Clause 2 - Community benefit societies

Industrial and Provident Societies Bill – in a Public Bill Committee at 10:30 am on 13th February 2002.

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Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport) 10:30 am, 13th February 2002

I beg to move amendment No. 2, in page 2, line 28, leave out ', or is to be,'.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to take amendment No. 3, in page 2, line 29, after 'Act', insert

'after the commencement of this Act.'.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

The amendments would restrict the scope of the clause to new community benefit societies created after the ''commencement of this Act''. It would confine the provisions to what is already good current practice.

It might benefit the Committee if I rely on the excellent Library note that is available on the subject. It states:

''It is normal practice today for the registration authority to require that community benefit societies include in their rules a provision that neither the assets of the society nor its profits may be distributed to members. The expectation is that any profits will either be ploughed back into the society to develop its business or that they will be used for another purpose similar to the society's main object (such as philanthropic or charitable purposes). This accords with the principle under which community benefit societies are registered, that their business exists not primarily for those who are members of the society, but for the interests of society at large.''

That is normal practice in registering new societies. I do not believe that it is the practice for existing societies and is a condition for their continuing registration. There is no reason why the provisions of the clause, which I should like to amend, should not be restricted in that way. Otherwise, there is a restriction on the rights of societies to continue to operate under

their rules. If a time comes when the registrar or Parliament wants to change that provision, they could, but it could also be changed back again.

This is a modest probing amendment, as I understand that the Government have concerns about clause 2, although not necessarily about subsection (1). I hope that we will be able to draw out the Government a little further.

Photo of Chris Grayling Chris Grayling Conservative, Epsom and Ewell 10:45 am, 13th February 2002

I shall follow up on the thoughtful amendments tabled by my hon. Friend the Member for Christchurch. On Second Reading, I raised my concerns about aspects of the clause with the hon. Member for Harrow, West. Some of those concerns are addressed by the amendments.

I fear that by enacting the clause as drafted, we would place undue constraints on organisations throughout the sector without full knowledge of the implications of those constraints. For example, two clubs might choose to merge, dispose of the assets of one of them and redistribute those assets to their members. Equally—I am thinking of the case of the Co-operative Society a few years ago—one can imagine that a mutual organisation could be liable to attack by corporate raiders. There are pros and cons on both sides of the argument.

If we set in stone provisions to constrain the actions of organisations, we will place undue restriction on their development, change or evolution. An organisation might, for example, wish to dispose of its assets and become a virtual organisation, or choose totally to restructure the way that it operates. The constraints in the clause could hinder its actions. It would be helpful if the hon. Member for Harrow, West could set out in detail how the provision will work, and how he will ensure that the Bill does not place on organisations constraints that might hinder their development in circumstances that we cannot yet foresee.

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

I shall try not to stray as widely this time as I did before, Mr. McWilliam.

I endorse the remarks of the hon. Member for Christchurch, who quotes the excellent Library brief. He is absolutely right to say that it is common practice for sponsoring organisations to recommend to their member societies the use of particular rules in order to offer the type of protection that we are trying to put on the statute book. He will agree that protection is better if it is laid down in statute, rather than if it is provided under model rules. I draw his attention to the example of the Royal British Legion clubs, which were specifically attracted to clause 2. Although the Royal British Legion has the type of rules that the hon. Gentleman is talking about, it would prefer both new and existing societies to have the benefits of the statutory protection that the clause affords and that his amendment would take away.

The hon. Member for Epsom and Ewell (Chris Grayling) made some remarks about the breadth of the clause, which I shall try to address in the clause 2

stand part debate. I accept that there are concerns about the breadth, but the specific worries that he raised are not justified because subsection (1)(c) allows enormous flexibility for community benefit societies that wish to dispose of assets.

I shall use again the example of a Royal British Legion club. If the club wanted to sell its main building, it could do that under the provisions of the clause. If the club wanted to sell part of its land, it could do that under subsection (1)(c). It could not distribute the cash that it received from the sale of the building to its members because the money must be protected for the benefit of the community.

