Clarification On Distribution Of Surplus Assets Of A Registered Society On Solvent Winding Up

Author:Mr Neil Griffiths and Kirstin Dunn

Friendly societies, along with other mutual societies, are registered with and regulated by the Financial Conduct Authority under the Co-operative and Community Benefit Societies Act 2014 (the Act). By section 123(1) of the Act, a society may be dissolved by "being wound up in pursuance of an order or resolution made as is directed in the case of companies." Section 123(2) provides that the provisions relating to the winding up of companies have effect in relation to a society as if the society were a company save that any reference to the registrar of companies is to be read as a reference to the Financial Conduct Authority.

Questions arose in the matter of Watford Printers Limited (in liquidation) (judgment dated 22 February 2018) as to the application of this provision and the Insolvency Act 1986 to a friendly society. Watford Printers Limited (the Society) was registered as a friendly society following the establishment of a workers' cooperative in 1921 to buy and operate printing machinery. The members of the Society were the workers (or former workers) of the printing business and their spouses. Membership was attained by purchasing at least five shares of £1.00 each.

The conduct of the Society was governed by its rules, which were registered on the Mutual Public Register. The need for clarification of distribution of surplus assets arose because there was no rule expressly covering distribution of surplus assets at the end of the life of the Society. Certain rules made it clear that the Society did not operate in the same way as a company. For example, irrespective of the number of shares held by a member of the Society, in any meeting, each member held only one vote.

In the absence of guidance in the rules of the Society, legal precedent, or unanimity among the members as to the method of distribution, the liquidator sought direction from the court. More specifically the court was asked, inter alia, whether the distribution should be made (a) in accordance with the number of shares held at the date of liquidation (the formula familiar to all involved in winding up companies); or (b) on the basis that every shareholder should receive the same capital distribution irrespective of the number of shares held after repaying the amount of capital showing as the nominal value for each member.

There is some support for the latter formulation in a) section 2(3) of the Act: a society will not be eligible for registration if it carries on...

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