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

Part of Industrial and Provident Societies Bill – in a Public Bill Committee at 12:00 pm on 13th February 2002.

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Photo of Andrew Love Andrew Love Labour/Co-operative, Edmonton 12:00 pm, 13th February 2002

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 They illustrate just how out of date and out of line with modern practice industrial and provident society law has become.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.