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,
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.