Legal News for UK Co-ops and Mutuals

Co-op Membership vs Share Ownership

2012-02-08T05:19:00.000-08:00

This short report from Co-operativesUK highlights just how many more people are co-op members than directly hold shares in stock exchange listed companies. This is hardly a surprise and does not take account of indirect ownership of shares in companies via pension funds and insurance policies. However, as the report points out, that indirect ownership gives no voice in the enterprise whereas co-operative membership does.

The comparative international table of co-op membership and direct share ownership as a percentage of the population is interesting. Who would have thought that co-op membership penetration would be 40% in the USA and only 21% in the UK? US credit unions, energy and telecoms co-ops explain that, as the report points out. Those co-ops are very big in the US while UK co-op membership is mainly in consumer co-ops.

New Regulators for Co-op and Community Benefit Societies

2012-02-03T06:23:00.000-08:00

At the end of January 2012 the Government published detailed draft plans for the transfer of the role of registering co-op and community benefit societies after the new Financial Services Bill becomes law.

Currently the role belongs to the FSA but when the FSA's functions are transferred to two new regulators this function will belong mainly to the new Financial Conduct Authority. In essence that body will carry out the basic regulatory function while the new Prudential Regulation Authority will deal with issues specific to any societies that are authorised to operate in financial services - most obviously credit unions. However, there is a certain amount of overlap in the roles of the two bodies.

The detailed proposals are to be found in clauses 47 to 50 of the Financial Services Bill 2012 published on 30th January 2012 and in the Draft Mutual Societies Order published at the same time to aid parliamentary consideration of the Bill.

This represents a decision to effectively continue with the present arrangement rather than transferring the function of registering societies to another regulator dealing with similar issues such as the CIC Regulator.

This has the advantage that the co-operative and community society structure is less likely to become a variation of the company structure but the disadvantage that the function may remain, as it has been with the FSA, a rather marginalised and minor function of a large orgainsation mainly focused on other issues.

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

2012-01-23T02:22:00.000-08:00

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

2012-01-13T08:11:00.000-08:00

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

2012-01-08T03:02:00.000-08:00

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. "

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

2012-01-07T05:17:00.000-08:00

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

EU Commission State Aid Clearance for UK Social Enterprise Bank

2011-12-29T12:20:00.000-08:00

On 20th December 2011, the EU Commission announced its approval, under the EU State Aid rules, of UK support measures of up to £400 million for the creation of the social investment company Big Society Capital (BSC). UK government support for BSC will be provided by the use of money from dormant bank accounts under the Dormant Bank and Building Society Accounts Act 2008. If a bank account has been without transactions for at least 15 years, the bank can transfer the balance to a Reclaim Fund against which the account holder can claim. Unclaimed money in that fund can be handed over to BSC. The UK Co-operative Bank is currently working on establishing the Reclaim Fund.

BSC will invest in social enterprises, charities and voluntary organisations that have difficulty in raising affordable funding from the markets. It will generally do so through Social Investment Finance Intermediaries to develop financial intermediation for the social sector and to address market failures in that area. The Commission approval is limited to five years and any state provided capital above £400 million or any increase in BSC's balance sheet total to more than £600 million within that period must be notified to the Commission.

The BSC was formally proposed by the Cabinet Office of the UK Government in May 2011 as part of a wider strategy to increase the scale of the Social Investment Market in the UK. BSC is intended to provide a range of financial services to social sector organisations, to raise money for onward investment in the sector, and to assist social organisations to become more sustainable and resilient. Its initial capital consists of the £400 million estimated to be available from dormant bank accounts and a further 200 million to be provided by the UK's four largest private sector banks. BSC is to be set up by April 2012 and will operate as a wholesale, independent, non-public, social sector organisation. It will be committed to transparent reporting of both its financial results and its social impact and will aim for long term self sufficiency after suffering some capital attrition in the first five years. (see http://www.cabinetoffice.gov.uk/content/big-society-capital)

One ground for the Commission's decision under Article 107(3)(c) of the Treaty on the Functioning of the European Union was an undertaking by the UK Government that all support for and recipients of funds from BSC would meet the requirements of one of two Block Exemption Regulations. The first would require the amount of the capital invested to be be too small to constitute state aid under the EU rules under Commission Regulation (EC) No: 1998/2006 - currently 200,000 euro's. The second would be that the investment would remain within the limits set out in the Commission regulation exempting categories of state support from scrutiny because their economic benefits (in fields such as SME support or social, regional, or environmental aid) are deemed to outweigh potential distortions of competition in areas (Regulation No 800/2008).

