interest purposes.

57 Cooperative societies are not managed in the interests of outside investors. According to recitals 8 and 10 in the preamble to Regulation No 1435/2003 and section 1.1 of the Communication on the promotion of cooperative societies in Europe, control of cooperatives should be vested equally in members, as reflected in the ‘one man, one vote’ rule. Reserves and assets are therefore commonly held, non-distributable and must be dedicated to the common interests of members.

58 As regards the operation of cooperative societies, in the light of the primacy of the individual, their activities – as stated in particular at recital 10 in the preamble to Regulation No 1435/2003 and section 1.1 of the Communication on the promotion of cooperative societies in Europe – should be conducted for the mutual benefit of the members, who are at the same time users, customers or suppliers, so that each member benefits from the cooperative’s activities in accordance with his participation in the cooperative and his transactions with it.

59 Moreover, as stated at section 2.2.3 of that communication, cooperative societies have no or limited access to equity markets and are therefore dependent for their development on their own capital or credit financing. That is due to the fact that shares in cooperative societies are not listed on the stock exchange and, therefore, not widely available for purchase. Moreover, as is also made clear by recital 10 in the preamble to Regulation No 1435/2003, there is limited interest on loan and share capital, which makes investment in a cooperative society less advantageous.

60 As a consequence, the profit margin of this particular kind of company is considerably lower than that of capital companies, which are better able to adapt to market requirements.

61 In the light of those special characteristics peculiar to cooperative societies, it must therefore be held that producers’ and workers’ cooperative societies such as those at issue in the main proceedings cannot, in principle, be regarded as being in a comparable factual and legal situation to that of commercial companies – provided, however, that they act in the economic interest of their members and their relations with members are not purely commercial but personal and individual, the members being actively involved in the running of the business and entitled to equitable distribution of the results of economic performance.

62 Producers’ and workers’ cooperative societies with characteristics other than those normally associated with that type of society would not truly pursue an objective based on mutuality and would therefore have to be distinguished from the model described in the Commission’s Communication on the promotion of cooperative societies in Europe. "

© Ian Snaith 2012 This work is licensed under the Creative Commons Attribution-NonCommercial-Noderivs 2.0 England and Wales Licence. To view a copy of this licence visit http://creativecommons.org/licenses/by-nc-nd/2.0/uk/ or send a letter to Creative Commons, 559 Nathan Abbott Way, Stanford, California 94305, USA

Co-op, Bencom, and Credit Union Law Changes from 08.01.12: A Summary

On 8th January 2012 most of the changes to the legislation governing co-operatives and community benefit societies first discussed in 2007 come into effect. They were enacted in the snappily named Legislative Reform (Industrial and Provident Societies and Credit Union) Order 2011 SI 2011/2687, popularly known as the "LRO". Those regulations come into effect on 8th January 2012, two months after the Order was finally made.

The text of the Order can be found here

The history of its development and the rationale for it can be found here

Co-operative and Community Benefit Societies are still officially called industrial and provident societies as section 2 of the Co-operative Community Benefit Society and Credit Unions Act 2010 which renames them is not yet in force but here they will be given their new name on the basis that the 2010 Act will be brought into effect one day.

Summary of Changes

The LRO makes the following changes by amending the relevant Acts of Parliament

These changes apply to societies other than credit unions:

• The limit on the value the shares that can be held in a society is abolished for shares which are not withdrawable


• Societies can decide their own years of account for the purpose of their annual returns

These changes apply to any society including a credit union:

• Societies can charge up to £5 to provide a copy of their rules to people who are not members or to members who have already had a copy


• The minimum age limit of 16 for membership of a society is abolished and the minimum age for serving on the board and signing documents and receipts becomes 16. The society's rules may still limit membership to people aged 18 or more



• Dormant societies with no transactions in their accounts (apart from FSA fees, dividend payment and interest payments) for two years before the current accounting year can be dissolved by special resolution of their members. A credit union also has to have FSA confirmation of the resolution.


• Societies may publish unaudited interim revenue accounts and balance sheets together with its latest year end account and balance sheet as long as it clear marks them as unaudited.

These changes apply only to credit unions:

• New and more liberal Common Bond requirements


• Corporate members permitted subject to conditions and limits



• limit on percentage of non-qualifying members removed


• Deferred shares and interest bearing shares allowed


• Effect of securing loan on member's shares clarified



• Fee for ancillary services not limited to recovery of cost of providing them



• Liberalisation of limit on share dividend payable by credit unions

© Ian Snaith 2012 This work is licensed under the Creative Commons Attribution-NonCommercial-Noderivs 2.0 England and Wales Licence. To view a copy of this licence visit http://creativecommons.org/licenses/by-nc-nd/2.0/uk/ or send a letter to Creative Commons, 559 Nathan Abbott Way, Stanford, California 94305, USA