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The Community Shares Handbook

2.9 Insolvency and dissolution

It is the duty of the board to act if a society becomes insolvent and is unable to discharge its debts when they fall due. If it fails to act and the society continues trading then it could be in danger of wrongful trading, and the directors could become personally liable for the debts of the society.

The Co-operative and Community Benefit Societies Act 2014 introduced major changes to how insolvency in a society can be addressed. However, it should be noted that much of what follows only applies to societies registered in England and Wales. Scotland has its own system of receivership and the 2014 Act does not apply to Northern Ireland. 

In 2014, new regulations (Statutory Instrument 2014, Number 229) gave societies facing insolvency most of the same options as those already available to companies. A society can enter into voluntary arrangement with creditors based on the company voluntary arrangements (CVA), or enter into administration, both of which are set out in the Insolvency Act 1986. Alternatively, it can enter into an arrangement with creditors based on Part 26 of the Companies Act 2006. These arrangements are not available to societies that are registered social landlords. And unlike companies, societies cannot enter into administrative receivership where the receiver is working for a secured creditor, not the creditors as a whole.

The FCA’s registration guidance provides detailed guidance on the arrangements for insolvency and dissolution of a society. This guidance is summarised in this section. However, any society embarking on this course of action should follow the FCA’s guidance on these matters, and not rely on the summary presented here.  

2.9.1 An arrangement with creditors

An arrangement with creditors, also called a scheme of arrangement, is a legally binding arrangement made by a society with its members and creditors to address its insolvency. The process begins with a court order calling meetings of creditors and members to approve proposals to address the insolvency. Options include reducing the liabilities and/or increasing the assets of the society, or by amalgamation, merger or transfer to another solvent legal entity. Each class of creditor (secured, unsecured, etc) and member has to approve the proposals by a three-quarters majority vote in favour, with members voting on a one-person-one-vote basis, and creditors voting by value of the credit they represent. When the three-quarters support of all the classes of creditor and member has been secured, the scheme arrangement is submitted to the court to sanction.

The court will check that the FCA is satisfied that the arrangement does not contravene the Co-operative and Community Benefit Societies Act 2014, before it sanctions the scheme and issues a court order that makes the scheme legally binding on all creditors and members. The scheme must also be registered with the FCA. 

2.9.2 Voluntary arrangement based on a CVA

Instead of attempting to come to an arrangement with creditors, a society can opt for a voluntary arrangement based on a company voluntary arrangement (CVA). This involves the appointment of a licensed insolvency practitioner who is responsible for developing the arrangement with creditors, securing their support for this arrangement, and administering its implementation. The CVA must be approved by creditors representing at least 75% of the debt. A CVA does not require member approval because it cannot involve a restructuring, amalgamation or transfer of ownership of the society itself. Instead a CVA usually involves scheduled payments to creditors through the insolvency practitioner until these debts are paid off. 

2.9.3 Administration

Administration involves the appointment of an administrator (a licensed insolvency practitioner) who takes control of the society, displacing the management committee. The purpose of administration is to sell the business as a going concern, or failing that, achieving a better result for creditors than if the society was wound up possibly through some form of voluntary arrangement, or at the very least, realising the assets of the society for distribution to secured creditors. A society can enter into administration either voluntarily or through a court order. The administrator will assess whether the society can continue to trade so that the business can be sold as a going concern. Administrators are responsible for liaising with all creditors, and making a written proposal for the future of the society within eight weeks of appointment. Beyond that it is up to the administrator to negotiate an agreement with the creditors and reach an outcome satisfactory to all parties.  

2.9.4 Winding-up and dissolution

A society can be wound-up under the Insolvency Act 1986 if it is insolvent, or by way of an Instrument of Dissolution, if it is still solvent.  Member share capital is fully at risk, and any share capital belonging to a member will only be realisable after all other creditors of the society have been repaid in full.

If a society is insolvent, it will be wound up under the Insolvency Act 1986, subject to any other administrative procedures (see Section 2.9.4). Members will lose their share capital, but, under normal circumstances, will not be liable to contribute towards the debts of the society. However, under Section 124 Co-operative and Community Benefit Societies Act 2014, members who have withdrawn share capital up to one year before the date of the insolvency remain liable for the debts of the society, up to the value of the share capital they have withdrawn, if the existing members’ share capital is insufficient to cover these debts. This places a duty on societies to suspend all withdrawals of share capital if and when it is known to be insolvent.

If a society is solvent and is up to date in making its annual returns, it can apply to the FCA for an instrument of dissolution to terminate its registration as a society. The instrument is a document setting out the assets and liabilities of the society, the number of members of the society and the nature of their interests in the society, all claims by creditors and the provisions to meet these claims, and proposals for the disposal of any residual assets in the manner prescribed by the society’s registered rules. A resolution based on the instrument of dissolution must be supported by at least three-quarters of the members at a general meeting of the society. If the society is dormant, it must be approved by a special resolution passed at two general meetings, the first meeting with a two-thirds majority vote, and the second meeting by a simple majority vote, held between 14 days and one month later.  An instrument of dissolution must be advertised by the FCA in the London or Edinburgh Gazette, as well as a newspaper which is local to the society, giving the public three months’ notice of the society’s dissolution and the right of creditors to ask a court to set aside the dissolution.  If the society is solvent, and all creditors have been satisfied, then the society should return members’ share capital. Any residual assets should then be disposed of according to the rules of the society. A society with residual assets of less than £1,000 can request to cancel its registration. This does not require the consent of members or a special resolution, but can be subject to a legal challenge. 

The final step in the dissolution process is for the society to submit a Section 126 certificate to the FCA after the three month notice period has lapsed, certifying that all the property vested in the society has now been transferred to the persons entitled to it.

Charitable community benefit societies registered with the Scottish Charity Regulator will also have to seek their consent before winding up or dissolving. This is required under section 16 of the Charities and Trustee Investment (Scotland) Act 2005 and they must seek consent at least 42 days in advance of the proposed date of dissolution. Further information can be found at www.oscr.org.uk/media/1589/dissolving-your-charity.pdf .