In addition, the Commission took into account that any funding provided by either BSC or a Social Investment Finance Intermediary financed by BSC would be conditional on market funding being unavailable and subject to criteria about the applicant's business plan, the expected level of risk adjusted returns, and the social impact of the investment being met. See:
http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/1573&format=HTML&aged=0&language=EN&guiLanguage=en

This Commission decision indicates that the EU State Aids rules do not need to stand in the way of the development of co-operatives, social enterprises, or other organisations with social or charitable objectives. The Commission approved the UK proposal quickly on the basis of undertakings by the UK Government. The modest scale of the proposed state aids and the likely focus on objectives such as social and environmental benefit were crucial to the decision. However, the approval also provides further evidence of the EU's positive approach to the role and importance of co-operatives and social enterprises. In that sense the approval builds on the decision of the European Court of Justice of 8th September 2011 in Joined Cases C‑78/08 to C‑80/08 on the application of state aid rules to certain Italian tax provisions concerning co-operatives.

As a result, 2011 has been an important year for EU recognition of the role of enterprises which can be classed neither as state owned nor as investor owned and which represent an alternative to both statism and an investor dominated market economy.

© Ian Snaith 2011 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-operative News

2011-09-28T03:11:00.000-07:00

This is the site for everyone interested in co-op news of any kind. Important in 2012 the International Year of Co-operatives

Co-operative News

UK Co-op Law in 2010: A Summary

2010-07-30T02:06:00.000-07:00

In the UK, a body wishing to function as a co-operative is free to use any legal form it chooses. That includes registering under the Companies Act 2006 or the Limited Liability Partnerships Act 2000 or operating as a partnership under the Partnership Act 1890, subject to restrictions on the use of the word “co-operative” in the name of a registered company. However, the Industrial and Provident Societies Acts 1965 to 2003 (to be renamed the Co-operative and Community Benefit Societies and Credit Unions Acts 1965 to 2010 when s 2 of the Co-operative and Community Benefit Societies Act 2010 is brought into force) provide a legal structure specifically designed for co-operatives. Credit unions, a form of savings and loan co-operative, must register under the 1965 Act as adapted by the Credit Unions Act 1979 and are prohibited from otherwise registering under the Industrial and Provident Societies Acts 1965 to 2003. Similarly, an organisation using any other legal structure (including the SCE form) is prohibited from using the words “credit union” as part of its name (ss 1 to 3 Credit Unions Act 1979). Like other financial services businesses, credit unions are also subject to regulation by the Financial Services Authority (FSA) as authorised deposit takers under the Financial Services and Markets Act 2000.

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.

Co-operatives and Community Benefit Societies Bill became and Act today

2010-03-19T06:02:00.000-07:00

Look here for a summary of what it does and here for the full text. I hope to update my new book of Co-operative and Community Benefit Society Statutes to take account of this very soon.

FSA Road Show Slides for All Proposed Credit Union Changes

2009-12-10T13:55:00.001-08:00

These helpfully bring it all together.

Presbyterian Mutual Society Working Group

2009-12-10T13:15:00.000-08:00

This Group was due to Report last September but we're still waiting. Maybe soon..........

In the meantime the collapse of this Society into administration led initially to the immediate application of the adminitration procedure to Northern Irish I & P societies. This has not yet been done in GB.

Less directly, it has alsoled to a review of the Northern Ireland Credit Union and I & P Law (see paras 4.7.-4.15 on credit unions and 4.30. -4.40 on I & P's) and ripples in the UK (see pages 161-162 of this Consultation Document from HM Treasury)

In essence, NI credit unions would come under FSMA alongside their GB bretheren and thus enjoy the shelter of the Financial Services Compensation Scheme but their registration would stay with the Northern Ireland devolved Government as that what the movement there wants. I & P's will stay with NI but may get Law Reform along GB lines while also having to spell out ultra clearly to people with shares in them that this is risk capital and NOT protected as a deposit.

