Industrial and Provident Societies Bill

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Mr. Thomas: The Committee should reject clause 3 and put in its place new clause 5. I have considered carefully the constructive criticism from those on both Front Benches and the new clause is the result. Instead of the apparently sweeping power under the clause to amend any piece of industrial and provident society law in line with company law, the new clause contains a specific list of aspects of I and P law in which change in line with company law would be permissible.

Both my hon. Friend the Minister and the hon. Member for Christchurch suggested that the Treasury would have too much power under the clause. Since I was elected, I have considered the Treasury to be a hugely beneficial and magnificent force. I have high regard for its officials and even higher regard for its Ministers. However, I recognise that the scenario may have been different before I was elected and unable to make such a judgment, and that the situation may not continue. Although I have confidence that it will continue for the foreseeable future, I recognise the need to limit the powers available under clause 3(1).

Clause 3(1) includes a power to modify by statutory instrument the relevant provisions to bring I and P law into line with company law. The clause defines the relevant provision by excluding those parts of the Industrial and Provident Societies Act 1965 that make I and P societies essentially different from companies.

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Every other provision of the Act could be amended by statutory instrument under clause 3 if it was different from company law.

New clause 5 substantially changes that scenario by listing instead those provisions of I and P law that can be modified. In fact, consequential changes need to be made in only eight or nine areas. Whole areas of I and P law are therefore completely untouched by new clause 5. They would probably have been left untouched by clause 3, mainly because a suitable comparison with company law could not be made. For example, I have omitted from new clause 5 those parts that go to the essential nature of industrial and provident societies—for instance, sections 16 to 18 of the Industrial and Provident Societies Act 1965 that deal with cancellation, suspension or refusal of registration. I left them out because they can be changed only by primary legislation and they cannot be assimilated into company law. I have omitted also those parts that are merely permissive and those parts that are not substantially different from company law—or, if they are substantially different, those parts that do not cause issue on whether there is a level playing field.

Section 11 of the 1965 Act on funds for the purchase of Government securities is untouched by new clause 5 and so too is section 21 on advances to members. Similarly, section 14 on rules to bind members and section 44 on the register of members and officers are untouched. Potentially, of course, they could have been changed by clause 3. Similarly, section 58 of the 1965 Act on instruments for dissolution and section 60 on decisions on disputes are not at risk of being changed by new clause 5. Crucially, the new clause would not allow every change proposed in the Treasury consultation document that was published in 1998—the document to which the hon. Member for Christchurch and others alluded.

I draw the attention of the Committee to the excellent House of Commons Library brief that touched on the Treasury consultation document. That document listed five areas where change might be appropriate and it went out to consultation on them. It looked first at a set of measures designed to change registration procedures. That would require primary legislation and it is not, therefore, touched by the new clause.

The original Treasury consultation document appeared to want to change the provisions on the statutory definition of eligible societies contained in the 1965 Act, but that, too, would have required primary legislation and could not be achieved under the Bill or by new clause 5. I shall deal shortly with a particular area where I think a statutory instrument would be appropriate, but more general changes to the registrar's powers would require primary legislation and are therefore not included in new clause 5.

Nothing that could be proposed by statutory instrument under new clause 5 is new in principle. At the very minimum, it has to have been considered at least once by Parliament in the context of changes to

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company law. In six of the eight areas that are listed, it is also being considered under reforms to either building society law or friendly society law, or both.

At the very least—in terms of the eight areas that might allow statutory instruments under the clause—inspiration will have come from a change to company law that has already been considered by Parliament. However, six of the eight cases might have been considered during Parliament's second or third opportunity for scrutiny of changes to building society law or friendly society law. The opportunity to change under the eight areas is relatively narrow, albeit important to industrial and provident societies. That narrowness is ensured by the requirement for assimilation with company law.

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There is nothing in the list of provisions set out in new clause 5 that is radically different from anything in existing company law. Radical change to the rules and regulations under which I and P societies operate is not possible under a statutory instrument delivered under this clause. The net effect of the differences between I and P law and company law in the eight areas is that the legal form of I and Ps is significantly out of date and problematic.

Perhaps it will illustrate my point if I briefly go through the eight areas listed in new clause 5(3). Under section 1(1)(b) and schedule 1 paragraphs 2 and 6 and section 14 of the Industrial and Provident Societies Act 1965, the provisions seek to allow statutory instruments to be brought forward—if the Treasury is so minded—to bring industrial and provident society law into line with section 35, 35(a) and 35(b) of the Companies Act 1985. That is briefly sectioned for the benefit of third parties dealing in good faith with companies that do not need to be concerned whether under a company's constitution there is the capacity to enter into a transaction or not, or whether the power of the board of directors to bind the company is subject to any limitation.

I give the example of a rugby club that wants to borrow money from a bank in order to modernise its bar. There could be, under section 35 of the Companies Act, a scenario in which the rugby club does not have the provision of social facilities within the objects of its constitution. Under the changes that are being introduced for the Companies Act, that is not a problem for the bank lending the money because its loan is protected. However, if the rugby club is an industrial and provident society and the provision of social facilities is not included in its objects, that loan agreement is potentially ineffective, because the bank could lose its money. That is the issue of capacity—the ultra vires issue that company law reforms have already dealt with. Surely it is relatively straightforward to apply the solution that is appropriate for companies that have to deal with this question to industrial and provident societies.

