59.4 Introduction to FSA regulated businesses

The Financial Services and Markets Act 2000 (FSMA) provides a framework within which a single regulator for the financial services industry, the FSA, operates, with a full range of statutory powers. For further information on the FMSA (see Chapter 80 - Financial Services and Markets Act 2000). 

The FSA authorises and regulates all deposit taking, insurance and investment businesses. A list of all regulated activities is provided at paragraph 80.6. Only an authorised person can carry on any of the regulated businesses.

Schedule 6 to the FSMA outlines the threshold conditions that need to be met when a person applies for permission to carry out a regulated activity. These include conditions that the person, in the opinion of the FSA, has adequate resources and is suitable. The FSA may withdraw permission to carry out regulated activities at any time and must give written notice of the withdrawal of the permission to the person concerned [note 1]. Insolvency does not automatically result in the withdrawal of permission but it is probable that the threshold conditions will no longer be met in most cases of insolvency and permission withdrawn.

59.5.Effect of insolvency

The general law of insolvency applies to most financial services businesses, as it does to other businesses.

The FSA has the power to ask the court to initiate various insolvency procedures [note 2] and the right to be heard by the court in insolvency proceedings instigated by other parties [note 3].

Where the FSA is not the petitioning creditor, and it appears that the insolvent business has carried on a regulated activity the official receiver should notify the FSA of the insolvency order and ensure that  all notices or other documents that are required to be sent to creditors to the FSA [note 4].

If it appears to the official receiver that an insolvent has carried on any regulated activity without authorisation he/she must report the matter to the FSA [note 5].

59.6 Financial Services Compensation Scheme

The Financial Services Compensation Scheme (FSCS) (see Annex A) is the statutory fund of last resort for customers of financial services firms. FSCS can pay compensation to consumers if an authorised firm or individual  is insolvent and unable to meet claims made against them [note 6]. The scheme covers insurance, deposits and investments and is funded by the financial industry in the form of a levy. 

Customers of any insolvents in the financial sector could potentially be helped by the FSCS, and it is therefore important that the official receiver advise FSCS at an early stage of any company or bankrupt that he/she is dealing with that is authorised under the FSA. The FSCS will investigate any claims made by customers to establish their loss and the amount that may be claimed from the scheme. For this purpose retrieval and protection of records is of prime concern for the FSCS and the official receiver should take steps to recover the books and records as soon as possible see also Chapter 10 - Custody, Storage, Preservation and Destruction of Records.

The  FSCS can claim in the insolvency in respect of any payments made by them to the insolvents' creditors under the rules of the scheme and any creditor claiming and receiving payment from the scheme will have the amount they can claim in the insolvency reduced by any amount received in compensation from the FSCS.

Chapter 47 - Disclosure, Part 3, paragraph 47.35 deals with the issue of disclosure of information to FSCS.

Further information on the FSCS is provided in Chapter 80 - Financial Services and Markets Act 2000, Part 8, paragraphs 80.40 to 80.42 and Annex D.   

59.7 Banks

A bank is a firm whose business is to receive deposits or other repayable funds from the public and to grant credits for its own accounts. Deposit taking is a regulated activity under the Financial Services and Markets Act 2000 (FSMA), Schedule 2 and is regulated by the Financial Services Authority (FSA) (see Annex A). A business wishing to trade as a bank must become an authorised person by obtaining permission under the FSMA 2000 [note 7] to carry on a regulated business and must comply with the relevant regulations. Banks and other deposit taking institutions may be wound up like any other company or partnership. In addition, the FSA may petition for the winding up of an authorised person or former authorised person [note 8].

Given that the majority of banks will have assets, it is unlikely that the official receiver will remain liquidator of a bank that has been wound up. Where a company or partnership in liquidation has been carrying on a regulated activity the FSA must be sent a copy of any notices sent to creditors and has the right to attend and make representation to any meeting of creditors [note 4]. 

The official receiver should issue notices to creditors in the normal manner and should include the scheme manager of the Financial Services Compensation Scheme (see paragraph 59.6) and should be aware of the voting and attendance rights of the scheme manager.

If it appears to the liquidator that a company or partnership has carried on any regulated activity without authorisation he/she must report the matter to the FSA [note 5].

