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31 Jan 2003 : Column 1117—continued

Mr. Gareth Thomas (Harrow, West): My hon. Friend mentioned football. Will he also pay tribute to rugby clubs that use the industrial and provident society model—such as the Pinner and Grammarians rugby club based in my constituency—and the many industrial and provident societies that are affiliated as rugby clubs to the Welsh rugby union? Does he share my hope that those rugby clubs will soon produce again the players to help Wales rightly challenge and win the six-nations championship?

Mr. Todd: Until my hon. Friend's final sentence, I would have agreed with him entirely. As hon. Members can imagine, with my build I was a pretty competent rugby player in my day, and I am a keen supporter now. I am delighted to see the industrial and provident society model being used by rugby clubs across the country, including the one in my hon. Friend's constituency. I congratulate him on the assumed association that he has with those clubs.

Industrial and provident societies give legal form, and thus structure and clarity, to a range of community organisations and activities for which charitable structures, public sector structures and the company model are not entirely appropriate. A key attraction of the industrial and provident society is the element of democracy. Where a number of people are involved or are dependent as customers on the service or trade of the organisation, the one member, one vote principle that the industrial and provident society offers, and where it differs most markedly from a shareholding operation, presents a powerful attraction. It is an arrangement by which power and control cannot be bought for money. Where a local community has been involved in creating or protecting an important community facility, the one member, one vote governance route helps to reflect the effort that all those involved have put in, and their mutual dependence on one another. Industrial and provident societies that are members of the excellent Village Retail Services Association, which helps to keep rural post offices and shopping facilities available to communities, are good examples.

A similar form of democracy can be created in a company. Indeed, some co-operatives have even decided to use the company model. I do not criticise that approach, but the problem is that nothing can stop shareholders changing or abandoning the original purpose for which the company was set up.

Another key difference between the industrial and provident society and the company model is the approach of the different registration bodies. Under the Industrial and Provident Societies Act 1965, the Financial Services Authority has to approve any changes to the constitution of an industrial and

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provident society, and it strictly monitors such changes to ensure that they are in line with the registered purposes of the society. That clearly offers added reassurance to members. Companies House, by contrast, has no such function. It has a lighter touch—and rightly so—but with the result that shareholders or members of a company can change that company's constitution more easily. Companies House does not scrutinise constitutional changes to companies. Such scrutiny is not needed as there is no equivalent to section 1 of the 1965 Act in company law.

Those key differences create important distinctions between the company model and the industrial and provident society model, and they provide choice for those looking for the right legal structure to suit their purpose. A variety of structures give legal expression to the activities and services of organisations rooted in our communities, reflecting the many differences in their motivations, modus operandi, financing, governance and so on. I am not seeking to say that either the co-operative or community benefit route represents the best legal structure for every situation. For some scenarios, the approach would be entirely inappropriate, but our legal structures need to be appropriate for the circumstances to which they are applied.

One type of organisation that has been particularly attracted to the co-operative and community benefit society models is local registered clubs. There are 6,500 registered clubs in the UK, many of which have chosen to be co-operatives or community benefit societies. Examples include clubs of the Royal British Legion, the Association of Conservative Clubs, the National Union of Labour and Socialist Clubs, the National Union of Liberal Clubs, the Royal Naval Association and the Royal Air Forces Association.

Mr. Andrew Love (Edmonton): Does my hon. Friend recognise that any organisational form that can bring together Conservative societies and working men's and socialist clubs must have something very special about it?

Mr. Todd: Indeed. My hon. Friend highlights the fact that this has never been a partisan issue, as was demonstrated in last year's debate. It is a model that can be applied in a wide range of circumstances when it is convenient for particular bodies to incorporate themselves so as to protect the interests of the original purpose for which they were set up.

Mr. John Bercow (Buckingham): As the hon. Member for Edmonton (Mr. Love) implied, the hon. Gentleman is offering us a heady cocktail. Will he now tell the House something about the diverse range of purposes for which members will allocate surpluses?

Mr. Todd: If I may, I shall not deal with that point now, as I have some way to go. In dealing with the clauses, I shall come to the issue of how to deal with assets should they be dissolved for some purpose.

David Cairns (Greenock and Inverclyde): One of the first things I was asked to do when I was elected as a councillor some years ago was to intervene with the local Conservative association, whose club was being closed owing to lack of interest. Tragically, it was one of those things that history leaves behind. Would the Bill have

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allowed me to intervene more strongly to prevent the people who were running the Conservative club from flogging it off altogether, even though nobody was using it and there was absolutely no interest in it?

Mr. Todd: I thank my hon. Friend for that intervention, which I am sure contained no political message in respect of the Conservative cause in his constituency. If the Bill had been enacted and the society had held a democratic vote and was seeking to protect its value, it would have had more difficulty in disposing of that value, except for the purpose for which it was set up. Of course, in the case to which he refers, the purpose for which the club was set up was presumably either the promotion of the Conservative cause or another associated purpose.

