Time to Reform IPS Legislation
Malcolm Lynch
New Sector Magazine, Issue 60, February/March 2004
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It this article Malcolm Lynch outlines his concern that the useful legal
structure of cooperative and community benefit society has no future unless
fundamental problems are tackled through reforming industrial and provident
society law (IPS). He contrasts this situation with the active role that
government has taken to introduce recent legislation establishing a new form of
community-interest-company (Companies - Audit, Investigations and Community
Enterprise Act, April 2004). This will further eclipse and marginalise the use
of the cooperative and community benefit society model.
Contents:
In the Prime Minister's office, there is a Strategy Unit which conducted an
excellent review of charities and the wider not-for-profit sector in September
2002. This review, entitled Private Action, Public Benefit, included the first
review since 1998 of industrial and provident societies.
The review was not extensive but it made a number of proposals for reform of
industrial and provident society (IPS) law. Since, then some private members
bills have introduced some reforms of industrial and provident society law, and
the Treasury now will shortly be consulting on further changes. The changes
which have been introduced, and those on which there will be further
consultation, do not leave me with any comfort that the legal form of industrial
and provident society will blossom and flourish as a legal structure of choice
for persons wishing to establish cooperative and community enterprises.
A welcome change is the proposal that instead of referring to industrial and
provident societies, reference is made to cooperative and community benefit
societies which are the two legal forms regulated under the IPS Act. This change
should help remove some of the confusion which has existed in explaining this
legal form for many years.
There has been a long term decline in the use of the cooperative and community
benefit society legal form as evidenced by the number of new registrations of
societies. At the same time, anecdotal experience demonstrates that there is
continuing growth in registrations of community enterprise but as companies
limited by guarantee and having no share capital. This is an issue of concern
because many organisations which are registering using the legal form of a
company limited by guarantee for their community benefit activities ought to be
registered as community benefit societies. Community enterprise needs capital.
Sometime this can be obtained by way of grants but there are many occasions when
this is not possible and they should be seeking share capital from the community
or from other community enterprises to further their aims rather than collapse.
This is one of the advantages of the community benefit society.
The more limited restrictions on the issue of share capital by cooperative and
community benefit societies is a distinct advantage over the form of the company
limited by shares whose shareholders have enormous difficulty in satisfying
legal requirements for issue of shares to third parties in order to raise
capital, and the company limited by guarantee which is limited in the forms of
capital it can attract.
Regrettably the cooperative or community benefit society legal form is not a
first choice because the manner of registration is costly, awkward and slow. All
of which are factors which should not be in the way of community enterprise.
The whole system of governance for cooperative and community benefit societies,
starting with the banking division of the Treasury being the responsible
Government department instead of the Department of Trade and Industry (DTI) as
the promoter of enterprise; registration by the Financial Services Authority (FSA)
rather than the Registrar of Companies; and a system which relies on sponsoring
bodies to seek to obtain the cheapest form of registration conspire to ensure
that progressive obsolescence will continue and the costs of using this legal
model will increase.
The contrast with the very active role played by the Social Enterprise Unit of
the Department of Trade and Industry (DTI) in bringing forward the community
interest company could not be greater. The introduction of the community
interest company, which may well be in place by April 2004, is likely to
accelerate the decline of the cooperative and community benefit society form for
not very good reasons unless the fundamental problems are tackled.
If you want a democratic cooperative or community benefit enterprise then you
should register as one. However, it is likely that many will take and convert
into the form of a community interest company in the absence of fundamental
reform.
Malcolm Lynch is head of the charity and social economy team at Wrigleys
solicitors (Leeds & Sheffield) and can be contacted at:
malcolm.lynch@wrigleys.co.uk
Website: http://www.wrigleys.co.uk
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