In GB, as in NI,the idea would be to apply the financial promotion regime (whereby any promotion of an investment has to be approved by a regulated person) to I & P shares - at least if they are not bound by of an effective Code of Practice (as Co-operativeUK's members are) which makes them tell people with shares that they have risk capital and not a deposit or savings and will lose the lot if there's a problem with the society's solvency.

Co-op Law Reform in the Republic of Ireland

2009-12-10T13:03:00.000-08:00

This was published last April and is a useful guide to current law in Ireland and reform plans. For the main issues see the press release. To monitor progress visit this site.

Tougher Liquidity and Capital Requirements for Credit Unions

2009-12-10T12:44:00.001-08:00

See the full text of the FSA Consultation Paper on the planned revision of CRED, the credit union source book here or the summary here. This is the credit unions' version of the tighter liquidity and capital requirements being imposed on banks in the light of the financial crisis. It also accommodates the regulstory reform order changes (see earlier post today).

Re-launch of Co-operative and Community Benefit Societies and Credit Unions Bill

2009-12-10T12:27:00.000-08:00

The private member's bill which almost passed both Houses earlier this year has been launched again in the House of Lords. To follow its progress go here.

It is a very useful measure and is an important part of the process of updating industrial and provident society and credit union law.

Hope it makes it this time.

Law Reform Progress for I & P Societies and Credit Unions

2009-12-10T12:10:00.000-08:00

The draft Legislative Reform (Industrial and Provident Societies and Credit Unions) Order 2010 has now been laid before Parliament. Here is the Explanatory Memorandum.

It follows on from the previous consultation documents and process.

Commencement seems to have gone back to 1st July 2010. The liberalisation of share capital rules (abolition of the £20,000 limit for non-withdrawable shareholdings) is probably the most exciting aspect for I & P's. For credit unions there are many new features, including: the possibility of corporate members; the possibility of paying interest rather than dividend on share capital; and a redefinition and further relaxation of the common bond concept.

Credit Union Senior Management Arrangements

2008-01-29T00:45:00.000-08:00

The FSA have issued a Consultation Paper proposing to change the provisions of the CRED part of their Handbook on this.

The present position is that the task of allocating (“apportioning”) significant responsibilities to people must itself be allocated by the credit union - normally to the Chief Executive – CRED 4.2.4G to 4.2.7G. However, this can be held jointly by the chief executive and particular members of the management committee or, if there is no chief executive, only by particular members of the committee or even to every member of the committee either together or separately - CRED 4.2.8G, CRED 4.2.9G and CRED 4.2.10.G.

As part of the application to all firms of the “common platform” of systems and controls currently applicable to firms covered by the MIFID and CRD requirements of the EU, the FSA proposes to remove the requirement that an individual be given the role of apportioning specific responsibilities – FSA, “Organisational systems and controls- extending the common platform” CP 07/23, 2007 Appendix 1, Annex B.

Instead, the requirement will be that the credit union

“when allocating functions internally, must ensure that senior personnel……are responsible for ensuring that the firm complies with its obligations under the regulatory system. In particular, senior personnel…………must assess and periodically review the effectiveness of the policies, arrangements and procedures put in place to comply with the firm's obligations under the regulatory system and take appropriate measures to address any deficiencies.” - SYSC 4.3.1R.

“Senior personnel” are defined in the FSA Handbook Glossary as:

“those persons who effectively direct the business of the firm, which could include a firm's governing body and other persons who effectively direct the business of the firm.”

Under this system, the committee and the senior managers will together have this responsibility and will be able to allocate it as they think fit. Clearly, the Chief Executive (if any) is likely to continue to have the main responsibility and to share it to a greater or lesser extent with one or more members of the Committee. Equally, if there is no Chief Executive some or all committee members will carry out this role. The change simply means that CRED is less prescriptive about that level of detail.

This change will take effect from 1st October 2008 if the consultation being carried out in early 2008 agrees the proposal.