59.8 Building Societies

A building society is defined in the Building Societies Act 1986 as a building society incorporated (or deemed to be incorporated) under that Act. Building Societies are authorised and regulated by the FSA [note 9] (see Annex A). The principal purpose of a building society must be the making of loans which are secured on residential property and are funded substantially by its members [note 10]. A building society must apply for and be granted authorisation by the FSA before it can raise funds and borrow money [note 11]. In recent years many building societies have converted to banks (see paragraph 59.7).

59.9 Requirement on a building society to keep accounting records

A building society must keep accounting records and establish and maintain systems of control of its business and records and of inspection and report  [note 12]. The provisions relating to the maintenance of accounting records are broadly similar to those of the Companies Act 2006.  A building society must prepare audited accounts for each financial year [note 13].

59.10 Winding up of a building society

The winding up provisions of the Act, with modifications, apply to building societies [note 14]. The principal modifications are as follows:

A petition to wind up a building society may be presented by [note 15]  -

a) the FSA,

b) the building society or its directors,

c) any creditor or creditors (including any contingent or any prospective creditor), or

d) any contributory or contributories where either the number of members is reduced below ten, or the share in respect of which they are a contributory has been held by them or has devolved on them on the death of a former holder, and between them been held for at least six months before the commencement of the winding up.

A building society may be wound up by the court if [note 16] –

a) the society has by special resolution resolved that it should be wound up by the court,

b) the number of members is reduced below ten,

c) the number of directors is reduced below two,

d) being a society registered as a building society under this Act or the repealed enactments, the society has not been given permission under Part IV of the FSMA to accept deposits and more than three years has expired since it was so registered,

e) the society's permission under Part IV of the FSMA to accept deposits has been cancelled (and no such permission has subsequently been given to it);

f) the society exists for an illegal purpose,

g) the society is unable to pay its debts, or

h) the court is of the opinion that it is just and equitable that the society be wound up

The FSA may also present a winding up petition against a society or make application to the court for directions if it believes that the purpose of the society has ceased to be that required or that the society is breach of limits on certain assets and liabilities [note 17].

When a winding up order is made against a building society notice of the order must be sent to the FSA.

A building society is a financial institution and its investors can make a claim to the FSCS (see paragraph 59.6). The official receiver should issue notices  to creditors, including the  scheme manager of the FSCS  and should be aware of the voting and attendance rights of the scheme manager at any meeting of creditors held.

59.11 Liabilities of contributories of building societies

As applied to a building society, the expression "contributory" means [note 18] –

a) every person liable to contribute to the assets of the society in the event of its being wound up, and

b) for the purposes of determining, and all proceedings prior to the determination of, the persons who are deemed to be contributories, includes any person alleged to be a contributory, and

c) includes persons who are liable to pay or contribute to the payment of –

(i) any debt or liability of the building society being wound up, or

(ii) any sum for the adjustment of rights of members among themselves, or

iii) the expenses of the winding up,

but does not include persons liable to contribute by virtue of a declaration of the court under any action for wrongful or fraudulent trading [note 19].

The liability of the members of a building society is limited. The liability at any time of a borrowing member of a building society is limited to the amount payable under the mortgage or other security by which his/her indebtedness to the society is secured [note 20]. The liability of a shareholding member is limited to the amount that has been paid for the shares; this means that, though a shareholding member would be entitled to the repayment of the money spent in acquiring his/her share, if the society were to become insolvent, he/she is not required to make any contribution if he/she has discharged his/her liability to the society by paying for his/her shares in full. If the member is in arrears on his/her shares in the society, i.e. they are not fully paid for, the member would be liable to pay the amount by which he/she was in arrears. The share of a member in a building society has nothing but the name in common with the share in a company: the members of a building society receive interest on their shares and do not participate in the profits of the society by way of dividend; additionally unadvanced shares in a building society can be withdrawn by the members in accordance with the rules of the society [note 21].

59.12 Dissolution

A building society may be dissolved by the consent of its members but a society which is in the course of dissolution may be wound up by the court [note 22]. The early dissolution provisions of sections 202 and 203 of the Insolvency Act 1986 do not apply to building societies [note 23].

