Insolvency and Co-ops: Opportunity or Threat?

Co-operatives UK recently published a short paper by Dr Anthony Jensen about the opportunities available for business (and job)  rescue by the use of worker co-ops or other forms of employee ownership to deal with insolvent businesses. It suggests a strategy be developed to explore this further with a pilot programme to see whether a legal "right to bid" for the employees of an insolvent business would be a runner.

This led to an interesting debate in the Worker Co-op Facebook Group on reasons for business failure and the possibility of employee buyouts as a means of rescue or succession. If this were done well it would be an opportunity.

However, in this or any other case, woe betide any co-op that uses the industrial and provident society structure and has solvency issues..... Are you sitting comfortably for details of the threat?

It is ten years since Gareth Thomas MP of the Co-operative Party succeeded in amending the Enterprise Act 2002 to insert section 255 which allows HM Treasury to apply the administration procedure for rescuing insolvent businesses to co-operatives and similar societies.

In that time nothing has been done. What is the legal background to the problem and why does it matter?

Under section 55(1)(a) of the Industrial and Provident Societies Act 1965 an IPS may be dissolved by:

“being wound up in pursuance of an order or resolution made as is directed in the case of companies registered under the Companies Acts”.

That procedure for dissolution by liquidation on insolvency applies to societies as it applies to companies. 

However, since the Insolvency Act 1986, insolvent companies have had the option of using a rescue procedure known as “administration”. That procedure involves a moratorium on all debts and claims for a period during which the viability of certain statutory objectives, including the rescue of all or part of the business, the realisation of assets on better terms and the agreement of terms with creditors is assessed. 

Between 1986 and 2002 that procedure was available to companies only by court order. However, since the Enterprise Act 2002 the administration procedure has been available to companies out of court and has been, generally, the only remedy available to a secured creditor, such as a bank, with a floating charge over the company's assets.

It has always seemed clear from the wording of the legislation that administration does not apply to industrial and provident societies. That was confirmed in the case of Dairy Farmers of Britain [2009] EWHC 1389 Ch  as part of the reasoning by Henderson J who decided that the receiver appointed by a floating charge holder (i.e. usually a bank with security over assets) was neither an “administrative receiver” nor an administrator. The receivership of a society would be run by a receiver whose role was governed by the contract between the society and the charge holder (i.e. bank) under case law rules from before 1986. Ironically, the judge saw section 255 of the Enterprise Act 2002 (Gareth's amendment) as showing that administration and administrative receivership did not apply to societies already (see paragraph 37 of the judgment).

Some differences between the Company Law and Co-operative Law protect co-operative identity but this one doesn't. It's just a failure to update co-op law and creates unnecessary obstacles for societies operating as businesses in the market place.

Take a company and a society which are both insolvent. The company may get a moratorium on claims by creditors. If a bank enforces a floating charge over the company's property it must appoint an administrator who has to pursue the interests of all creditors.

The society will either be wound up with the loss of jobs or put in the hands of a receiver who pursues bank's interests.

This discrimination against co-operative societies is down to failure by governments during the last ten years to make regulations to remedy the problem. Do we have to wait another ten years?

Time for a campaign by the Co-op Party and Co-operatives UK for action by HM Treasury, the Law Commission, and/or the Cabinet Office/Big Society/Office for Civil Society bit of No 10?

© 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