Corporate Governance and Social Enterprises: Ppt Presentation

2007-07-02T08:23:00.000-07:00

This is the powerpoint presentation for my talk on Thursday 5th July at the 4th Social Enterprise Research Conference at South Bank University, London. Maybe people will find the Bibliography useful if nothing else. It is a work in progress and needs further research and refinement. Comments welcome.

Industrial and Provident Society Law Review Launch

2007-06-21T00:40:00.000-07:00

Today, the Consultation Document from the Treasury is launched by Ed Balls in the House of Commons. May the great debate begin. Visit this link to read it as soon as it is put up by HMT.

Treasury Consultation On I & P Law

2007-06-08T01:37:00.000-07:00

The much awaited consultation document is not yet available. Here is a sneek preview of some of the thinking as provided by Sammy Amissah of HMT.

At the "Co-operating with Change" Consultation Conference organised by Co-operativesUK and ABCUL at New Century House on 5th June 2007, Sammy Amissah from the Treasury revealed that substantial progress had been made towards the production of the consultation paper but pointed out that work on the Financial Mutuals Private Members' Bill and other issues had delayed matters.

He suggested the following broad areas might be looked at and here are some notes on his comments:

Future Direction of the Sector :-

Legal Barriers to financial services operations by industrial and provident societies (I & P's) such as prohibition on banking by societies with withdrawable share capital; issues around capital adequacy and banking regulation in that context; comparison with Rabobank (NL) and Credit Agricole (France). Oudated I & P name.

£20K capital limit, remove or change? Regulatory implications of this especially if withdrawable share capital used; non-user investor members - clarifying this possibility which FSA have already accepted under present law; protection of the use of the word "co-operative".

Electronic Communication

Need for parity with companies but possibility of extra costs to societies to allow FSA to finance upgrade to electronic filing and searching of I & P register.

Corporate Governance

Application of Company Directors Disqualification Act 1986 to I & P directors.

Legal rule to allow directors of any society to be removed by ordinary resolution of the society's members regardless of anything to contrary in rules - as is the cae for company directors under section 303 CA 1985.

Whether duties of I & P directors need to be codified as will happen with company directors when Companies Act 2006 is in force.

Issues about training for directors of societies - a concern members have raised with the Treasury, apparently.

Credit Unions

Change of Name to "Community Banks"?

Liberalisation of Common Bond and balancing this with increased regulation as per Banking rules on e.g. capital adequacy

Non-Qualifying Member Rules - adjustment to allow person to stay a credit union member even if no longer in common bond.

Allow corporate membership of credit unions? Community organisations as members? Making deposits?

Electronic Communications ( as with I & P's generally)

FSA Report on Corporate Governance in Credit Unions

2007-04-06T07:21:00.000-07:00

Visit here to read this report issued in December 2006. It deals with the realities on the ground in GB credit unions.

Investor Members Allowed in GB Co-ops

2007-04-05T03:09:00.000-07:00

The FSA have indicated in a policy document that they are willing, in appropriate cases, to accept the idea of non-user investor members in co-operatives registered as industrial and provident societies.

Visit my web site to read their paper. In essence they will have to be reassured that the "user" members retain control of the co-op (e.g. voting rights of investor members will be limited) and the £20,000 limit will apply to shares held by investors who are not other industrial and provident societies. Only risk capital (i.e. shares) can be issued in this way and the investors must be warned of this. Co-ops wishing to do this must get legal advice.

© Ian Snaith 2006
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.

Electronic Searches of FSA register of I & P's Now Available

2006-09-27T04:39:00.000-07:00

Thanks to Dave Hollings on Co-opnet for this news. The Searches can be done from here.

First European Co-operative Society (SCE) Formed

2006-09-27T03:49:00.000-07:00

Early in July 2006 the first known use was made of the European Union Regulation and Directive to permit the formation of a European Co-operative Society.

As CICOPA reports:

"On 6 July 2006, a first ever European social cooperative society, Escoop, has been formally established in front of a notary, in Mola di Bari, Italy, between various Italian, Finnish and Spanish organisations involved in social services, the academic world and public administration, having at its centre the Italian social cooperative consortium Elpendu."

