3.2 Managing withdrawals

There is an expectation for societies to enable withdrawals of share capital. This should be in line with what was indicated in the most recent share offer document subject to the FCA’s guidance. Most societies have a fixed suspension period (normally between 2-5 years) before shares can be withdrawn. Societies also retain the right to suspend the withdrawal of share capital in the best interests of the society. 

The FCA’s guidance states that a society should only allow the withdrawal of shares if:

• It has trading surpluses that match or exceed the value of shares involved and,
• The directors believe that the society can afford to pay its debts taking into account all of its liabilities (including whether it will be able to pay its debts at the date of withdrawal, and for a year after that, any contingent or prospective liabilities), and
• The society’s situation at the date of the transaction. 

Essentially, this means that a society should not allow for withdrawals if the society is, or could, become insolvent. An important distinction needs to be made between solvency and liquidity. The mere fact that a society has cash to pay for withdrawals does not mean that it is solvent, or that withdrawals can be allowed. Equally, a solvent society with accumulated profits may find itself unable to allow withdrawals because it lacks the available cash to do so. A solvent society should maintain a cash position that allows it to fulfil the terms and conditions of its share capital.

Additionally, members may be liable for the value of their share capital up to one year prior to the society winding up, even if the member has withdrawn their capital and ceases to be a member. 

A society can manage its capital liquidity in several ways. It has the powers to set terms and conditions for the withdrawal of share capital in its rules. This usually includes rules that require members to give a set notice period, from one week to one year, of their request to withdraw some or all of their capital; rules that cap the total amount of share capital that can be withdrawn in any one financial year; and rules that allow the society to discount the value of its share capital. In addition, a society can adopt a rule which gives the board the power to suspend withdrawals. This rule is mandatory if the society is to present its share capital as an asset on its balance sheet.

Whichever method of providing for liquidity is used, the society should establish cash balances capable of meeting requests for withdrawal.

There are five main ways in which a society can generate enough cash to enable share withdrawals by members. 

All of these methods rely on the society being solvent in the first place. Before issuing community shares, a society should decide which of these methods it will use, and ensure that this is reflected in its business plan and share offer document.  This, in turn, will depend on the starting point of the society, its trading activities, objects and purpose. The methods can be used singly or in combination.

• Raising new share capital: This can be achieved through an open offer, enabling the society to recruit new members and raise new share capital. Open offers work best where the community is already engaged as customers, volunteers, employees, or suppliers, making the invitation to become a member and investor all the more appealing. Existing members can also be encouraged to invest new additional capital.
• Reinvestment by existing members: It is common practice for societies to credit the share accounts of existing members with share interest and/or dividend payments, thereby reinvesting this money in the share capital of the society. Depending on the scale of these payments, this can be a significant source of new capital.
• Redemption from reserves: A profitable society that is accumulating reserves may use these reserves to finance share withdrawals and reduce its liability for share interest.
• Reduction in capital requirements: Some societies, especially those in the community energy sector, plan to reduce their capital requirements over the lifetime of their fixed assets, and to wind up the society at some pre-determined point in the future. In such circumstances, it is reasonable to allow share capital withdrawals in line with the depreciation of the society’s fixed assets.
• Replacement with loan capital: Solvent societies that have reinvested reserves into business assets and do not have cash to finance withdrawals may decide to take out loans to provide liquidity. However, whilst they can borrow to provide liquidity, the limit to shares withdrawable must be based on the above methods.  

Charitable Community Benefit Societies

If the society is charitable, consideration should be given to the nature of funds held by the charity when considering share withdrawability. Withdrawals should not endanger the charity’s ability to spend the money held in restricted funds, which are held for specific purposes only. 

Definitions from the Charity Commission website (England & Wales) guide to developing a reserves policy:

Restricted funds: funds subject to specific trusts, which may be declared by the donor(s) or with their authority (e.g. in a public appeal) or created through legal process, but still within the wider objects of the charity. Restricted funds may be restricted income funds, which are spent at the discretion of the trustees in furtherance of some particular aspect(s) of the objects of the charity, or they may be endowment funds, where the assets are required to be invested, or retained for actual use, rather than spent. Restricted funds must not be used to fund withdrawals. 

Unrestricted funds (including designated funds): income or income funds which can be spent at the discretion of the trustees in furtherance of any of the charity’s objects. If part of an unrestricted income fund is earmarked for a particular project it may be designated as a separate fund, but the designation has an administrative purpose only, and does not legally restrict the trustees’ discretion to spend the fund.