59.13 Offences

The offences as detailed in Part IV Chapter X of the Insolvency Act 1986 apply to building societies with the exception of sections 216 and 217 relating to the reuse of a company's name [note 24]. The Building Societies Act 1986 contains various provisions relating to offences which may be committed by directors of building societies relating to record keeping and the provision of information to other parties (see paragraph 59.9). The directors and shadow directors of a building society may be subject to disqualification proceedings [note 25]. It is also an offence for an undischarged bankrupt to act as director of, or directly or indirectly to take part or be concerned in the promotion, formation or management of a building society except with leave (permission) of the court.

59.14 Friendly societies

Traditionally friendly societies are unincorporated associations having as their object some beneficial aim such as to provide for life or sickness insurance to a specified limit or to establish workmen's clubs. The winding up of such friendly societies, known as registered friendly societies is dealt with in of Chapter 58: Unregistered Companies, Part 2. Since the introduction of the Friendly Societies Act 1992 it has been possible to create an incorporated friendly society. This status is available to both societies registered under the 1992 Act and also existing societies. The majority of incorporated friendly societies carry out some form of insurance or investment business which is regulated by the FSA under the FSMA. This part of the chapter details the structure, regulation and winding up of incorporated friendly societies alone and all references to friendly societies within this part should be taken to refer to incorporated friendly societies.

On 1 December 2001 under the FSMA [note 26] the FSA became responsible for the regulation of friendly societies. Part of the FSA's functions are to promote the protection of funds of friendly societies, to ensure that the law is being complied with and to recommend reforms to government. It has both supervisory and interventionist powers including a power to demand access to documents and the ability to appoint inspectors to carry out investigations on its behalf. The FSA may disclose information it has obtained to the official receiver. For further information on disclosure to the FSA (see Chapter 47 - Disclosure, paragraph 47.6).

Incorporated friendly societies must apply for registration with the FSA and a society is incorporated from the date of its registration. Although they are not companies, an incorporated friendly society must have limited or the Welsh equivalent as the last word of its name [note 27]. If the name does not include the words "friendly society", the fact that a society is an incorporated friendly society must be shown on all stationery, notices, cheques etc [note 28].

The FSA maintains a file for each society, which is open to public inspection. Appointments to the committee of management, or to the posts of chief executive and secretary are recorded as are resignations. Annual accounts and reports are also recorded and available for inspection. This file should be treated as the equivalent of the record kept by Companies House for a limited company [note 29].

A society must have at least 7 members. The society must keep a register of members recording the names and addresses of the members of the society, the register being kept at the society's registered office or other such place as the committee of management thinks fit. Any change in the registered office must be notified to the FSA [note 30].

A society must have an elected committee of management comprising at least 2 members, one member being also elected as chairman of the committee  [note 31]. The committee appoints a chief executive who is responsible under the immediate authority of the committee for the conduct of the business of the society. A secretary must also be appointed although the office of chief executive and secretary may be held by the same person [note 32]. Notification of any appointments or resignations should be sent to the FSA  [note 33].

59.15 Requirement on friendly societies to keep accounts and make returns

The requirement on an incorporated friendly society to keep accounts and make returns is laid out in the Friendly Societies Act 1992. Every friendly society and every registered branch shall cause accounting records to be kept, and establish and maintain systems of control of its business and records and of inspection and report [note 34].

The records kept may be in any form but where the records are not kept by making entries in a bound book adequate precautions shall be taken for guarding against falsification and facilitating its discovery [note 35]. The records must be kept at the registered office of the friendly society or branch or at such other place or places as the committee of management thinks fit and must be open to inspection by the committee of management at all times. The records must be preserved for 6 years from the date on which they were made.

A friendly society must prepare annual audited accounts, known as individual accounts, which give a true and fair view of the affairs and performance of the society or branch for the financial year [note 36]. Such accounts must comprise a balance sheet and an income and expenditure account. The committee of management have to prepare an annual report on the society's activities [note 37]. The financial year of a friendly society is the period of 12 months ending with 31 December.

Each year the accounts, the auditor’s report and the report by the committee of management, must be laid before the society at the annual general meeting [note 38] and sent to the FSA not later than 30 June or 14 days before the annual general meeting, whichever is earlier [note 39].

