Law Commission consults on modernisation of Co-operative and Community Benefit Society law. Deadline 10th December 2024.
Introduction
This is the first major review of society legislation formerly known as the Industrial and Provident Societies Act since its enactment in 1852. Between times there have been occasional amendments and then consolidation Acts, such as the 2014 Act. The intent of this society legislation was to provide a relatively simple corporate structure to enable economic activity where there was a democratic control of capital on the basis of one person one vote regardless of the number of shares held. Today it is an Act with 155 sections.
HM Treasury as the sponsoring department has requested the consultation to modernise the law. It is an opportunity to look afresh at the law of societies. The Consultation Document has five principal sections.
You can read the Law Commission's consultation document here, as well as a shorter summary which can be found here.
Defining societies
The first two sections seek to refine the definitions of co-operative and community benefit societies. Societies must satisfy either definition to be registered under the Acts and for their continued registration. The definitions were introduced under the Prevention of Frauds (Investment) Act 1939 to seek to restrict the sale of shares in societies to prevent the legal form being used for fraudulent activity. The reform required companies from that point to sell their shares through licensed brokers. Satisfying these conditions is not always simple as it requires following guidance issued by the registrar where interpretation can vary.
The Registrar of Mutual Societies, currently the Financial Conduct Authority, provides guidance on how to fall within the definitions. Since then financial promotion legislation has become very extensive so this would be a good opportunity to remove the definitions and apply proportionate financial promotion legislation. Financial promotion legislation already applies to transferable shares issued by societies.
Registration of charitable societies with the Charity Commission
Charitable community benefit societies were regulated by the Charity Commission from 1960 to the early 1980's and then became exempt from registration with the Charity Commission. In Scotland and Northern Ireland such societies are required to register with the charity regulator. The Law Commission proposes that should occur in England and Wales too. Registered Providers may wish to argue that they should maintain their exemption since they already have a strong regulator.
Share Capital
The Law Commission clarifies some of the misconceptions which have arisen around share capital of societies, but largely considers the current provisions largely provide flexibility. It recommends a prudential rule that directors of societies should consider whether they can pay debts as and when they fall due over a period of one year if they are permitting the withdrawal (redemption) of share capital. The Law Commission is not convinced that it requires a new type of share for very large societies who are seeking to raise significant amount of capital. Obtaining the balance between keeping to the mutual status of one person one vote regardless of shareholding and seeking a significant capital investment deserves further consideration.
There is also a proposal to permit societies to have entrenchment provisions to enable societies to adopt provisions which require that any capital surplus, following the repayment of shares at their nominal value, is distributed to other mutual or community organisations.
Director's Duties
The duties of a director of a company are to its members. The Law Commission recommends that s172 Companies Act 2006 duties should apply to directors of societies. However, there is a principal difference between the two legal forms in that the purpose of a society is greater than the maximisation of financial benefit to its members it is also to maximise the mutual purpose of the society which companies may express in Section 172(2). It will be important to capture that difference.
General Reforms
There are a number of reforms proposed to outdated provisions such as aligning the execution of documents with those for companies and to permit electronic meetings. It also proposes an appeal mechanism from the Registrar's decision as to whether a society satisfies the definition of what a society should be as well as further powers for the Registrar. Consideration should be given to the obligations which the Registrar should have to act reasonably in the application of its powers.
Other stakeholder suggestions
There are a number of other proposals which stakeholders came up with when the Law Commission prepared its consultation. Perhaps the most significant of which is to change the governing department from HM Treasury to the Department of Business and to place the registrar function with Companies House. HM Treasury did not include consideration of this topic in its brief, but this is often considered an overdue reform.
Responses
The Law Commission has 87 Consultation Questions. Responses should be with the Law Commission before midnight on 10 December 2024.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.