Registered Societies formally Industrial and Provident Societies
The Co-operative and Community Benefit Societies Act 2014 consolidates the legislation previously contained in the Industrial & Provident Societies and other related Acts. The 2014 Act consolidates previous legislation with no change of meaning, all legal requirements remain the same. Industrial & Provident Societies legislation was originally drafted to govern co-operative societies whose business was intended to be conducted for the good of the community and were none profit making. Members purchase one share and in general meetings the rules allow one member one vote. Whilst not as widely recognised as companies Co-operative and Community Benefit Societies known as ‘registered societies’ have a number of advantages over a company structure. Registered societies may conduct any legal business except that of investment for profit. Consumer, agricultural and housing co-operatives, social clubs, Women’s Institute markets, allotment societies, mutual investment companies, friendly societies and housing associations are usually incorporated as Co-operative and Community Benefit Societies, as do some social enterprises. This process is facilitated by the existence of “model rules” developed by various governing federal bodies, which reduce legal costs of incorporation. Registered societies must be registered with the Financial Conduct Authority (FCA) who carry out a similar function as Companies House would for a company.
A society can register under the Act if: It is a society for carrying out an industry, business or trade, and it satisfies the FCA that either:
A society must:
A ‘co-operative society’ acts in the benefit its own members, and the FCA would normally expect it to demonstrate the following:
there is a common economic, social or cultural need or interest amongst all its members;
the business is run for the mutual benefit of its members;
control is retained by the members, and this is exercised by them equally;
any interest paid on share or loan capital does not exceed a normal commercial rate;
profits are either re-invested, or shared fairly (although not necessarily equally); and
there are no unreasonable restrictions on membership.
An example of this might be a social club which exists to provide services (a bar, place to meet socially etc.) to its own members.
For a society should demonstrate that it is run for community benefit, the following factors would be considered by the Financial Conduct Authority:
a society wishes to operate on the basis of “one member, one vote” rather than on the number of shares held;
a society may be part of a group of societies;
In addition, the following must apply:
the society is run primarily for the benefit of people who are not members;
any interest paid on share or loan capital does not exceed a normal commercial rate;
the society’s rules prohibit profits or assets being distributed to members; and on dissolution, the society’s rules require assets to be transferred to a body with similar objects and not distributed to members.
An example of such a society might be a Housing Association, or a society that operates a community transport vehicle.
FEATURES OF AN CO-OPERATIVE AND COMMUNITY BENEFIT SOCIETY
Matters to be provided for in the society’s rules – section 14 of the Co-operative and Community Benefit Societies Act 2014 lists the following matters which should be provided for in the society’s rules:-
1. The name of the society.
2. The object of the society.
3. The registered office of the society to which all communications and notices of the society may be addressed.
4. Terms of admission of the members, including any society or company investing funds in the society under the provisions of the said Act.
5. The mode of holding meetings, the scale and right of voting, and the mode of making, altering or rescinding rules.
6. The appointment and removal of a committee of management and of managers or other officers and their respective powers and remuneration.
7. The maximum amount of interest in the shares of the society which may be held by any member otherwise and by virtue of section 24 of the act in relation to maximum interest in society’s withdrawable shares.
8. Whether the society may contract loans or receive money on deposits subject to the provisions of the said Act from members or others; and,
if so, under what conditions, under what security and to what limits of amount.
9. Whether the shares or any of them shall be transferable, the form of transfer and registration on the shares, and the consent of the committee thereto; whether the shares of any of them shall be withdrawable, and the mode of withdrawal, and the payment of the balance due thereon on withdrawing from the society.
10. The provision for the audit of Accounts.
11. Whether, and if so, how members may withdraw from the society, and provision for the claims of the representatives of deceased members or the trustees of the property of bankrupt members.
12. The mode of application of profits.
13. The custody and use of the society’s seal.
14. Whether, and if so, by what authority, and in what manner, any part of the society’s funds may be invested.
Statutory obligations – On or after registration the following conditions must be fulfilled:-
1. Sc 11(1) – The registered name of the society must appear in a conspicuous position in legible characters outside its registered office and every other place in which business is carried on.
2. Sc 11(2) – A society must have its registered name mentioned in all notices, business correspondence, advertisements, websites, etc.
