Changes to co-operative law will promote growth

Co-operatives need the law to provide a clear and simple business structure, to protect the use of the name “co-operative” and to let societies compete on fair terms...

Co-operatives need the law to provide a clear and simple business structure, to protect the use of the name “co-operative” and to let societies compete on fair terms with other businesses.

Historically, industrial and provident societies (IPS) have provided that but, by 2002, IPS law was out of date and obscure. That held co-ops back.

Since 2002, however, reforms have improved the position — and the years up to 2015 promise a quantum leap in legal support. 

Between 2002 and 2012, steady progress was made.During this period, most of the legal changes came from Acts passed as private members’ bills and regulations made by government using powers under those bills or other laws.

Some changes protected co-operative identity. Others gave societies parity with companies in the market place.

For example, in 2002, the procedure to convert a society into a company was subjected to a 50 per cent turnout of members as well as the existing 75 per cent majority of those voting. That made demutualisation harder.

In 2003, technical rules about the business societies can do and how they make contracts were eased in line with the rules applied to companies.

In 2006, exemptions from audits for smaller societies were updated and IPS community benefit societies — bencoms — were allowed to fully lock assets in the society.

That year, the registrar for societies, currently the Financial Conduct Authority (FCA), also announced that societies could raise funds from non-user investor members — as long as their co-operative identity was not imperilled.

Since 2011, children under 16 have been able to join and form co-ops, unaudited interim co-op accounts can be published, and the deadline for filing annual returns has been liberalised.

More radically, the £20,000 limit on holdings of non-withdrawable shares has gone, while communication by email and through websites with members and with the FCA is allowed for official purposes.

This all meant that, by 2012, many of the disadvantages for societies that had accumulated in the second half of the 20th century had been tackled and co-operative identity had been secured.

But there are still problems. Today, co-operative societies still carry the Victorian “IPS” name and cannot use insolvency rescue procedures or the full range of sanctions available against negligent or dishonest directors or senior executives. Co-operative legislation remains complex and old fashioned.

This year, the Law Commission drafted a modern Co-operative and Community Benefit Societies Bill. That is now with HM Treasury and a consultation is expected to begin in September. The Bill should go before Parliament late this year or early next year and be passed before the 2015 election. The new Act will consolidate the many Acts and regulations that govern societies into one Act, using modern language and a clear, logical, structure.

Alongside the new Act, other reforms currently in the pipeline are likely to be implemented. Societies will become “co-operative and community benefit societies” rather than industrial and provident societies.

This will make co-operative identity clearer and should be a great boost to the sector. On registration, societies will be clearly labelled as either co-ops or bencoms and the FCA will develop, and consult on, revised guidelines on the registration conditions for each type of society. That should protect co-op identity from abuse while still offering enough flexibility for growth and adaptation to social change and new challenges.

The administration and creditor voluntary arrangement rescue procedures, long available to companies, will be opened up to insolvent societies and incompetent and dishonest society directors and executives will be subjected to the same disqualification regime as company directors.

In addition, the FCA’s powers to deal with misleading names and other wrongdoing connected to societies will be upgraded in line with those applicable to companies.

As part of this raft of reforms, the current £20,000 limit on holdings of withdrawable share capital in societies will be raised in line with inflation.

Also, if Lord Naseby’s Mutuals’ Redeemable Shares Bill, presented to the House of Lords on July 22nd, is passed, a major obstacle to the full potential for raising capital from non-withdrawable society shares will disappear. Co-ops will then be able to raise capital in larger amounts from their members and others, while keeping their mutual identity. That will make them less dependent on loan capital and retained profits.

Co-ops will get a boost from the process of legislation but, in the longer term, opportunities to establish new co-operative businesses, capital to expand existing ones, and fairer treatment for those facing financial problems should also flow from the creation of a modern, user-friendly legal regime.

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