New Clause 1 - Application of Company Accounts and Audit Provisions to Societies

Industrial and Provident Societies Bill – in a Public Bill Committee at 11:45 am on 13th February 2002.

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'Part VII of the Companies Act 1985 as for the time being in force shall apply to any society registered under the Industrial and Provident Societies Act 1965 as if that society were a company.'.—[Mr. Love.]

Brought up, and read the First time.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to take the following: New clause 2—Formalities of Carrying on Societies' Business and Pre-incorporation Contracts—

'Sections 36, 36A, 36B, 36C, 37, 38, 39 and 41 of the Companies Act 1985 as for the time being in force shall apply to any society registered under the Industrial and Provident Societies Act 1965 as if that society were a company.'.

New clause 3—A Society's Capacity—

'Sections 35, 35A, 35B and 322A of the Companies Act 1985 as for the time being in force shall apply to any society registered under the Industrial and Provident Societies Act 1965 as if that society were a company.'.

Photo of Andrew Love Andrew Love Labour/Co-operative, Edmonton

I understand that new clause 4, which has been printed on the amendment paper, has not been selected. I admit to some drafting inadequacies.

New clauses 1, 2 and 3 are probing measures which underpin why the Bill is long overdue. They illustrate just how out of date and out of line with modern practice industrial and provident society law has become. Indeed, there are now major differences between it and company law.

Although company law has developed over the past 20 to 30 years and, as the Minister suggested, will develop following the company law review, there has been little material change during that period in industrial and provident society law. There is a distinctly unlevel playing field between the two types of organisation, which is important for two reasons. First, when an organisation or business wants to incorporate and must decide whether to use company law or industrial and provident society law, industrial and provident society law has a significant disadvantage. Secondly, the two types of organisations must compete with each other, and, as I hope to show through the three new clauses, it is becoming increasingly difficult for industrial and provident societies to compete on a level playing field with companies.

New clause 1 deals with the accounts that must be produced, which are covered in the Friendly and Industrial and Provident Societies Act 1968, whereas the Companies Acts have been significantly and radically changed since that time in two particular ways. First, part VII of the Companies Act 1985, the provisions of which, including all its associated schedules, were amended by the Companies Act 1989, ensures that larger, public limited companies must provide a high level of public transparency, in order to protect investors and other stakeholders in the company. We need only look at the shenanigans on the other side of the pond, in the United States, to understand the importance of transparency and company accounts. That transparency is specifically intended to establish trust and confidence in the marketplace.

Secondly, at the other end of the scale, there are two types of generous exemptions for smaller firms. Small companies must comply with two of the three criteria of a turnover of up to £2.8 million, a balance sheet total of up to £1.4 million, and up to 50 employees. They face minimum requirements in the detail that they must provide in their returns. Companies are defined as medium sized if they comply with two of the three

criteria of a turnover of up to £11.2 million, a balance sheet total of up to £5.6 million, and up to 250 employees. They can substantially consolidate the accounts that they file with Companies House. Indeed, a further change was introduced last year that allows companies with a turnover of up to £1 million not to have their accounts audited if their members so agree.

That those important relaxations are provided for companies but not for industrial and provident societies gives companies a significant advantage. Industrial and provident societies must continue to provide a true and fair view, and set up accounts. Naturally, that true and fair view is interpreted by their advisers who have a specific interest in producing comprehensive accounts. Industrial and provident societies are exempted from producing accounts only if their total is up to £90,000. With a limit of up to £350,000, they can produce a less expensive set of accounts, and if they are over that limit they can produce a fully audited set of accounts.

Those limits are seriously out of date and completely inadequate in current circumstances. It is a serious injustice in the marketplace between companies and industrial and provident societies. I shall cite an example. Many small housing associations provide a detailed service to particular groups within our society. They face many pressures of consolidation, rent restructuring and harmonisation. Such limits seriously disadvantage them. The changes under new clause 1 would go some way towards ensuring a continuation of that specialist housing association market.

New clause 2 would reduce the current legal burdens on industrial and provident societies in respect of the use of the company seal. When companies are undertaking the usual formalities of Companies House of pre-incorporation contracts, under the Companies Acts they do not need to use the company seal or the legal requirements that surround that, but can simply require a director and the company secretary to sign the documents. However, industrial and provident societies have to continue to undergo the legal requirements that previously existed.People may say that that is not an onerous responsibility, but it adds to the red tape and burdens placed on industrial and provident societies. Given that such a change has been undertaken for companies, it is sensible that the same change is be made to the rules governing industrial and provident societies.

New clause 3 deals with the capacity of organisations. It would protect those outside the organisation who deal with the stakeholders from ultra vires activities of an industrial and provident society. Under the Companies Act 1989, that protection has been provided to those who deal with companies. Prior to that, if a person wanted to undertake a contract with a company, he had to decide whether or not that company had the legal capacity to undertake the contract. That took two different forms: whether that activity was included in the objects clause of the company, or whether the board of directors had the powers to undertake it. That was somewhat of a lottery, and the change in the Companies Act 1989 was

introduced to provide protection to those who had entered into contracts in the normal way. That still does not exist for industrial and provident societies, and if we want to increase confidence, trust and activity in the marketplace, industrial provident societies should have the same procedures and protections for those who enter contracts with them as companies.

We could examine the housing association movement. Primarily, the groups are community benefit societies that undertake specifically housing activities. However, we know that housing associations are moving into social and economic regeneration, working with communities and developing credit unions. Whether all those activities are undertaken according to the objects or powers of the board of trustees has not yet been resolved. The change under new clause 3 would give protection to those who deal with housing associations so that there would be no requirement for them to justify whatever activities they are undertaking.