3. Sc 30(1) – A register of members and officers must be kept at the registered office.
4. Sc 75 (1) – Proper books of account must be kept.
7. Sc 81 – A copy of the Accounts must at all times be displayed in a conspicuous position at the societies’ registered office.
5. Sc 89 – An annual return must be made to the FCA together with a copy of the Accounts and if appropriate the report of the auditor within 7 months after the year end.
Membership and Shares – Each member must hold at least one share in the society which normally has a low nominal value, such as a £1 or 5p.Sc 24 (1) states no person may hold more than £100,000 in shares, although it is recommended that the rules state that each member hold one share only which should not be transferable and on which no dividend or interest should be paid. There is no limit on the nominal capital of a Co-operative and Community Benefit Society, and it is possible provided the rules allow raising capital through an issue of shares to members.
Meetings and Voting – The rules of the society must deal with the mode of holding meetings, and the scale and rights of voting. At General Meetings the rules usually provide for one member one vote.
Rules to bind members – Sc 15(1) – A registered society’s registered rules bind the society and all its members and all persons claiming through them to the same extent as if—
(a) each member had subscribed the member’s name and affixed the member’s seal to the rules, and
(b) there were contained in the rules a covenant on the part of each member and any person claiming through the member to observe the rules (subject to the provisions of this Act).
(2) But a member of a registered society is not bound by an amendment of the society’s rules registered after the person became a member if and so far as the amendment—
(a) requires the member to take or subscribe for more shares than the number held by the member at the date of registration of the amendment,
(b) requires the member to pay upon the shares held by the member at that date any sum exceeding the amount unpaid upon them at that date, or
(c) in any other way increases the liability of that member to contribute to the share or loan capital of the society, unless the member consents in writing to the amendment.
Disputes – Sc 137 Determination of disputes in accordance with a society’s rules:-
(1) If a registered society’s rules give directions as to the way in which relevant disputes are to be determined, a relevant dispute is to be determined in the way directed by the rules (subject to the following provisions of this section).
This enables a society to establish cost effective and efficient procedures for dealing with internal disputes. Disputes between members and the society or any of its officers must be decided in the manner directed by the rules of the society. A decision so given is binding and conclusive on all parties. Dependent on the circumstances an application for enforcement of a decision made under the society’s rules for dealing with disputes may be made to the magistrates or county court.
Umbrella of Governing Body – The legislation is ideally suited for groups of societies or clubs who are associated to an umbrella governing body, such groups would share common objectives and include for example the co-operative movement and the Club and Institute Union, the Association of Conservative Clubs. The member society owns the shares of the governing body. The governing body would sponsor standard model rules appropriate to the activities of the group.
ADVANTAGES AND DISADVANTAGES OF AN CO-OPERATIVE AND COMMUNITY BENEFIT SOCIETY
The effect of incorporation of a society is contained in section 3 of the Co-operative and Community Benefit Societies Act 2014:-
3(3) A registered society is by virtue of its registration a body corporate by its registered name, with limited liability.
3(4) The society may sue and be sued by its registered name.
3(5) Registration vests in the society all property for the time being vested in any person in trust for the society.
3(6) Any legal proceedings pending by or against the trustees of the society may (once the society is registered) be brought or continued by or against the society.
3(7) The acknowledgement of registration also constitutes an acknowledgment of, and is conclusive evidence of, the registration under this Act of the rules of the society in force at the date of the society’s registration.
Other advantages of a Co-operative and Community Benefit Society include:-
1. High quality rulebook and constitution as the rules are reviewed by the Financial Conduct Authority and sponsored by a governing body they are comprehensive and consistent. A separate rulebook for bylaws should not usually be required.
2. A floating charge can be given over the society’s assets making it easier to raise finance.
3. The transfer of assets to the society from an unincorporated entity is automatic, no legal conveyance is required and no stamp duty is payable.
4. Simplified and inexpensive procedures for settling disputes.
5. Certain privileges under the Licensing Act.
6. Statutory procedures exist for both member’s voluntary and compulsory dissolution and winding up. Simplified procedures exist for the winding up of solvent societies and in addition Co-operative and Community Benefit Societies can be treated as a company for the purpose of Insolvency Law.
