What happens if your co-op’s rules don’t cover how to distribute surplus assets if you decide to wind up the business? Read this blog by our lawyers Anthony Collins Solicitors about what happened to workers co-operative Watford Printers here...
It is relatively unusual for cases involving co-ops to reach the courts, but earlier this year one such case did so, and it has some important implications.
The case concerned a printing business established as a workers’ cooperative in 1921. In May 2015 it was wound up, and after paying off all the relevant creditors the Liquidator held some £800,000. There were some concerns about how this should be distributed, as some members had expressed concerns about other members increasing their shareholding (a “sudden surge”). These concerns ultimately led to an application to the Court for directions, and the case was heard earlier this year by Chief Registrar Briggs, the Chief Bankruptcy Registrar of the Companies Court in the Chancery Division of the High Court.1
The important principle at stake was what happens to the surplus assets of a co-operative society on a solvent winding up, where the society’s rules do not deal specifically with the point. In this case, it was held that those assets are to “be divided amongst the shareholders proportionately to their respective shareholdings”.
It was argued that as the society was registered under the Co-operative and Community Benefit Societies Act 2014, distribution of surplus assets should be consistent with the 2014 Act. Section 123(1) of the 2014 Act provides that a society may be dissolved by being wound up after a resolution being passed or a court order being made in a similar fashion to a company (subject to one or two amendments to company law, including the FCA taking the place of the registrar of companies). Company law provides that, in a solvent winding up, surplus assets should be distributed among the members “according to their rights and interest in the company” (s107 Insolvency Act 1986).
Having considered various cases, the FCA’s guidance, and the Handbook of Co-operative and Community Benefit Society law, the Registrar decided that Parliament had set down the rights of distribution of surplus assets. They were to be distributed in accordance with section 107 of the Insolvency Act 1986, which in this case the Registrar decided meant that they were to be distributed among the shareholders proportionately to their respective holding of shares.
This is an unfortunate decision. It fails to take into account the fundamental nature of the society as a co-operative society as evidenced by its rules. This was a co-partnership society: a partnership between employees (who could not be refused membership – rule 64), and other members including customers, with special provisions e.g. in relation to governance in the event that the employee members on the board are in a minority. The Registrar made no mention of a number of important aspects of the rules, such as the fundamental point that the primary mechanism for distribution of profits for a cooperative society is to members based on their transactions with the society, not return on share capital.
It is not clear whether the Court understood the system of registered rules for societies, which differs from companies; or the nature of society law as opposed to company law. It appears that the Court approached the rules and the society rather from a company perspective, summarising those features that would normally be the most relevant in company law.
It is all the more unfortunate that the Court did not have the benefit of input from the former committee members who understood the rules and might have been able to help the Court to understand the different nature of such a society. In this case, only the Liquidator was represented in Court; the disaffected members were not.
The most important point of learning from this decision is that rules (and especially model rules) should always include provision for what should happen to surplus assets on a solvent winding up. Although it is to be hoped that this case will not be followed in future, it sets a precedent, and there is now greater risk that in the absence of such provisions, distribution will be according to the amount of shareholding, which may not be the wishes of founding members.
The second point of learning concerns the fact that the Court was not made fully aware of the bigger picture in relation to cooperatives societies and cooperative law. It is not uncommon for those who are regularly dealing with company law to view issues concerning societies through a company law lens. This is a much more challenging issue to address.
This case highlights the lack of knowledge among legal practitioners about the unique elements of society law. Co-operatives UK campaigns to increase awareness of the co-op model of business. Join us in lobbying government to provide user friendly and regulatory frameworks by participating in our policy work.
Written by Anthony Collins Solicitors
We have worked with our lawyers Anthony Collins Solicitors to produce this blog to keep our members up to date with the latest legal developments to affect co-operatives. If you have any questions about this content, please contact the Advice Team at [email protected]
1 Re Watford Printers Ltd  EWHC329 Ch