New clauses 1, 2 and 3 illustrate clearly why we need the changes to allow a level playing field to develop between industrial and provident societies and companies.

Photo of Gareth Thomas Gareth Thomas Party Chair, Co-operative Party

I commend the way in which my hon. Friend the Member for Edmonton (Mr. Love) has introduced his new clauses. I agree with his view that there is a sensible case for aligning the law governing companies with that governing industrial and provident societies in the three matters. He is right to say that, in each case, societies operating as businesses suffer a significant disadvantage compared with companies, because of a failure to keep I and P law abreast of the changes and developments that have taken place in company law.

In each case, my hon. Friend's new clause points to the basic solution to the problems that exist by applying the appropriate company law provisions to societies. However, as my hon. Friend said, some further drafting work would be required to ensure that the new clauses could be appropriately applied to societies. It was that consideration that led me to propose the Bill in its original form and new clause 5 so as to omit the use of delegated legislation by Government, if they were so minded, to refine the application of company law to societies as we have already discussed.

The application of part VII of the Companies Act 1985 on accounts to societies, which my hon. Friend suggested in new clause 1, is a complex and technical point. Further work would be necessary before an appropriate and effective amendment to achieve that aim could be developed. If the Committee is convinced by the thrust of my hon. Friend's case, it may be that further down the line a new clause with more modest aims, such as the provision for societies of the exemptions and deregulatory advantages enjoyed by small and medium-sized companies, and an exemption from the need for a full audit on the same terms as companies, could be achieved without the need for delegated legislation and appropriately added to the Bill.

On the other two new clauses—and the one that was not accepted for debate—I believe that the application of company law rules to societies could be achieved more easily, but a clause to achieve that would clearly need some more refinement than is outlined in my hon. Friend's new clauses. If the Committee is so minded, I will consider whether incorporation of suitable provisions would be a useful and sensible addition to the Bill and consult on that. I may bring forward amendments on Report.

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury 12:15 pm, 13th February 2002

I congratulate my hon. Friend the Member for Edmonton on the way that he has set out his case for the inclusion of his new clauses. The provisions concern accounting and audit requirements, the capacity of societies, formal matters such as the execution and authentication of documents, and matters concerning contracts entered into by societies. The Government understand, and agree with the general objective of creating, so far as is appropriate, a ''level playing field'' between companies and industrial and provident societies. In that sense, we are sympathetic to the aims of these new clauses, which attempt to further that objective in the specific areas mentioned.

However, as my hon. Friend the Member for Harrow, West pointed out, there are drafting difficulties and technical issues with the new clauses. To take one example, the new clauses are silent on their relationship with existing provisions in the Industrial and Provident Societies Act 1965, with which they would appear to overlap. The result would be most unsatisfactory in terms of the coherence of the legislation, and could cause confusion. For example, section 36 of the Companies Act, which would be applied to industrial and provident societies by new clause 2, operates in the same areas as section 29 of the 1965 Act on the making of contracts by societies. The Companies Act provision refers to a wider range of contracts which appear to conflict with those of industrial and provident societies.

The Government are also concerned that we have not had time to think through the substantive implications of the effect of some of the new clauses and that those affected by the proposals contained in them have not had the opportunity to express their views. I therefore hope that my hon. Friend will withdraw the motion.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

I waited to hear what the Minister would say about the new clauses because this debate deals with having an approximation of the law relating to industrial and provident societies and that relating to companies. If the Government are sympathetic to the hon. Gentleman's new clauses, it is disappointing that that they cannot use their resources to ensure that a new clause setting out the objectives can be brought forward on Report and that there cannot be a chance of some public consultation before then. The Government already had the opportunity to consult about general principles in 1998.

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury

Perhaps I should point out to the hon. Gentleman and to the Committee that the performance and innovation unit is undertaking a report and is looking at the social enterprise sector. One of its objectives is to see how the industrial and provident societies might be helped to thrive and grow. I look forward to that report being published. In future, there will be ways of taking some of these projects forward, perhaps in a more considered context. I certainly look forward to discussing them with him in due course.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

The Minister has now added to the technical objections to the drafting the old chestnut of prematurity. As the Government went out to consultation in 1998 on the subject and raised expectations among industrial and provident societies that something would be done, let us hope that the performance and innovation unit report is not long delayed and that, when it is published, it will lead to a speedy resolution of these issues. The hon. Member for Edmonton concentrates our minds on substantive changes that need to be made, rather than just the theoretical stuff that we were discussing on the previous new clause. I do not know what he is going to do with his new clauses. If the Minister is unwilling to amend them and make them suitable for incorporation

in the Bill, all the hon. Gentleman can do is hope that the performance and innovation unit will come up with the goods sooner rather than later.

Photo of Andrew Love Andrew Love Labour/Co-operative, Edmonton

I thank my hon. Friend the hon. Member for Harrow, West, the hon. Member for Christchurch and the Minister for their contributions. Those who contributed have recognised the drafting difficulties and the technical complexity of some of the issues, but I am pleased there was sympathy from hon. Members on both sides of the Committee for the thrust of what is to be achieved through the new clauses.

I accept that we have not tabled, and it would take considerable time to debate properly, adequate new clauses that would reflect what we are trying to achieve. I also accept that the PIU is undertaking a review of the social enterprise sector, and that will deal with some of the issues touched on in each of the three new clauses. It may be possible to introduce changes in the future, and I believe that there must be some urgency in ensuring that they are made. I accept what the Minister says, and I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

Bill, as amended, to be reported.

Committee rose at twenty-one minutes past Twelve o'clock.