Insolvency Changes for Co-ops and Bencoms

The Co-operative and Community Benefit Societies Act 2014 has consolidated the legal framework for co-operatives and community benefit societies (formerly known as industrial and provident societies). The Act builds on some key legal changes and simplifies and updates the language of the legislation. It applies separate registration for co-operatives, and community benefit societies respectively.

One of the key legal changes made in advance of the consolidation was the application of corporate rescue procedures to most of those societies in the event of their insolvency.
The 2014 Act consolidated, in section 123, the provision which has always applied to societies all the winding up and dissolution procedures applicable to companies. Through that provision society directors are also potentially liable for wrongful and fraudulent trading. However, only the implementation by SI 2014/183 from 6th April 2014 of the new section 22E of the Company Directors’ Disqualification Act 1986 allows for the disqualification of society directors or committee members on the same basis as company directors.

Similarly, the Industrial and Provident Societies and Credit Unions (Arrangements, Reconstructions and Administration) Order 2014 SI 2014/229 (“the ARA Order”) allows most co-operatives and community benefit societies to use company voluntary arrangement and administration procedures when insolvent. The ARA Order applies to most societies, including credit unions, but not to societies that are private registered providers of social housing, or registered social landlords.

Before the 2014 changes, liquidation or receivership were the only insolvency procedures available to societies. The ARA Order applies an amended version of Parts 1 (company voluntary arrangements) and 2 (administration) of Insolvency Act 1986 to societies. It also applies the arrangements and reconstructions provision of Part 26 of the Companies Act 2006.

Some modifications are made to the insolvency and company legislation when it applies to societies. In particular, the procedures may require greater engagement with the FCA as registering authority for societies than would be needed in the case of a company and its registering authority, Companies House. For instance, where compromises or arrangements are proposed in either an administration or a Scheme of Arrangement, the FCA must be satisfied that it is not contrary to the rules of the society or the provisions of the Co-operative and Community Benefit Societies Act 2014, and if appropriate, the Credit Unions Act 1979.

Receivership applies to societies on a contractual basis but is technically not an administrative receivership under the Insolvency Act 1986 because those provisions do not apply to societies.

As a result of these changes, the rules applicable to insolvent co-operative or community benefit societies are now very similar to those that apply to companies and the same remedies apply to society directors who fall short of their obligations in that context. However, it is important to check for detailed variations in the application of the provisions by the legislation governing societies.

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