The March 2013 Budget saw a commitment by the government to consult on two important changes to the legislation governing Industrial and Provident Societies (IPSs). On the assumption, that the changes receive favourable public support, many co-operatives registered as industrial and provident societies will be asking, “what does it mean for us?”
Linda Barlow, a Legal Officer in Co-operatives UK's, Co-operative Advice Team, offers an outline of the changes below.
Increase in the cap on withdrawable share capital
Co-operatives have been growing at a fast rate since the start of the credit crunch in 2008 but the legislation on investment has not kept pace. IPSs that have the ability in their rules to raise capital through issuing ‘withdrawable share capital’ have been subject to an artificial cap on the amount of capital they can raise.
What is withdrawable share capital?
Withdrawable share capital is particular to IPSs and is not available for other corporate forms such as Limited Liability Partnerships (LLPs) or share companies. Withdrawable share capital has some unique characteristics. Unlike transferable share capital in conventional companies withdrawable share capital:
- Is issued on the principal of one member, one vote. This means that regardless of the number of shares a member holds, s/he/it is only entitled to cast one vote at general meetings of their society.
- Is not as heavily regulated by the Financial Services and Markets Act 2000 (FSMA 2000), which means that societies enjoy some exemptions from FSMA covering the approval of financial promotions, which can reduce the cost of a share issue, including the promotion of their share offers without drawing up or issuing a share prospectus. This type of capital generation is proving to be very popular amongst local communities seeking to take over ownership of community assets that are at risk of closure.
- Cannot be transferred between people. The Law allows shareholders to withdraw their share capital, subject to agreed terms and conditions that protect the society’s financial security.
An increase in the cap will:
- Increase the amount an individual person (including members that are limited companies) can invest in an IPS via withdrawable share capital.
- Enable IPSs to grow by opening up this ‘unlocked equity’ from their members rather than relying on traditional sources of debt finance.
- Protect the financial security of the co-operative. Unlike conventional company share capital, withdrawable share capital is not subject to the speculative share market, and members have a social as well as economic incentive for investing.
- Provide the necessary balance of protecting members’ investments against the needs of the society to grow. Although withdrawable share capital provides a society with a valuable finance option, it is nevertheless ‘risk capital’ and it is important that members, many of which may use personal savings to purchase shares, are fully aware that they may lose some if not all of their investment. With this in mind, we hope that the new cap will refelct an increase that is in line with average earnings as a measure of average ability to pay or fund purchase of shares.
Any co-operatives wanting to know more about ‘Community Shares’ and how this type of finance is being used in context can visit the Community Shares website.
To enable IPS to enter into Administration
Unlike limited companies, and although provided for in the Enterprise Act 2002, IPSs are unable to enter into administration and until now if an IPS was in financial difficulty the only option available would be to wind-up, transfer its engagements or amalgamate with another corporate body.
What is administration?
Administration is the procedure which places a corporate body under the control of an insolvency practitioner and the protection of the court. The aims of administration are to rescue the corporate body as a going concern of this is not possible, to achieve a better result for creditors than a winding up.
This new provisions will:
Pave the way to set IPSs (except those registered as social landlords) on a par with limited companies in terms of the application of the provisions of the Insolvency Act 1986 to IPSs, opening up a range of alternatives to winding up, including:
- entering into a company voluntary arrangement (CVA), where a company can, by reaching an agreement with its creditors, avoid liquidation or administration; or
- obtaining a moratorium from the court, which provides ‘small companies’ up to 28 days to give directors time to put together proposals for a CVA. During this time, the company’s creditors cannot bring action against the company.
- Pave the way to recognise and address the gaps in other pieces of legislation applicable to IPSs, that may have occurred as a result of this change, for example, clarifying the application of the Pension Protection Fund (Entry Rules) Regulations 2005 to IPSs.
This blog is for information only and does not constitute legal advice.