In September 2024, The Law Commission published a consultation paper containing provisional proposals for reform to the Co-operative and Community Benefit Societies Act 2014, and sought the views of those with knowledge or an interest in the issues on these proposed reforms, writes Cliff Mills of Anthony Collins Solicitors.
Over recent weeks, a group of UK law firms (Anthony Collins, Bates Wells & Braithwaite, Stone King and Wrigleys) have been working collaboratively to put forward high level ideas from a legal practitioner’s perspective. In particular, these have focussed on an alternative approach to the conditions for the registration of societies. The following is a summary of their ideas on this, and further closely related topics.
- Basis for registration of a society
When the conditions for registration (the FCA being satisfied as to bona fide co-operative or society for the benefit of the community)1 were introduced in 1939, the objective was to prevent fraudulent financial promotions by businesses registering as a society to avoid being subject to rules applying to companies.
That legislative2 approach was a short-cut. Rather than articulating the reason why a business could register as a society and not a company, it named types of organisations which were permitted: co-operatives, the target of the original legislation in 1852; and other societies which it was legitimate to treat differently from companies.
The result of this was to leave the FCA today as the arbiter of what is and is not a co-operative and a society for the benefit of the community, with scant legislative guidance as to how to make that judgement. It fails (still) to expressly describe why a business should or should not be allowed to register.
Rather than seeking to define in statute two types of business (a solution many have been advocating), an alternative, and arguably more robust approach is to address the defect in the 1939 Act by articulating the basis for entitlement to registration; but how?
The Companies Act 2006 for the first time set out in statute the purpose of a company, namely pursuing “the benefit of its [shareholders]3 as a whole”. In the same year, the Charities Act incorporated into legislation charitable purposes.4
Different corporate bodies are set up for different purposes. The trend to set out these purposes in statute is helpful (open and transparent); but it also gives a clear focus to those entrusted with power (directors) on their duties – to deliver the stated purpose, thereby enabling members to hold them to account. It was in codifying directors’ duties that the Companies Act 2006 first spelt out the purpose of a company.
How might this apply to societies?
A working group of law firms (Anthony Collins, Bates Wells and Braithwaite, Stone King and Wrigleys)5 have been collaborating over recent weeks to put forward a proposed alternative approach. They propose the following as the basis for legislation.
A Registered Society is a corporate body, with a membership of individuals and/or other corporate bodies, united by a common purpose, defined in the Registered Society’s rules.
The common purpose of a Registered Society must be other than the generation of profit or capital gain for distribution to members and any profit distribution or capital gain for members must be consistent with the defined common purpose.
The common purpose of a Registered Society may be (non-exclusively):
- a collective purpose, where the purpose is defined as mutual and/or co-operative; and/or
- a community purpose6, where the purpose is defined as for the benefit of the general community, or a section of the general community, and/or
- a charitable purpose, where the defined purpose is for the public benefit, which may be a charity.
Minimum constitutional rules, appropriate to the different purposes are to be set out in a schedule.
An application for registration must include a statement of compliance, including that the proposed society has a common purpose, which is not unlawful, and that the relevant rules requirements relating to purpose have been addressed. The registration will proceed unless the Registrar finds that there is some apparent non-compliance.
Ordinary membership of a Registered Society shall be open to any applicant affirming the defined common purpose of the Registered Society, who meets reasonable qualifying criteria for membership to provide reasonable assurance that the prospective member is, in good faith, committed to the common purpose.
Voting in general meetings shall be on an equitable basis, not based on shareholding. There is a presumption of one person one vote, or where appropriate voting based on volume of trade with society. In societies with multiple membership constituencies, weighting of votes between constituencies is permitted where appropriate to purpose; but one person one vote or voting based on volume of trade to apply within constituencies. There should be a catch-all such as: some other equitable voting arrangements which the subscribers declare is in the best interests of the purpose which the members advance, and which does not prioritise investor or financial interests in a way which satisfies the/Registrar that confidence in societies is at risk.
- Consequential suggestions
Basing registration upon purpose has a further implication. It was the much called for codification of the duties of company directors that forced the legislation to define the purpose of a company. It is the duty of a director to deliver the corporate purpose.
By basing registration on a clear purpose, this will enable the legislation for societies to follow the lead of the Companies Act and clarify that it is the duty of directors to ensure that the society delivers its purpose. (This is already provided for in section 172 (2) Companies Act 2006.) The relevant provision would therefore be along the following lines.
A director of a society must act in the way they consider, in good faith, would be most likely to promote the success of the society in delivering its purpose, and in doing so have regard (amongst other matters) to—
(a) the likely consequences … [continue as per s.172(1) Companies Act 2006]
The other fiduciary duties and civil consequences should be incorporated from company law except where they are not appropriate for the different purposes.
- Accountability
A further matter connected to the previous two is the issue of the accountability of directors. The working group agreed that in general, the legislation should increase the accountability of directors (and other officers) to the society and its members, putting them more in control with less reliance on the registrar.
In that connection, there is one important area where currently the members of societies have less power to hold directors to account than shareholders of a company. This is in connection with the ability to remove a director. In company law there is a statutory right for shareholders to Members to have the right by ordinary resolution to remove a director.7
A parallel provision should be included in legislation for societies.
- Section 2(2) CCBSA 14. Prevention of Frauds (Investment) Act 1939.
- Section 172(1) refers to “members” who are investors in a company context.
- This provision embeds shareholder primacy in statute.
- Now contained in the Charities Act 2011 5.
- Facilitated by Malcolm Lynch, also including Julian King, Cliff Mills, David Alcock, Oliver Hunt and Luke Fletcher
- As with the CIC regulations 2005, certain activities might be precluded from being included in community purpose.
- Companies Act 2006 s. 168