7. Compared to other structures they enjoy favourable corporation tax treatment, e.g., like bank interest may be paid gross to third parties; interest paid can be used as an allowable deduction against taxable income from any source regardless of the purpose of the loan.
Disadvantages of Co-operative and Community Benefit Societies are:-
1. If model rules have not been sponsored they can be difficult and expensive to set up. The model rules have to provide for certain specified matters and are reviewed by the Financial Conduct Authority prior to acceptance.
2. Reduction in privacy, an annual return and accounts have to be filed with the Financial Conduct Authority, and a statutory audit may be required.
3. The Financial Conduct Authority has the power to appoint an inspector to examine the affairs of a society.
4. An annual fee is payable to the Financial Conduct Authority.
5. Solicitors, bankers, accountants and other professional advisors are often unfamiliar with Co-operative and Community Benefit Society law.
EXAMPLE OF PROMOTING BODIES FOR MODEL RULES OF AN CO-OPERATIVE AND COMMUNITY BENEFIT SOCIETY
Association of British Credit Unions Limited
Association of Conservative Clubs (ACC)
Co-operatives UK
Club & Institute Union Limited (CIU)
Royal British Legion
Rugby Football Union
QUESTION AND ANSWER SECTION
Q. Does the Society have to pay tax?
The taxation of Co-operative and Community Benefit Societies is covered by section 187(10) and 486 of the Income and Corporation Taxes Act 1988 as amended by schedule 4, part 2 of the Co-operative and Community Benefit Act 2014. Registered Societies are in principle subject to Corporation Tax, however, taxation cannot arise on ‘self supply’, in practice, this means that tax does not arise on profits made from trading with the society’s members, for instance on the profits of alcohol sold to members. Accordingly, a charge may arise on the following:
interest received;
trading activities with non-members;
property lettings;
chargeable gains on the disposal of assets;
capital sums derived from assets
A number of rugby and sporting clubs have applied for Community Amateur Social Status (CASC) to obtain a more favourable treatment of corporate and other taxes.
Q. What are the implications of the Society ceasing to be a member of the umbrella body?
The Society continues as a corporate entity with limited liability incorporated under the Co-operative and Community Benefit Societies Act and monitored by the Financial Conduct Authority. The rulebook of the Society remains in force but has to be updated removing reference to the umbrella body; the amended rules should then be submitted to the FCA together with their form ‘Mutual Change of Rules for registered societies’. Care needs to be taken in updating the rules, for example, dispute resolution under Sc 137 usually refers to the Umbrella body, this rule should be updating to provide an independent arbitrator such as other local societies or local dignitaries.
Q. Does the Society require an audit?
Sc83(4) of the Co-operative and Community Benefit Society exempts any society with aggregate receipts and payments of less than £5,000, assets less than £5,000 and less than 500 members is automatically audit exempt. For Registered Societies above this limit, audit exemption is not automatic but requires the passing of a member’s resolution. Audit exemption is gained by considering the threshold for the previous year, so the vote at the general meeting is for next year’s audit. The resolution will fail if 20% or more of the votes are ‘against’ and 10% or more of members entitled to vote are ‘against’. The Articles of the society may also require an audit, in which case audit exemption is not available.
Where a member’s resolution has been passed to gain audit exemption an ‘independent accountants report’ signed by a registered auditor is required where income exceeds £90,000.
A full audit would always be required where income is more than £10.2million or total assets exceed £5.1m.
Q. What financial information has to be presented to members?
Annual accounts have to be prepared and presented to members. The format of accounts and reports for Co-operative and Community Benefit Societies is very different from reporting for other entities and the legislation allows greater flexibility than Company Law. Many societies continue to prepare accounts in Companies Act format with reference to ‘directors’ and other Company Act terms, such accounts can be misleading for members and may not be fully compliant with the legislation.
Q. What details of members has to be kept?
Section 30 of the Co-operative and Community Benefit Societies Act 2014 requires a register of members must be kept, detailing Sc 30(1):
the names and postal addresses of the members;
Details of electronic address;
number of shares they hold;
a statement of other property held in the society, e.g. loans or deposits;
the date the person became a member;
the date, where relevant, the person ceased to become a member; and
Sc30(3) the names and addresses of the officers of the society with the offices held and the dates they assumed office.
Any member of the society can inspect any of the above information apart from the number of shares and the other property held in the society by each member.