New Co-op Laws Fully in Place 1st August 2014

Many of you will have heard about the legal changes that have come into force this year. At some point I’ll tidy up this website to give them more prominence as a resource for readers, whether lawyers, co-ops, bencoms or housing or co-op development workers.

In the meantime, here are some brief thoughts an their implications followed by detailed legal references with links to the legislation itself. The one missing piece of this jigsaw is the FCA document about how they intend to apply the new law. That is expected later this year.

You can also visit Co-operative UK’s website for their input as well as the ABCULAnthony Collins LLP, CroftonsDWF LLP, and Trowers and Hamlyn  websites.

Legal Changes: What To do Now

Co-ops of all kinds and Bencoms, such as housing associations, and their advisors need to be aware of the changes described below. The implications to think about are:

Might the increased availability of share capital by individual or company members of societies be useful?

If the former £20,000 maximum holding limit for withdrawable shares is written into the rules, rather than a formulation such as the maximum allowed by law, the rules will have to be amended to take advantage of the new limit of £100,000 or a lower limit with which the society is comfortable for liquidity reasons.

Do society rules need to be reviewed in the light of the availability of new insolvency and Scheme of Arrangement options to e.g. allow for dissolution after administration?

If society rules refer to specific named legislation rather than the law currently in force they could be changed to refer to the 2014 Act.

Societies, especially energy co-ops, need to be prepared to deal with the new FCA advice publication expected later this year and the increased reporting requirements and more fully explained limits on return on capital that it is likely to include.

Co-op development workers, business advisors, lawyers, and accountants advising clients setting up a new business need to be aware of the availability of the co-operative and community benefit society structures as well as companies limited by shares or guarantee, partnerships (registered or unregistered), and Community Interest Companies to advise on the full range of choices. Spread the word

With the help of a team of practitioner colleagues, a newly updated second edition of my Handbook of Co-operative and Community Benefit Society Law is to be published by Co-operatives UK and Jordan Publishing in September 2014 and can be pre-ordered now.

More Detail and Links

Four new pieces of legislation and new regulatory guidance reform the law that applies to co-operative societies and community benefit societies in 2014:

From 1st August 2014 the Co-operative and Community Benefit Societies Act 2014 (“CCBSA 2014”) consolidated and brought together all the legislation governing societies and changed their name. It also introduced registration as either a co-operative or a community benefit society rather than as a society which shows it is one or the other.

From 6th April 2014 six statutory instruments changed the law to facilitate the use of co-op and bencom societies for business:

The Industrial and Provident Societies and Credit Unions (Arrangements, Reconstructions and Administration) Order 2014 SI 2014/229 used the power granted by section 255 of the Enterprise Act 2002 to apply the insolvency rescue procedures of creditors’ voluntary arrangements, administration and schemes of arrangement under the Insolvency Act 1986 and the Companies Act 2006 to societies. This puts insolvent societies in the same effective position as insolvent companies.

The Co-operative and Community Benefit Societies and Credit Unions (Investigations) Regulations 2014 SI 2014/574 applied part 14 of the Companies Act 1985 to societies so that the FCA have powers equivalent to those available to the Department for Business Innovation and Skills (BIS) for companies where they take the view that fraud or other wrongdoing requires the inspection or investigation of a society. This should increase confidence in societies as they are subject to the same investigation regime as companies.

The Industrial and Provident Societies and Credit Unions (Electronic Communications) Order 2014 SI 2014/184, made under sections 8 and 9 of the Electronic Communications Act 2000, permitted the electronic submission of a single registration document to the FCA when an application was made to register a society. Its amendment of the 1965 Act is consolidated by section 3(1)(b) CCBSA 2014. This adds to the ability of societies to use electronic communications.

The Industrial and Provident Societies (Increase in Shareholding Limit) Order 2014 SI 2014/210 used the power available to HM Treasury under section 2 of the Industrial and Provident Societies Act 1976 to raise the limit on the amount of withdrawable share capital that a person other than another society can hold in a society from £20,000 to £100,000. That provision is consolidated from 1st August 2014 by section 24 of CCBSA 2014. This increases the access of co-operatives and community benefit societies to capital.

The Co-operative and Community Benefit Societies and Credit Unions Act 2010 (Commencement No. 2) Order 2014 SI 2014/183 adds section 22E to the Company Directors Disqualification Act 1986 to apply the disqualification provisions to committee members and officers of societies. This applies the same discipline to directors, executives and committee members of societies as apply to company directors.

The Nature of Co-operative and Community Benefit Societies and effect of the new Legislation

These societies have been called “industrial and provident societies” since 1852. From 1st August 2014 they have officially been called co-operatives or community benefit societies. There are two types of society using one legal structure.

The legal structure is used by co-operatives. They are businesses owned and controlled by their consumer, employee or supplier members and not by outside investors who own shares. They include the large scale consumer co-operatives which have been in the news recently as well as credit unions (savings and loan co-operatives), village shops or pubs rescued from closure and businesses owned and democratically controlled by employees.

The structure is also popular with community benefit societies, such as housing associations and green energy producers, which do not benefit their own members but rather serve and benefit the community or pursue wider social aims.

Both types of society are registered by the Financial Conduct Authority (FCA) Mutual Societies Team but are not otherwise regulated by the FCA or the Prudential Regulation Authority (PRA) unless they operate in financial services, which most don’t. They share with companies the key features of corporate personality, limited liability of members for society debts and the ability to use shares and loan capital to raise funds. They differ from companies because, to be able to register and remain registered, they must prove to the FCA’s satisfaction that they are either a co-operative or a community benefit society and their registration can be cancelled if they no longer meet those conditions.

The Co-operative and Community Benefit Societies Act 2014 provides a boost for this legal structure and will facilitate its use by people setting up co-operatives and community benefit businesses by reducing the time and trouble needed to find, apply and understand the law that applies to them.

The increase in capital limits allows greater use of members’ share capital by societies while encouraging the use of withdrawable shares which can be effectively redeemed or bought back by the society allowing the member to realise their capital investment.

However, new guidance expected from the FCA in August 2014, to coincide with the coming into force of the 2014 Act, is expected to underline the limited return societies are expected to provide to investors in shares or loan capital as well as increasing reporting requirements for societies to provide the FCA with information to show that they still meet the co-operative or community benefit registration requirements.

Societies compete in the market place with companies so on issues such as insolvency law, director disqualification, electronic communications with their registrar (the FCA) and powers of investigation and inspection they have now been placed in the same legal position.

Challenges from the New Laws

These reforms provide a golden opportunity for lawyers, accountants and other business advisors to offer clients a wider range of legal choices when businesses are established or change ownership.

With the help of organisations such as Co-operatives UK and the FCA Mutual Societies Team lawyers can offer clients the possibility of a structure which enjoys all the benefits of corporate personality, limited liability and share capital while serving the needs of the community or preserving control by employees, consumers, suppliers or other stakeholder groups. Societies also enjoy some exemptions from the FSMA rules on financial promotion when shares are offered to members and can issue withdrawable shares and so ease the problem of exit from members who invest.

Important Dates

The 1st August 2014 saw the new legal framework for societies fully in place. New FCA guidance is expected to be issued later in 2014. Increased capital limits, the application of insolvency rescue provisions, new investigation powers, and director disqualification all came into force on 6th April 2014.

© Ian Snaith 2014 Creative Commons LicenseThis work is licensed under a Creative Commons Attribution-ShareAlike 2.0 UK: England & Wales License.


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