The escoop website gives more information.

Ed Miliband Sees "Third Sector" as Teaching Public Sector

2006-09-25T08:54:00.000-07:00

In a Society Guardian piece of 20th September the Minister for the Third Sector indicates that, rather than lots of public sector functions being contracted out to "Third Sector" organisations, such as charities and social enterprises, maybe the third sector will be asked to "teach" some of its techniques and approaches to the public sector which will continue to deliver the services. Should social enterprises gear up for consultancy rather than service delivery?

Maybe this is an indication that under a post-Blair New Labour regime there will be less contracting out and more direct public sector provision? Or maybe it's impossible for a Labour politician to appear to be too critical of public servants and their delivery when David Cameron is snuggling up to them?

Third Sector and Social and Economic Regeneration

2006-07-25T05:31:00.000-07:00

A major consultation exercise has been launched by the Treasury and Cabinet Office of the UK Government on the role of the Third Sector.

For details visit:

http://www.hm-treasury.gov.uk/documents/public_spending_and_services/third_sector/pss_thirdsector_consultations.cfm

Responses by electronic or other means are invited and the results are to be published in Novemeber. This is part of the Comprehensive Spending Review so it's a really important chance to tell Government what they can be doing to encourage and facilitate a role for the Third Sector (charities, voluntary organisations, co-operatives and other social economy organisations)in regeneration. An opportunity not to be missed, I think.

Venture Capital For Social Enterprise

2006-07-25T03:00:00.000-07:00

News has broken of a greater willingness by venture capitalists to provide finance for social enterprise. More news soon.

The launch of "breakthrough" is apparently today, 25th July

See:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/07/24/cnperm24.xml&DCMP=EMC-mcn_24072006

and

2006 Edition of "Keeping It Legal"

2006-07-11T12:14:00.000-07:00

The Social Enterprise Coalition and Bates Wells and Braithwaite Solicitors have published a new edition of the brochure "Keeping It Legal". This introductory guide to the various legal structures available for social enterprises costs £15 (or £7.50 for SEC members) from http://www.socialenterprise.org.uk/Page.aspx?SP=1982 .

"Keeping It Legal" will be useful to people in the UK starting out, or thinking about renewing or developing structures. It gives an overview of the main choices and issues around unincorporated structures, companies (including CIC's), industrial and provident societies (IPS), and choices on stakeholder involvement and charitable status.

Banking Services for Credit Union Members

2006-07-04T07:48:00.000-07:00

Certain large credit unions have arranged for banking services to be made available to their members through the Co-op Bank. It starts later this year. See
http://www.abcul.coop/page/news.cfm#302
for details.

Draft Money Laundering Guidance for Credit Unions

2006-06-29T14:47:00.000-07:00

The Joint Money Laundering Steering Group (JMLSG) of the British Banking Association has released a draft of sectoral guidance for credit unions at http://www.jmlsg.org.uk/bba/jsp/polopoly.jsp?d=362&a=7280 . This has to be read in the context of the Money Laundering Regulations 2003 and other legislation and with the FSA Guidance and general JMLSG Guidance.

The draft has been agreed with the credit union apex organisations.

Social Enterprise Brief Now in Cabinet Office of UK Government

2006-05-25T03:48:00.000-07:00

As part of the recent government reshuffle, political responsibility for the social enterprise unit has moved from DTI and been merged with responsibilities from the Home Office for the voluntary and community sector to create a new "Office for the Third Sector". Ed Miliband is now the Minister responsible within the Cabinet Office.

The new Social enterprise strategy is due to be published by Government "later in the Summer". See:

http://www.sbs.gov.uk/sbsgov/action/detail?type=RESOURCES&itemId=7000031637&r.li=7000031642&r.pp=11&r.l1=7000000412&r.s=p&r.pt=global

Credit Union Chairman Banned by FSA

2006-05-25T03:15:00.000-07:00

The FSA has made an order prohibiting the Chairman of a credit union from carrying out any regulated activity in respect of credit unions.

