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Requirements for conversion of a registered society into a company

Mr. Gareth R. Thomas: I beg to move amendment No. 2, in page 1, line 7, leave out "subsections (2) and" and insert "subsection".

Mr. Deputy Speaker: With this it will be convenient to discuss the following amendments: No. 3, in page 1, line 8, leave out subsection (2).

No. 1, in page 2, line 27, leave out Clause 2.

No. 6, in clause 2, page 2, line 40, after "cannot", insert—

'save with the written consent of the Financial Services Authority'.

No. 7, in page 3, line 34, at end insert—

'(6) In exercising its discretion as to whether to give its consent under paragraph (c) of subsection (1), the Financial Services Authority shall have regard to the following matters:
(a) the purpose or intention of the society's members evidenced by the rules of the society and, in particular, by the inclusion of the provisions referred to in subsection (1);
(b) the interests of the community for whose benefit the society was registered and its successors;
(c) whether the whole or any part of the value represented by the assets of the society should be dedicated to the continued benefit of the community; and
(d) whether the transfer of engagements, amalgamation or conversion referred to in paragraph (c) of subsection (1) is necessary in the interests of the viability of the industry business or trade carried on by the society.'.

No. 5, in title, line 5, leave out from "company;" to "and" in line 7.

Mr. Thomas: I introduce the amendments in my name with some reluctance. I believe that the debates on clause 2 on Second Reading and in Committee have established the importance of ensuring that assets originally dedicated to a community, not to a society's members, should

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remain dedicated to that purpose. Following the discussions I have had, I believe that there is now strong sympathy for that position.

Our debates on the clause have also highlighted the importance and value of the community benefit form of industrial and provident society as a vehicle for the pursuit of public interest aims. I have already referred to the benefit of having a regulator, in the form of the Financial Services Authority, to ensure that any society registered under the legislation remains either a co-operative or a community benefit organisation.

Without that safeguard in industrial and provident society law, there would be little to stop the conversion of a co-op from a non-profit vehicle to a company operating for the benefit of its members, shareholders or whatever. Generally, the Registrar of Companies does not police such matters; rightly, he has no duty to do so where a company structure is used. The courts exist as a possible forum for enforcing provisions in company constitutions to protect assets, but unfortunately that would be an expensive and cumbersome process, and only complex structures involving trust arrangements, and a number of other corporate vehicles, can achieve such aims if the industrial and provident society structure is not used.

In comparison, industrial and provident society legislation provides a relatively cheap and effective means of establishing and maintaining social enterprises that operate in the interests of people other than their owners. Clause 2 would have bolstered and improved that system, but even without it, the House should recognise that the industrial and provident system still has great advantages.

Clause 2 and the debates that surrounded it have played their part in the wider process. I understand that the performance and innovation unit in the Cabinet Office has been working on such issues as part of an examination of social enterprise for the Government. I welcome the fact that that work is taking place.

In that spirit, I also commend the judgment of my right hon. Friend the Secretary of State for Trade and Industry in giving a Minister specific responsibility for this sector when she took up her post. The performance and innovation unit report is imminent, and when it appears the whole question of legal structures for social enterprise will be considered across Government Departments, so it seems appropriate that the issue of asset locking should be taken out of the Bill at this stage and examined as part of that wider discussion.

During our deliberations in Committee, my hon. Friend the Economic Secretary to the Treasury highlighted a number of technical issues that would have remained if clause 2 had stayed in the Bill. What she said is recorded in column 11 of the Hansard report of Standing Committee G for 13 February. Those technical issues need to be sorted out, so it is right to take clause 2 out. I hope that the performance and innovation unit report, and the consideration of it across Departments, will address those issues.

On that basis, I commend the amendments to the House. As I said, I do so with some reluctance—but I feel reassured that the issues will not drop off the agenda, and I am delighted by the work being done within Government. It is sensible that the issues raised by clause 2 should be considered as part of that general discussion rather than remaining in the Bill.

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11.30 am

Mr. Love: I should like to speak to amendments Nos. 6 and 7, which are probing amendments designed to increase the flexibility of clause 2. I shall try to set out their context.

There are two classes of industrial and provident societies: bona fide co-operatives, and societies for the benefit of the community, which have a much wider role in society and operate not just for the benefit of their members. Indeed, their prime consideration is the community interest. When registering, all industrial and provident societies must give reasons for registration as an industrial and provident society; that touches on the previous debate about why there are different charges and why there is an onus on the Financial Services Authority to provide proper regulation of industrial and provident societies.

The FSA gives societies guidance on the registration criteria, which range from a desire to operate mutually under a one member, one vote constitution to business reasons. The important point, however, is that societies must be able to demonstrate their reasons to the registrar. Although there is a safeguard for industrial and provident societies, community benefit societies are vulnerable to asset stripping, and that is particularly true of those that have unclear rules on such circumstances. Someone could therefore exploit a loophole to achieve conversion to a limited liability company, with the assets falling into the hands of a restricted group of members.

The Royal Automobile Club operated under slightly different rules, but everyone was amazed to discover what happened to all the so-called members who signed up with the RAC and built it up over a long period. When its assets were distributed, the members of the best swimming club in London were the net beneficiaries, receiving £35,000 each, which was unfair then and is unfair now. Against that background, we need to protect industrial and provident societies.

Housing associations are safeguarded by the Housing Corporation, because public assets are involved, but if a housing association dispensed of its public assets it could convert for the benefit of a limited membership.

In my probing amendments, I wanted to test the Government's attitude to entrenching assets in an industrial and provident society. Governments of all persuasions, as has been said on numerous occasions in the past 10 to 15 years, have always resisted attempts to entrench assets, as is reflected in clause 2. However, in France, for example, AXA, a well-known brand name in this country and Europe, can be characterised as an industrial and provident society. There are other major examples of what we would consider industrial and provident societies throughout Europe, although that does not apply to every type of organisation. In this country, charities are perhaps the most prominent example of organisations that simply cannot change their charitable status. Everyone accepts that that is appropriate in the circumstances.

Ms Meg Munn (Sheffield, Heeley): Does my hon. Friend agree that people who set up a community benefit organisation often do not think about what might happen subsequently? The danger is that they might not be clear about how the rules will apply if the organisation changes in a particular way? As he graphically illustrated with the

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RAC, unintended consequences might result. There is a genuine need to provide protection for organisations that seek to benefit the community and are not established to provide benefits, profits or surpluses for individual members.

Mr. Love: That is exactly the case that I am trying to make. Societies are often established with proper constitutions, but without thought about what will happen. I know that it is not possible, but if we interviewed people who originally set up many mutual organisations that have since been demutualised, we would discover that that eventuality was the last thing on their minds. Assets that have been built up over generations for mutual benefit should not be given to a limited number of shareholders who benefit from demutualisation. My amendments therefore seek to provide long-term protection.

Credit unions are another form of organisation with entrenched constitutions, perhaps because the Credit Unions Act 1979 was very much based on the Irish experience and did not sufficiently take into account the norms of British jurisprudence. However, it was decided that credit unions cannot convert in the same way as building societies or other mutual organisations. As my hon. Friend the Member for Harrow, West said, some discussions with the Government on public interest companies have covered the possibility of introducing legislation to entrench other forms of organisation. In principle, if the arguments are strong enough, there is no reason why entrenchment should not take place, which is why amendments Nos. 6 and 7 provide a flexible response to asset locking while allowing the FSA to use its experience and expertise to make the final decision. If, under clause 2, a society entrenches its assets, and if there is a move in future to convert the society, it will be for the FSA to sanction the decision.

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