59.16 Winding up of a Friendly Society

An incorporated friendly society may be wound up under the Insolvency Act 1986  [note 40] by the court on any of the following grounds-

a) the society has by special resolution resolved that it be wound up by the court ,

b) the number of members is reduced below 7,

c) the number of members of the committee of management is reduced below 2,

d) the society has not commenced business within a year from its incorporation or has suspended its business for a whole year,

e) the society exists for an illegal purpose,

f) the society is unable to pay its debts, or

g) the court is of the opinion that it is just and equitable that the society should be wound up.

A petition may be presented by [note 41]-

a) the FSA,

b) the society or its committee of management,

c) any creditor or creditors (including any contingent or any prospective creditor),

d) any contributory or contributories, although a contributory may not present a petition unless the number of members is reduced below 7 or he has been a contributory for at least six months before the winding up,

or by all of those parties, together or separately.

The official receiver must send notification of the winding up order to the FSA within 15 days of the order being made. [note 42]. 

Where a friendly society has carried on insurance or investment business its investors can make a claim to the FSCS (see paragraph 59.6). The official receiver should issue notices to creditors, including the scheme manager of the FSCS and should be aware of the voting and attendance rights of the scheme manager at any meeting of creditors held.

The provisions of sections 202 to 204 of the Insolvency Act 1986 (early dissolution) do not apply to friendly societies [note 43].

An incorporated friendly society may also be wound up voluntarily if it resolves by special resolution that it be wound up voluntarily [note 44]. The administration procedure is not available in the case of a friendly society because section 8(1) of the Insolvency Act 1986 allows such an order to be made in the case of a company and section 735 of Companies Act 1985 define a company only as one registered under that Act or its predecessors. For the same reason, a friendly society cannot enter into a voluntary arrangement. Similarly, the sections of the Insolvency Act 1986 dealing with administrative receivership cannot be applied to friendly societies.

The liability of a member of an incorporated friendly society is limited to the amount of any subscription to the society which is outstanding. No subscription shall be recoverable at law except on the winding up of the society [note 45].

59. 17 Long term business

The winding up of a friendly society may involve dealing with long term business. Long term business includes life assurance, permanent health insurance and pension fund management [note 46]. If a society which has been wound up carries on long term business, the liquidator shall, unless the court orders otherwise, carry on the long term business of the society with a view to its business being transferred as a going concern; and in carrying on that business, the liquidator may agree to the variation of any contracts of insurance in existence when the winding up order is made but shall not effect any new contracts of insurance [note 47].

If the liquidator is satisfied that the interests of the creditors in respect of the liabilities of the society attributable to its long term business require the appointment of a special manager of the society's long term business, he/she may apply to the court for the appointment of a special manager to act during such time as the court may direct, with such powers (including any of a receiver and manager) as may be entrusted to him/her by the court [note 48].

The court may, on the application of the liquidator, any special manager appointed or the FSA appoint an actuary to investigate the long term business of the friendly society and report on the desirability or otherwise of that business being continued and on any reduction in the contracts made in the course of carrying on that business that may be necessary for its successful continuation [note 49]. 

59.18 Offences, disqualification etc.

Part IV of the Insolvency Act 1986 applies to the winding up of a friendly society as if it were a company, with the exception of sections 216 and 217 (restrictions on the re-use of company name), and sections 218 and 219 which do not apply to offences by a friendly society. Sections 213 (fraudulent trading) and 214 (wrongful trading) of the Insolvency Act 1986 apply to a friendly society since they both operate if certain conditions apply in the course of the winding up of a company. Criminal proceedings for fraudulent trading under section 458 of the Companies Act 1985 do not apply to a friendly society, as a society is not included in the definition of a company in section 735 of the Companies Act 1985.  The Company Directors Disqualification Act 1986 also applies to incorporated friendly societies and references to director or an officer of the company therein are taken to include a member of the committee of management or officer of an incorporated friendly society [note 50]. The legislation is not extended to shadow directors of a friendly society.

The Friendly Societies Act 1992 also contains provisions relating to various offences such as record keeping and failing to notify the FSA. Reference should be made to the Friendly Societies Act 1992 for specific details of these offences.

