What are the key facts you need to understand?
Before exploring the insolvency implications, it is necessary to set out the differences between co-operatives and community benefit societies. Previously known as industrial and provident societies, new legislation in 2014 meant they are now classified as co-operatives or community benefit societies.
The main difference between a co-operative and a community benefit society is how profits are handled. In a true co-operative, everyone participating is generally also a member or shareholder and working together for mutual profit. As a result, when the co-operative does well the profits are shared amongst its members. In contrast, a community benefit society will not distribute its profits amongst its members but reinvest the profits in projects and assets to further the cause of the society.
Previously, co-operatives and community benefit societies relied on fairly old legislation, dating back to the 19th century. More recently the Co-operative and Community Benefit Societies Act 2014 was brought in to modernise the way these businesses were ran. This includes updating the insolvency provisions to bring these closer in line with the insolvency legislation for regular companies.
What is the voluntary winding up procedure for co-operatives and community benefit societies?
In terms of the voluntary winding up, the process is generally the same as a typical voluntary liquidation. The main noticeable difference is that in regular companies, there will generally be 5 or less members.
In co-operatives and community benefit societies, there will be significantly more, if not hundreds of members. For a voluntary winding up resolution to be passed, 75% of the members present at the meeting must vote in favour. Obviously with a larger membership there maybe a number of members who are reluctant to pass this resolution.
Where most voluntary liquidation meetings are held at short notice, through consent of 90% of the members, these meetings again will generally be held at full notice which will be defined in the society rules, but is generally 14 clear days. In terms of assets to be dealt with by the liquidator, members should also be aware that they will be liable to pay any unpaid share capital. They will also be liable for any share capital withdrawn in the year prior to the voluntary winding up.
The other major difference in the voluntary winding up of a co-operative or community benefit society is the involvement of the FCA. Rather than being registered at companies house, industrial and provident societies, co-operatives and community benefit societies are registered on the mutuals register. The statement of affairs will be registered here rather than companies house where it is freely available to view.
Can co-operatives and community benefit societies enter administration or voluntary arrangements?
Prior to the new legislation introduced in 2014, administration and company voluntary arrangements were not available to industrial and provident societies. Prior to 2014, only voluntary liquidation and receivership was available to these businesses to deal with an insolvency situation.
Following the new legislation, the same differences with voluntary winding up apply to the administration and voluntary arrangement procedures. It should be noted, however, that these provisions do not extend to registered providers of social housing or those registered as social landlords.
Special administration of registered providers of social housing
Shortly after the legislation introduced in 2014, further new legislation was brought forward under The House and Planning Act 2016 to cover the insolvency of providers of social housing.
A special type of administration was introduced, known as housing administration, to cover this type of community benefit society. The main differences of housing administration, compared to regular administration are as follows:
- Housing administration can only be commenced by court order; out of court appointments are not available.
- Consent of the secretary of state is required to make a housing administration order.
- Creditors cannot apply for a company to be placed into housing administration.
- As well as the usual objectives of administration, there is an additional objective that all social housing must be preserved as social housing under a registered provider.
- Secured creditors cannot appoint their own administrator over than that who has obtained permission from the secretary of state.
- During the housing administration, secured creditors cannot enforce their security or appoint LPA receivers.
The full secondary legislation to support the housing administration procedure only came into force on 5 July 2018 and has yet to be exercised. The purpose is the preserve the social housing stock in the event of insolvency and was introduced following the near collapse of Cosmopolitan Housing Group.
Winding up a society
When dealing with the winding up of a co-operative of community benefit company, it is important to ensure that you work with an insolvency practitioner who is experienced in dealing with the FCA and with registered societies.
If you are concerned about the solvency of your society, our BusinessRescueExperts are experienced in dealing with these matters and can provide free initial advice.