I can offer assurance that the provision has not only been considered under reforms to company law, but has been considered by, and is incorporated under,

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sections 8 and 9 of the Friendly Societies Act 1992. Section 5(8) and the second part of schedule 2 of the Building Societies Act 1986 achieve the same result for building societies.

There have been three occasions on which Parliament has had the opportunity to scrutinise these issues. Surely, therefore, it is sensible to allow the Treasury, if it so wishes, to amend the law governing I and Ps in this regard and to create that level playing field.

The reform proposed to section 3 involves assimilation with company law by allowing documents to be executed by the signature of officers rather than by seal. The equivalent reform was included in section 36(1)(a) of the Companies Act 1985 and the changes consequential on that provision.

Section 5 concerns the name of the society. No society can currently be registered with a name that is undesirable. The situation is extremely vague and unclear and the interpretation of the statute is unpredictable. Company law was changed in this regard by section 26 of the Companies Act 1985, which made the situation clear and straightforward. It would be sensible for the same principles to apply to industrial and provident societies. This is another part of creating a level playing field. Again, the innovation is not radical. Parliament has already considered it and it is a sensible update.

Section 29 concerns contracts, and the explanation for its inclusion in the new clause is similar to that for the inclusion of section 3 concerning the execution of documents by signature of officers.

The inclusion of sections 41 to 43 in the new clause is intended to allow assimilation with company law provisions that govern the accountability of and fair dealing by directors, committee members and officers. The issue relates to part X of the Companies Act 1985, and reflects the requirements that have applied to companies since 1980 concerning substantial property transactions involving loans, or certain other dealings with directors.

The inclusion of the sections ensures that beyond the existing common law duties of honesty, good faith and the avoidance of conflicts between duty and interest, which apply to both company and society directors already, certain specific transactions are prohibited under the Companies Act 1985 or require shareholder approval.

I shall give another hypothetical example concerning a rugby club. The club owns a large amount of land and wants to sell a couple of acres at the bottom of its fields, which it does not use and which are worth more than £150,000. One of the club's directors is a property lawyer. If the rugby club is a company, under company law such a transaction must be approved by its shareholders at a general meeting. If it is an industrial and provident society, however, such a transaction does not have to be approved by members.

The new clause offers the opportunity to ensure that there is appropriate transparency and that appropriate information is available to members. Similar provisions were brought into force for friendly

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societies and building societies by section 27 and part II of schedule 11 of the Friendly Societies Act 1992 and sections 62 to 68 of the Building Societies Act 1986. There have been three opportunities for Parliament to debate this proposal. This is the one area of the provisions that is out of step with company law, and the new clause would allow the opportunity for sensible change by means of statutory instrument.

Sections 47 to 49 govern the power of the regulator to appoint inspectors or to investigate the running of a society or company, and are similar to those found in part XIV of the Companies Act 1985. The Department of Trade and Industry can investigate companies in cases of suspected fraud or some other form of wrongdoing to protect the interests of shareholders, creditors or others. The powers in the 1985 Act can be exercised by the DTI on its own initiative, or at the request of a proportion of members of a company. However, under I and P law, the opportunity to act on the regulators' initiative is not available to the regulator. That is the one difference between company law and the provisions governing I and P law, in this respect. It is surely a sensible area for change.

For some industrial and provident societies, the situation has already been rectified. Sections 17 to 20 of the Credit Unions Act 1979 changed that scenario, so changes have been considered under not only company law reforms but credit union reforms. The Financial Services Authority also has extensive powers under the Financial Services and Markets Act 2000 in respect of building societies and friendly societies. Substantial opportunities have been granted to Parliament to consider the principles at stake, or potentially at stake, under the new clause. We are discussing only that narrow difference—the fact that the regulator cannot act on his own initiative. The new clause would make that provision available if the Treasury wanted to propose change by statutory instrument.

Paragraph (a) of section 55 of the 1965 Act would apply sensible provisions in terms of rescue of industrial and provident societies. Here the focus is, again, on administrative receivership, administration orders and company voluntary arrangements, which were debated and reformed under the 1986 legislation. The provisions were also made available to building societies under part XI and schedule 15(a) of the Building Societies Act 1986. Already, therefore, the provisions have given two opportunities for parliamentary scrutiny. The new clause would simply allow a reading across of the provisions by statutory instrument.

Rather than going through all the other changes, which are even more minor, I should summarise the position that the new clause offers. By doing so, I shall hopefully persuade my hon. Friend the Minister, other Labour Members and Opposition Members, of the worthiness of the new clause.

Crucially, the new clause limits the Treasury's power to the provisions listed in subsection (3) alone, and to the eight areas that I mentioned. Under the original clause 3, the power of the Treasury was limited

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by the provisions of the 1965 Act that it could not change. Therefore, there is a significant tightening of the opportunity for change.

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Prepared 13 February 2002