59.19 Industrial and provident societies

An industrial and provident society is an organisation conducting an industry, business or trade, either as a co-operative or for the benefit of the community, and is registered under the Industrial and Provident Societies Act 1965. 

The FSA is the registering authority for societies which register under the Industrial and Provident Societies Act 1965. The registration function is separate from the role of regulator of the financial services industry and provided by the FSMA. Most Industrial and Provident societies are not regulated by the FSA under FSMA and consequently do not have access to the Financial Services Compensation Scheme (see paragraph 59.6) It is only those members that are both registered under the Industrial and Provident Societies Act and regulated by the FSA (because they are authorised to conduct financial services business under FSMA) that have access to the FSCS.

These societies are incorporated under the Industrial and Provident Societies Acts 1965 to 1978 and must apply to the FSA for registration. They are not companies and must not use the word "company" in their name but must have "Limited" at the end of their name, unless the FSA is satisfied that the objects of the society are wholly charitable or benevolent [note 51]. Most societies engaged in business will be required to include the word limited. Societies may convert to companies and companies may become such societies.

Where a registered society is a charity (see paragraphs 59.45 to 59.51) and its registered name does not include the word charity or charitable the society must state the fact that it is a charity on all its stationery [note 52].

In order to register as an industrial and provident society, the society must show to the satisfaction of the FSA that either [note 53]:

i) it is a bona fide co-operative society [according to the Co-operative Principles developed by the International Co-operative Alliance, a co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise] or

ii) since its business is being or is intended to be conducted for the benefit of the community, there are special reasons why it should be registered as a society rather than as a company under the Companies Act 1985.

In practice, the activities of the societies range over a wide field and the FSA classifies them according to their activities as follows:

i] Credit unions (see paragraph 59.25),

ii] Retail societies - operate shops, supermarkets and department stores,

iii] Wholesale and productive societies,

iv] Agricultural societies,

v] Fishing societies,

vi] Clubs,

vii] Housing societies,

viii] General service societies,

The rules of the society must provide for the appointment of a committee and of managers or other officers [note 54]. As long as the society is run democratically, the election and appointment of directors or the committee is left to the rules of each society. The society must have a secretary.

A society must have at least 3 members, or 2 members if both are registered societies. The society must keep a register containing details of its members and officers. The register must be kept at the society's registered office. The registered office performs a similar function to that of a limited company, in that it is the address to which all official communications may be sent. The registered office must be in Great Britain or the Channel Islands, and any change in the registered office must be notified to the Registrar [note 55].

59.20 Requirement to keep records and accounts and make returns

The requirement on a society to keep proper books of account is laid out in the Friendly and Industrial and Provident Societies Act 1968 [note 56]. The books may be in the form of bound books of account or any other manner of recording as long as the society takes adequate precautions for guarding against falsification [note 57].

Each year a society must produce a revenue account detailing the affairs of the society as a whole (or two or more revenue accounts which deal separately with particular businesses conducted by the society) and a balance sheet. The accounts and balance sheet must be audited and the auditors must produce an audit report [note 58].

Societies are required to send an annual return to the FSA within a period of 7 months beginning after the end of the period required by the section to be included in the return. Unless societies have taken advantage of the disapplication provisions [note 59] (disapplication of obligation to appoint auditors) they are required to send with their returns copies of their auditors’ report on the society’s accounts and each balance sheet made during that period and any auditors’ report on that balance sheet. Where societies have taken advantage of the disapplication provision, they are required to send with their return copies of each balance sheet made during the period in question and a copy of any report that the societies were required to obtain [note 60]. Members may inspect the annual return at the offices of the FSA, or they must be provided with a copy by the society free of charge if they request one [note 61].

59.21 Winding up of an industrial and provident society

A society may be wound up voluntarily or by the court [note 62] as is directed in regard to companies by the Insolvency Act 986, the provisions of which apply to the winding up as if it were a company. An industrial and provident society is not an unregistered company so sections 220 - 229 of the Insolvency Act 1986 do not apply [note 63].  

The provisions of the Insolvency Act 1986 relating to the winding up of companies apply with the following modifications:

a) all references to the Registrar are to be treated as referring to the FSA [note 62], and

b) a society cannot be dissolved until the liquidator has lodged a certificate with the Authority that all the society's property has been transferred to those entitled to it [note 64].

