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

I & P Charities To Be Covered by “Gift Aid on Cash Donations” Scheme

At the House of Commons Committee Stage of the Small Charitable Donations Bill 2012 on 30^th October 2012, Gareth Thomas MP Co-operative Party Chair and Shadow Minister for Civil Society won an assurance from the Government Minister that I & P charities are within the Bill.

This means that those Community Benefit Societies registered under the Industrial and Provident Societies Acts 1965 to 2003 which meet the criteria for charities will, once the Bill is in effect, like other charities, be able to claim a limited amount of tax rebate on cash donations if they already operate the Gift Aid Scheme for tax benefits and meet other conditions.

Minister's assurance could help if the inclusion of I & P's were seen as uncertain after the Bill is law - Pepper v Hart .

In addition, the Minister agreed, at Gareth's request, to write to the Charity Commission to ask them to speed up their decision about who should regulate charitable I & P's.

A good day's work for the Co-operative Party.

See Hansard section on Clause 17 from column 317. here is the Minister's clarification:

“Sajid Javid:  I understand the intention behind amendment 34, but I ask the hon. Member for Harrow West to withdraw it, because it is not necessary. Clause 17 sets out definitions for several of the terms used in the Bill. Subsection (1) defines what is meant by a charity which, for the purposes of the Bill, includes a charity eligible for UK charity tax reliefs, and certain organisations that are not charities in law, but that benefit from gift aid. Those are community amateur sports clubs, as well as certain named organisations. 

Amendment 34 would add a further type of organisation to the definition of a charity: industrial and provident societies that operate as charities. Industrial and provident societies are regulated by the Financial Services Authority, rather than the Charity Commission, but some of them are charities, as the hon. Gentleman said. Industrial and provident societies that are charities are entitled to claim UK charity tax reliefs, including gift aid, because they meet the definition of a charity as set out in subsection (1)(a). It follows that there is no need to specify that industrial and provident societies are a separate class of organisation to which the Bill will apply. When an industrial and provident society is not currently a charity, it is not eligible for the scheme. Those societies that are charities automatically qualify for the scheme, subject to their meeting the eligibility conditions.

[.....]
Forgive me, dear reader, for also quoting this extract:

Mr Thomas: The Minister has been helpful and given clarity to bencom societies that are charities, saying that they are covered under the Bill if they fulfill all the criteria that we have debated at some length. That will provide huge reassurance to those legal experts who advise industrial and provident societies, such as Mr Snaith, who is a distinguished former university lecturer and expert on the co-op and co-op law.

© 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