This was the result of a property deal whereby the credit union invested in land in a way not permitted by the CUA 1979 and without adequate security or full knowledge on the part of the credit union board or members' meeting of the Chairman's personal financial interest.

For the press release and a link to the full "Final Notice" - the legal document carrying out the decision visit:

http://www.fsa.gov.uk/pages/Library/Communication/PR/2006/046.shtml

Co-op Group wins Stansell Case in Court of Appeal

2006-05-16T14:07:00.000-07:00

© Ian Snaith 2006
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.

On 9th May, the Court of Appeal released its judgment in Co-operative Group (CWS Ltd) v Stansell [2006] EWCA Civ 538 http://www.bailii.org/ew/cases/EWCA/Civ/2006/538.html

The case is important as it unanimously decides that a transfer of engagements by an I & P society can transfer all the assets and liabilities of the transferring society to the transferee and that this includes assets that cannot be assigned by contract.

The case arose from the transfer of engagements by CRS Ltd to the CWS. CRS had entered a construction contract with Stansell Ltd. After the transfer of engagements when CRS Ltd had been removed from the register of I & P's by the FSA, CWS took the view that Stansell Ltd had broken the contract. When they went to arbitration on that claim, the builders appealed to the Chancery Division of the High Court on the basis that CWS did not have the "asset" of CRS's right to sue under the contract. They argued this because a clause in the Stansell/CRS contract said it could not be assigned by CRS without Stansell's permission. The Chancery Division Judge upheld that claim and ruled that CWS had no right to sue as there had been an assignment without permission which is void under contract law http://www.bailii.org/ew/cases/EWHC/Ch/2005/1601.html

CWS appealed to the Court of Appeal on the basis that the statutory transfer of engagements mechanism in section 51 of the Industrial and Provident Societies Act 1965 overrides the contract's limitation on transferring rights under the contract. On the basis of the literal wording of section 51 of the IPSA 1965, the Court of Appeal unanimously upheld the CWS argument:

"In my judgment, section 51(1) vested the benefit of the building agreement in CWS, notwithstanding the prohibition against assignment in clause 18.1.1 and the absence of consent by Stansell to an assignment to CWS. I base my conclusion on the natural and ordinary meaning of section 51(1) and on the absence of (a) a legislative context and (b) binding authorities indicating that section 51(1) should be given a more restricted meaning than it naturally bears." - per Mummery LJ at para 52

Section 51(1) reads:

"Any registered society may by special resolution transfer its engagements to any other registered society which may undertake to fulfil those engagements; and if that resolution approves the transfer of the whole or any part of the society's property to that other society, the whole or, as the case may be, that part of the society's property shall vest in that other society without any conveyance or assignment."

This is an important decision for I & P's transferring their engagements as it confirms that, as long as the resolution is properly worded, all assets and liabilities can be transferred. That means that there is no need to keep the shell of the transferring society on the register as a subsidiary in case it has a right to sue or other asset that was not effectively transferred. The ease and flexibility of the transfer of engagements procedure remains one of the key benefits of using and I & P structure.

New Legal Structure

2006-05-16T08:35:00.000-07:00

Co-operatives UK the UK apex organisation for co-ops has launched a new structure for co-ops in the fom of a Co-operative Community Interest Company. Visit http://www.congress.coop/live/welcome.asp?id=1003
for details

Co-operatives and Community Benefit Societies Act 2003 Extended to Northern Ireland

2006-04-15T14:08:00.000-07:00

The Industrial and Provident Societies (Northern Ireland) Order 2006 SI 2006/314
http://www.opsi.gov.uk/si/si2006/20060314.htm
extends to Northern Ireland industrial and provident societies the provisions introduced in Great Britain by the Industrial and Provident Societies Act 2002 and the Co-operatives and Community Societies Act 2003. The Order applies in Northern Ireland from a date yet to be appointed. Interestingly, the order also applies the Company Director Disqualification order to NI I & P societies - the GB Company Director Disqualification Act 1986 does not apply to GB I & P society Directors.

New Audit Exemption for Co-ops and Mutuals

2006-04-10T07:32:00.000-07:00

Asset Lock for Community Benefit I & P's

2006-04-10T06:48:00.000-07:00