59.22 Liability of members

When a society is wound up, the liability of a present or past member of the society to contribute for payment of the debts and liabilities of the society, the expenses of the winding up and the adjustment of the rights of the contributories amongst themselves, shall be qualified as follows [note 65], that is to say –

a) no person who ceased to be a member not less than one year before the beginning of the winding up shall be liable to contribute,

b) no person shall be liable to contribute in respect of any debt or liability contracted after he/she ceased to be member,

c) no person who is not a member shall be liable to contribute unless it appears to the court that the contributions of the existing members are insufficient to satisfy the just demands of the society,

d) no contribution shall be required from any person exceeding the amount, if any, unpaid on the shares in respect of which he/she is liable as a past or present member, and

e) in the case of a withdrawable share which has been withdrawn, a person shall be taken to have ceased to be a member in respect of that share as from the date of the notice or application for withdrawal.

59.23 Other insolvency proceedings

The administration procedure is not available in the case of an industrial and provident society because section 8(1) of the Insolvency Act 1986 allows such an order to be made in the case of a company and section 251 of the Insolvency Act 1986 and section 735 of the Companies Act define a company only as one registered under the Companies Act 1985 or its predecessors. For the same reason, a society cannot enter into a voluntary arrangement.

Similarly, the sections of the Insolvency Act 1986 dealing with administrative receivership cannot be applied to societies. A receiver may be appointed but the appointment will be governed by the charge document, and his duties are contained in the Industrial and Provident Societies Act 1965  [note 66], which states that every receiver or manager shall

a] within one month from the date of his appointment notify the appropriate registrar of his appointment,

b] within one month (or such longer period as that registrar may allow) after the expiration of the period of six months from that date, and of every subsequent period of six months, deliver to that registrar a return showing his receipts and his payments during that period of six months, and

c] within one month after he ceases to act as receiver or manager deliver to that registrar a return showing his receipts and payments during the final period and the aggregate amount of his receipts and of his payments during all preceding periods since his appointment.

The preferential debts of a society in liquidation should not be calculated by reference to the appointment of a receiver [note 67].

59.24 Offences, disqualification etc.

If a society has been wound up, the provisions of the Insolvency Act 1986 apply as if the society were a company. It follows therefore that sections 213 (fraudulent trading) and 214 (wrongful trading) of the Insolvency Act 1986 apply to a society since they both operate if certain conditions apply in the course of the winding up of a company. Criminal proceedings for fraudulent trading under section 458 of the Companies Act 1985 do not apply to a society, as a society is not included in the definition of a company in section 735 of the Companies Act 1985.

Section 55 the Industrial and Provident Societies Act 1965 applies the provisions of the Insolvency Act 1986 to the winding up of a society as if it were a company but does not extend to the Company Directors Disqualification Act 1986. As a society is not an unregistered company referred to in section 220 of the Insolvency Act 1986 and is not a company within the definition of section 735 of the Companies Act 1985, the directors of societies are not within the scope of the Company Directors Disqualification Act 1986. A person disqualified under the Company Directors Disqualification Act 1986 from being a director will not be in breach of that order by being a director or committee member of a society [note 68], as section 1 of the Company Directors Disqualification Act refers throughout to companies. Section 11 of the Company Directors Disqualification Act 1986 also refers to a company so it would appear that an undischarged bankrupt could act as a director of a society without committing an offence [note 69].

59.25 Credit Unions

A credit union is a specialised form of industrial and provident society (see paragraphs 59.19 to 59.24). Credit Unions have to be registered with the FSA (see paragraph 59.19) Every society registered as a credit union must have a name containing the words "credit union" or the Welsh equivalent. A credit union is a profit sharing democratically run financial cooperative which offers convenient savings and low interest loans to its members. To join a credit union people must have a common bond e.g. reside in the same area or work for a particular employer. Members who cease to meet the conditions of membership become non-qualifying members.

Credit unions have objects fixed by law [note 70], which cannot be reduced, added to or changed. The objects must be –

(a) the promotion of thrift among members of the society by the accumulation of their savings;

(b) the creation of sources of credit for the benefit of the members of the society at a fair and reasonable rate of interest;

(c) the use and control of members’ savings for their mutual benefit; and

(d) the training and education of the members in the wise use of money and in the management of their financial affairs.

