2.4 Asset lock provisions
An asset lock is a constitutional device that prevents the distribution of residual assets to members. The purpose of an asset lock is to ensure that any retained surplus or residual value cannot be appropriated for private benefit of members and should be used for public or community benefit. Asset locks are a defining feature of community shares, because they remove the scope for members to make speculative capital gains resulting from the dissolution, disposal or conversion of the society into a company.
Community benefit societies
Charities (including charitable community benefit societies) and Community Interest Companies have statutory asset locks. Societies can adopt a voluntary asset lock, but only community benefit societies have the option of adopting a statutory asset lock.
The Community Benefit Societies (Restriction on Use of Assets) Regulations 2006, and the equivalent regulations for Northern Ireland, introduced the option for community benefit societies to adopt a statutory asset lock with similar qualities to those available to Community Interest Companies. Community benefit societies adopting this restriction are referred to in the Regulations as ‘prescribed community benefit societies’. Any community benefit society, except for those that are charitable community benefit societies or registered social landlords, can be prescribed.
This restriction on the use of assets means that any residual assets, after all members’ share capital has been refunded according to the rules of the society, must be transferred to one or more of the following: another prescribed community benefit society, a community interest company, a charity, a charitable community benefit society, a registered social landlord (subject to conditions), or any equivalent body in Northern Ireland or a state outside the United Kingdom.
The restriction can be included in the rules of a new community benefit society, or adopted by an existing community benefit society through a special resolution. Schedule 1 of the Regulations specifies the exact wording of the rules that must be adopted. A community benefit society must have this form of statutory asset lock, or be a charitable community benefit society, in order to qualify for Social Investment Tax Relief (see Section 8.6).
A charitable community benefit society must have an asset lock that satisfies the requirements of charity law. The 2006 Regulations cannot be used for this purpose because they do not restrict the use of residual assets exclusively to charitable purposes only.
The FCA requires all community benefit societies to have rules which prevent the profits or the assets from being distributed to members, be it the statutory asset lock or a voluntary asset lock. It has additional powers under secondary legislation to enforce a statutory asset lock, which includes the power to issue warning and enforcement notices, and to order restitution by the officers of the society.
Community benefit societies that have chosen not to adopt the restrictions set out in the 2006 Regulations are free to amend their rules regarding the use of assets, subject to FCA approval. A community benefit society might prefer the flexibility of this form of asset lock, because it could in the future amend its rules and apply to become a charitable community benefit society, something which a society with the prescribed asset lock could not do.
The position of co-operative societies is less clear. The FCA does not provide specific guidance on asset locks for co-operative societies. However, it does highlight the importance of the ICA Statement on Co-operative Identity, in determining whether a society is a bona fide co-operative, and the third principle on member economic participation refers to co-operatives having common property and indivisible reserves, although it qualifies this with the use of words such as ‘usually’ and ‘possibly’ (see Section 2.1.2). Most co-operative societies adopt a voluntary asset lock in their rules. There is scope to specify that these rules are fundamental to the society by requiring a higher voting threshold to change these rules. There is, however, no legal mechanism to entrench these rules to prevent them from being changed under any circumstance.
The same applies to voluntary asset locks in community benefit societies. Entrenchment of the asset lock rule can only be achieved by adopting a statutory asset lock.
A society can convert into a company, subject to the provisions of Sections 112-113 of the Co-operative and Community Benefit Societies Act 2014, which requires societies wishing to convert into a company to pass a special resolution to that effect, supported by at least a three-quarters majority vote in which at least half the membership has participated (see Section 2.6.4.)