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

Draft Co-op Law Consolidation Bill by March 2013......?

Hot news on the great Cameron and Co-operatives UK Co-op Law consolidation project.

I have just spotted that in its Business Plan for 2012-2013 (at page 11) The Law Commission states that an aim in its consolidation programme is:
"To consolidate the legislation about co-operative and public (sic) benefit societies (previously known as industrial and provident societies)"

The milestone for this is to "Provide a draft Co-operative and Public (sic) Benefit Societies Bill to HMT by March 2013".

It is encouraging to have a publicly announced date for the provision of a draft Bill to HM Treasury. A shame that the long hallowed "community benefit" (bencom) label for one type of society became "public benefit" in this brief entry in a Business Plan. A slip of the word processor perhaps?

© 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 Law Consolidation: Where is it now?

The project to consolidate the legislation for co-operatives and community benefit societies in the UK still seems to be at the stage of a brief being drafted by HM Treasury for the Law Commission. As of today I could find nothing on the English Law Commission website or the HM Treasury website.There was an estimate in the March report of Co-operatives UK's management to its board that once the Law Commissions are briefed it will take 9 months to achieve the drafting of the consolidated statute.  Then it has to be reviewed by the appropriate Parliamentary Committee and passed. Could be a  long job........

© 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

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