Only an individual can be a member of a credit union. The minimum number of members of a credit union is 21 [note 71]. The members purchase shares in the credit union, the shares have a value of £1 each and the maximum number of shares held by a member must not exceed 5,000.  Except so far as the rules of a particular credit union provide otherwise, and provided that non-qualifying members do not exceed 10 % of the membership, a person who ceases to fulfil the qualification for admission to membership shall be entitled to retain his/her membership, to purchase shares and receive loans. Shares may be withdrawn but 60 days notice of withdrawal is required; shares may only be realised by being withdrawn. Shares are not transferable and no share certificates are issued.  Members may then be granted loans, which may be secured or unsecured, of up to £5,000 in excess of his or her paid up share capital in the society. Since the maximum permitted shareholding is £5,000, the maximum possible loan to any member is £10,000.

Shares in a credit union held by a bankrupt would form part of the bankrupt's estate.

59.26 Winding up of a credit union

A credit union is wound up as an industrial and provident society [note 72] (see paragraph 59.21).

The FSA can wind up a credit union  [note 73] if it appears that:

a) the credit union is unable to pay sums due and payable to its members, or is able to pay such sums only by obtaining further subscriptions for shares or by defaulting in its obligations to members, or

b) there has been, in relation to that credit union, a failure to comply with any provision of, or any direction given under, the Credit Unions Act 1978 or the Industrial and Provident Societies Acts1965 or 1978, or,

c) there is no longer a common bond between the members of the credit union, or,

d) in any other case, where it appears to the authority that the winding up of a credit union is in the public interest or is just and equitable having regard to the interests of all the members of the credit union. 

The loans to members would be an asset in the liquidation of a credit union. There may be, however, a right of set off against the members' shares.

A credit union may accept deposits from persons too young to be members of the credit union. These monies are held on trust for the depositor and are not available for distribution to creditors [note 74]. Any surplus assets on the dissolution of a credit union must be applied for charitable purposes, if they are not transferred to another credit union [note 75].

A credit union may also be regulated by the FSA (because they are carrying out business that requires authorisation under the FSMA). Creditors of such regulated businesses have a access to the FSCS (see paragraph 59.6).The official receiver should issue notices  to creditors, including the  scheme manager of the FSCS  and should be aware of the voting and attendance rights of the scheme manager.

59.27 Insurance companies

Insurance is a business activity regulated by the FSA (see Annex A) under the provisions of the FSMA and only an authorised person may carry on insurance business [note 76]. In view of the system of control and the measures available to avoid liquidation, the official receiver is unlikely to deal with an insurance company and even then in the majority of cases there will be sufficient assets to attract the appointment of an insolvency practitioner as liquidator or for the business to be transferred as a going concern.

The winding up of an insurance company follows the same procedures as any other company as set out in the Insolvency Act 1986 but is additionally governed by The Insurers (Winding Up) Rules 2001 and The Insurers (Reorganisation and Winding Up) Regulations 2004. 

The Insurers (Winding Up) Rules 2001 apply in respect of insolvency orders made in respect of insurance companies after 1 December 2001 and supplement the Insolvency Act 1986 Rules. In the event of conflict between these two sets of rules the Insolvency Rules 1986 apply [note 77].

59.28 The Insurers (Reorganisation and Winding up) Regulations 2004

The regulations provide that a winding up or reorganisation measure can only be commenced in the UK if the insurer is authorised in the UK [note 78]. Reorganisation and winding up proceedings commenced in other European Economic Area states will automatically be recognised in the UK without further need for formality. 

The Directive also provides that the notification of the winding up of an insurance company be published in the Official Journal of the European Communities [note 79]. On 5 April 2006 the European Insurance and Occupational Pensions committee agreed a table to be used for the publication of the winding up orders in the Official Journal. This table can be accessed on the Europa website http://ec.europa.eu/internal_market/insurance/windingup_en.htm and should be completed with the company’s details and sent by email to MARKT-H2@ec.europa.eu. 