Photo of Chris Grayling Chris Grayling Conservative, Epsom and Ewell

May I take that example further? Let us suppose that a Royal British Legion club's membership tails off as veterans become fewer in number—that will be inevitable over the next few years. The club may become no longer viable as a result, and the members may decide to liquidate the club's assets and distribute them to the surviving veterans as a contribution. Would the clause prevent that from occurring?

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

The hon. Gentleman is right. The clause would prevent the assets—the cash in the bank—from being distributed to the members of the society. However, it would not prohibit the members from giving the money to the Royal British Legion charity or giving it for another community-benefit purpose. The key to the clause is that it protects assets that may have built up over many generations from being given to only the members who are around.

I recognise that there are further worries about the breadth of the clause, and I shall allude to them during the stand part debate. However, I tell the hon. Gentleman that the clause offers flexibility for how a community-benefit society may act. It is designed to prevent assets built up over generations from being distributed to people who happen to be members only at a specific time.

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury

I shall make some of my broader comments during the stand part debate. The hon. Member for Christchurch made some interesting suggestions when he moved his probing amendment. There is a case for examining the amendments in detail.

The clause's provisions state that we should be aware of proprietary claims of society members. If an irrevocable rule on asset lock-in featured in a society's constitution from the outset, its members and future members would be aware of their rights. However, the adoption of an unchangeable asset lock-in by an existing society, without a unanimous vote, could unwillingly deprive some members of rights. That could invoke article 1 of the European convention on human rights.

The question of when a society may take advantage of such lock-in provisions is important, but I am not sure whether the amendment would address that concern. It would prevent existing societies from adopting the clause's provisions, but it would not prevent a new society from adopting those provisions

after its first registration. Property rights could come into play at that time. We should consider such issues seriously during our debate.

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

I recognise the worries that have been expressed by the hon. Members for Christchurch and for Epsom and Ewell and the Minister about the clause, and the potential attraction that the amendment of the hon. Member for Christchurch offers. I recognise that there are other concerns about the breadth of clause 2, and I undertake carefully to examine the point that is addressed by the hon. Gentleman's amendment. I will propose amendments to clause 2. If they fail to satisfy the Government and Opposition Front Benches, it might be appropriate for discussion of the clause to be delayed.

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury

I look forward to co-operating with my hon. Friend in future discussions of these issues.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

This has been a useful debate.

I am a member of a Royal British Legion club. My hon. Friend the Member for Epsom and Ewell said that it is inevitable that Royal British Legion clubs will go out of business. I do not share his pessimism. There continue to be service men who are eligible to join Royal British Legion clubs, and most of the clubs—such as the one in Christchurch—offer associate membership, so that people who have not served in the armed forces can enjoy their hospitality, and cheap and good beer.

The Minister does not think that my amendments go far enough, because they do not cover the situation that she described of a new society whose assets are subsequently locked in, against the wishes of its original members. I am grateful to the hon. Member for Harrow, West for saying that, in the light of our debate, he will consider what to do. Therefore, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

I suppose that, as a matter of principle, I should declare that I am a member of the Crawcrook Royal British Legion club.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

I beg to move amendment No. 4, in page 2, line 37, leave out paragraph (b).

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to take the following amendments: No. 5, in page 2, line 40, leave out paragraph (c).

No. 6, in page 2, line 47, leave out 'paragraphs (a) to (c)'.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

Amendments Nos. 4 and 5 propose to leave out paragraphs (b) and (c) of subsection (1), and amendment No. 6 is consequential upon that.

Paragraph (b) introduces the entrenchment of rules. I agree with the Minister that that undermines the sovereignty of members. No Parliament can bind its successors, so why should one group of members of a community benefit society be able to bind its successors for all time, and curtail their freedom of choice to reach a different view? If the regulator or the registrar adopts a policy on public interest grounds,

he—or a subsequent regulator or registrar—can change it. That must also be the case with regard to members of a society: they should be able to reach a different conclusion in different circumstances that we might not be able to foresee now. That is why I am concerned about the entrenchment provision in paragraph (b).

Paragraph (c) is the most severely restrictive part of the clause, because it restricts flexibility and undermines a provision in the Industrial and Provident Societies Act 1965. It entrenches assets, and that is unacceptable for the reasons that have been adduced in our debate. I hope that the hon. Member for Harrow, West, will adopt a similarly flexible approach to these amendments as he did to previous ones.