As hon. Members know, a company is a vehicle for generating profits for its shareholders, and the ability to distribute the profits generated from its trade is fundamental to its nature. Co-operative societies and bencoms, however, are set up not as vehicles to generate profits for investors but to trade for the benefit of a community of members or the community at large. Members of a community benefit society are not permitted to receive any payment by way of profit distribution. All such profits must be retained in the society and applied to its objectives in serving the community. That partly addresses the issue raised by the hon. Member for Buckingham (Mr. Bercow). Similarly, on a solvent dissolution, any surplus remaining after all liabilities have been paid off should pass not to members but to some other community benefit purpose under the current rules.

A co-operative society also has a fundamentally different purpose from that of a company. It is set up by its members as a vehicle to pool their transactions and co-operatively to provide certain goods or services to themselves and/or the wider community. A co-operative is legally permitted to make a distribution to its members or customers from its surplus profits, but that power of distribution originated from the need to reimburse to its customers the amount by which they had, in effect, overpaid for their purchases. The mechanism is intended to ensure that customers are not exploited by their paying too much. That is illustrated by the fact that a distribution of profits is based on purchases and not on the size of the shareholding.

I turn now to the detail of what is proposed in the Bill, but I recognise that this is a Second Reading and I do not intend to labour every clause. Clause 1, the value lock, seeks to give community benefit societies the option of protecting their assets for the purpose for which the society was established. The assets in a community benefit society are held for the benefit of the community for which the society was established. The biggest group of bencoms is housing associations, and I have referred to other examples.

An important feature of a community benefit society is that, unlike the comparable company model, the commitment to community benefit is subject to review by the registering authority—the Financial Services Authority—so any attempt to change the constitution or water down such a commitment would not be approved. The assets may have been built up over many

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years with generations of people from different families in a community working to contribute to them. Charitable assets are effectively dedicated permanently to a particular charitable purpose. The purpose of the clause is to offer the same principle of protection to community benefit societies.

Clause 1 would free societies from the risk of one group of activists in the organisation attempting at some stage to use its assets for their own benefit, rather than for its original established purpose. Such societies may not make distributions out of profits or surplus to members. On a solvent winding-up, assets should not be distributed to members. However, there is the ability to convert or transfer engagements to a company under section 52 of the 1965 Act. That would allow such restrictions to be avoided.

Once a society is converted into a company, the shareholders can amend the rules to permit the distribution of assets to themselves. That is clearly a loophole in legislation that the Bill tries to tackle. The measure proposes that a society should be able to elect that no such power should be included in the rules, subject to obtaining the support of a 75 per cent. majority of those voting at a meeting when not less than 50 per cent. of those qualified to vote participate.

Clause 1 specifically permits the constitution of a bencom to include provisions to prohibit the distribution of assets except on dissolution. Even when it is dissolved, the clause allows the imposition of significant restrictions on the distribution of the assets. It allows the prohibition by democratic choice. It is important to emphasise that it has to be the will of the society's members when it is set up and its purpose is defined. Existing societies can also call a duly constituted meeting and decide in favour of prohibition.

Clause 1 allows for considerable flexibility. Sometimes a community purpose can cease to exist. My hon. Friend the Member for Greenock and Inverclyde (David Cairns) gave an example from his constituency. It could be argued that the purpose of the club had ceased to be relevant to the area. That may be an extreme example, but sometimes a community benefit society's purpose is no longer relevant to the community. There must be a mechanism to deal with that. If the bencom dissolved, its assets could be transferred to another community benefit society with similar provisions in its rules or to a charity.

Clause 1 does not prevent the sale of an asset. For example, one could convert a building into cash, but the value should continue to be applied for a specific purpose. It would not therefore put a lock on a redundant building and mean that it remained an eyesore in a community for ever. The clause provides for converting an asset into another form of asset for disposal for a specific purpose. Crystal Palace Supporters Trust is an example of that. I am not a Crystal Palace supporter, but it is written into the trust rules that, in the event of dissolution, its assets must go to community football in the Croydon area.

Clause 1 also allows a bencom to convert to a company or another body if the latter contains similar provisions in its constitution to protect the assets for the benefit of the community. The bencom is also permitted to convert to a different legal entity. However, the liberation of the assets from their original purpose is not

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permitted. The provisions will apply only if the society adopts them in its constitution by resolution of its members and if FSA approval is secured in the normal way.

The safeguard could be perceived as a protection against a hypothetical risk. However, the strategy unit report emphasised the problem. It states

Hon. Members will acknowledge that my description of clause 1 precisely fits the report's recommendation.

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