59.29 Winding up of an insurance company

On the winding up of an insurance company the court must inform the FSA of the order [note 80] and ensure that the notification of the winding up order is published in the Official Journal of the European Communities (see paragraph 59.28). 

Where a company or partnership in liquidation has been carrying on a regulated activity (including insurance business) the FSA must be sent a copy of any notices sent to creditors and has the right to attend and make representation to any meeting of creditors [note 4]. If it appears to the liquidator that a company or partnership has carried on any regulated activity without authorisation he/she must report the matter to the FSA [note 5].

Insurance is a financial service covered by the FSCS (see paragraph 59.6) and its investors can make a claim to the FSCS. The official receiver should issue notices to creditors, including the scheme manager of the FSCS and should be aware of the voting and attendance rights of the scheme manager at any meeting of creditors held.

On liquidation it is assumed that the company ceases to be on risk for any insurance protection it has undertaken. In the case of insurance cover which is compulsorily imposed by statute such as by the Road Traffic Act 1988, cover will automatically cease at the moment when the insurer ceases to be authorised. All policyholders should be informed that they should seek alternative cover promptly; if there are a large number of policyholders, this may be best achieved by advertisement.

If the official receiver becomes aware when acting as liquidator/trustee that an insolvent has been carrying out insurance business without authorisation by the FSA the matter should be reported to the FSA [note 81].

59.30 Long term business/general insurance

'Long term business' is the term usually applied to life, annuity, pension and permanent health insurance. The term 'general insurance' covers other types of insurance e.g. motor and household insurance. When a winding up order is made against an insurance company, if the insurance company carried on long term business, this part of the company's business is treated as if it were a separate company [note 82]. The assets attributable to the company's long term business will be applied to settle the liabilities of the long term business and the assets attributable to its other business will be applied to settle the assets of that business. The assets and liabilities in the long term business have to be separately identified in the company's accounts.

The values of creditor claims for general and long term business insurance in the winding up proceedings are determined by The Insurers (Reorganisation and winding up ) Regulations 2004 [note 83].

59.31 Priority of payment of debts

The principal difference in the winding up of an insurance company and any other company is the special order of priority for payment of claims. In cases of long term and general insurance the debts must be paid in the following priority [note 84]:

a) preferential debts,

b) insurance debts,

c) all other debts.

Composite insurers (those who carry on both general and long term business) have special rules applying different assets to different types of insurance creditor [note 85]. When creditors claims are admitted they should be apportioned between the insurers different types of business [note 86].

59.32 Lloyds names

Lloyd’s of London (see Annex A) exists to provide underwriting of insurance. It is regulated by the FSA. Underwriting takes place through syndicates, of which there are 60 to 70. Each syndicate consists of underwriting members both corporate and individual, referred to as "names", who share the profits of the syndicate but also accept unlimited liability for losses. Each syndicate is run by a managing agent. In 2005 there were 705 corporate members and 1625 individual members. 

If a bankruptcy order is made against an underwriting member of Lloyd’s, the member must cease underwriting immediately and will not be allowed to participate in underwriting for the whole of the year in which the order was made. (For example if a bankruptcy order were made against an underwriter on 31 December 1998, it would be treated as if he had not underwritten any business during 1998). This is to ensure that all debts incurred are treated as pre bankruptcy debts.

A member of Lloyd’s must have significant free assets and a bankrupt who has been a member of Lloyd’s is likely to have had substantial assets in the past. Membership of Lloyd’s is immediately terminated on bankruptcy for the duration of the bankruptcy although previous members could reapply if they could meet the current required asset level.  Lloyds no longer accepts new individual members all new members now being part of a corporate membership. 

Notification of the bankruptcy should be sent to the Financial Recovery Department of Lloyd’s 1 Lime Street London EC3M 7HA. Lloyd’s calculate all claims and in most cases claims can be formulated immediately. If a member owes money to an agent and cannot pay, Lloyd’s would pay that money from their Central Fund so that policyholders can be repaid. In the case of bankruptcy, Lloyd’s would pay all a member’s debts to agents from the Central Fund and become the member’s only creditor within the Lloyd’s market. Many names take out stop loss insurance policies to protect themselves from excessive losses. The proceeds of the stop loss policy are payable to Lloyd’s in order to discharge the name’s debt to Lloyd’s [note 87].

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