Photo of Gareth Thomas Gareth Thomas Party Chair, Co-operative Party 11:00 am, 13th February 2002

The hon. Gentleman is right that these amendments go to the heart of the proposals in the clause. He failed to acknowledge the flexibility that the provisions continue to make available to members of community benefit societies. Assets that have been built up to be used for the benefit of the community by many members over many generations should be protected. He is right, however, that members' different economic circumstances and interests may mean that it is appropriate to change the way in which the assets are used.

I shall return to the example of the Royal British Legion club that was used in the debate on amendments to clause 1. If a club's economic circumstances mean that it is timely for it to sell one of its main buildings, clearly, current members of the society should have the right to make that judgment. Clause 2 would not prevent that; it would simply prevent the money raised from such a sale from being handed out to current members of the society.

Another possibility is that, despite the opportunity for associate membership and for non-members of the armed forces to join, a club might be nearing the end of its useful life. If the society wanted to wind it up and the members were considering what to do with the assets in the bank after the sale of the club and other property, the only course of action that clause 2 would prevent would be their keeping the money. They could give it to a charity or to another community benefit society, or even to a company if it had appropriate limited purposes. Clause 2(1)(c) would still provide for considerable flexibility. The only thing that it would prevent the membership from doing would be distributing the assets among themselves.

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury

As my hon. Friend rightly said, the amendments go right to the heart of clause 2. I am in continuing dialogue with him about aspects of the clause. The amendment would remove the provision to allow societies to adopt rules irrevocably, committing their assets to the benefit of the community. I can see potential benefits to the sector from clause 2, although at this stage I do not think that the arguments are clear cut. Such a change in the law should be considered

carefully. Locking-in a society's assets in perpetuity should not have unintended effects such as reducing the flexibility of the sector to consolidate and grow.

We need to consider some technical points. For example, provisions that would limit the use of a company's assets and that could not subsequently be altered would be highly unusual—perhaps even technically impossible in company law. Without such provisions, the clauses in the Bill to allow the transfer of assets from societies to companies do not seem appropriate. It may be possible to design powers to enable companies to make such unalterable commitments. However, that approach would be more far-reaching in scope than the current version of the clause. We need to examine the implications more carefully.

We also need to consider the framework provided in other sectors of the economy, such as the charity sector, where rules govern the use of assets. Clause 2(1)(b), which would allow industrial and provident societies to lock in their assets for the benefit of the community irrevocably, would produce consequences. We should be clear about whether that rule would benefit all societies, given the wide range of societies that operate for the benefit of the community. If so, should there be provision to overturn the rule in exceptional circumstances? For example, there may be occasions, such as on the dissolution of a society, when the redistribution of its assets might be impeded and less efficient if no suitable eligible society had adopted a similar lock-in rule. If it is appropriate for those asset lock-in rules to be reversed in special circumstances, we need to consider which body might be best placed to intervene, what powers it would require and in what circumstances it should exercise such powers. Those issues need further consideration.

If we accept the amendments, we will be left with little change to the present situation. In practice, limitations are already placed on the ability of community benefit societies to distribute assets outside of purposes that benefit the community. While I am sympathetic to the amendments in that they try to remove problematic provisions in the clause, I am not convinced that they leave us a useful basis for legislation.

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

As I suggested on the previous group of amendments tabled by the hon. Member for Christchurch, I recognise that there are still issues to resolve on the clause. My hon. Friend the Minister alluded to some of the difficulties that are still to be resolved. If the Committee is minded to reject the three amendments, I will consider further the comments of the Minister and the hon. Gentleman, with a view to tabling amendments on Report or recognising that another legislative opportunity might be more appropriate for such changes.

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury

I very much welcome the commitment made by my hon. Friend and look forward to working closely with him on the issue.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

Again, we have had a constructive debate and I am grateful to the hon. Member for Harrow, West for demonstrating his flexible approach. He prayed in aid the word ''flexible'' in relation to the drafting, but my problem with it is that the flexibility goes one way. True flexibility can flex in more than one direction, so I hope that he will provide additional flexibility if and when he revises the clause. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 2 ordered to stand part of the Bill.