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Capacity Of Society And Power Of Committee To Bind It

Volume 402: debated on Friday 4 April 2003

The text on this page has been created from Hansard archive content, it may contain typographical errors.

I beg to move amendment No. 7, in page 4, line 36, after 'which' insert—

not less than 21 days'.
The amendment is perhaps of slightly more substance than the previous ones, although I have been interested in the interventions made and interest shown with regard to the first two groups. I think that this amendment merits a little more thought.

I shall be interested to hear my hon. Friend's contributions on this matter as well.

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The amendment deals with the protection of a contract or business deal between a society and a third party and the need to ensure that the actions of that society where it exceeds its constitutional objects do not prevent the contract from being legal and of substance. It relates to what should be done with regard to the consequences of such an event. If a society proves to be trading outside its rules, the object of the provisions is to protect the partner or customer in the contract. However, there is also a consequence for the society, which has to work out what to do about the fact that the objects set down in its constitution have been exceeded by the actions of its officers or a committee. The steps set out in the clause represent the belief that it should be possible for a society retrospectively to agree that those acting on its behalf have done so correctly.

The amendment sets out a notice period for a meeting at which such a decision might be made. The clause already gives a statement of the majority that must be achieved at such a meeting to secure that decision, but I think that it is perfectly legitimate that proper notice should be given for such a meeting, which will involve what may obviously be a very substantial decision for a society, as it is perfectly possible that the breach of objects is substantial and relates not only to a technical matter.

I thank my hon. Friend for giving way. I am interested to know what deliberations he had with regard to the 21-day period. I can see the logic of having no fewer than 21 days' notice, but the amendment does not seem to contain a further requirement to hold the meeting within a given period. On what basis did he deal with only half the timing equation?

That is a very reasonable intervention. The answer is that the 21-day requirement is based on equivalent company law. However, that may not be an entirely adequate answer, as societies are obviously rather different institutions from companies, and simply saying that we want to proceed on the same basis as that which applies to companies might be seen as inadequate. I think that 21 days' notice gives those who are concerned about the breach of an object of a society the opportunity to gather their arguments and inform members. As I said, the matter at stake may be of some substance in the society, so some individuals might wish to lobby people to vote against the resolution.

Perhaps it is worth setting out the consequences of not passing such a resolution. In those circumstances, a liability will remain among those who have made the contract—and rightly so. We should not permit circumstances in which the servants or a committee of the society can make a business deal that is clearly outwith the objects of the society, regardless of the democratic intent of its members. The provision is therefore a serious restraint.

The argument that, because company law provides for a 21-day period, it is appropriate in respect of industrial and provident society law is not a strong one, considering that one or two shareholders will often own 75 per cent. of the voting rights in a company. In industrial and provident societies, a much wider group of people would be involved. My question relates to the provisions in a special resolution. There are protections, including the 75 per cent. vote, so one has to question whether it is necessary to specify 21 days as a special length of time and whether seven or 14 days would he more appropriate, especially where it may be necessary to pass a resolution to preclude legal action.

Order. I think that, even on a Friday, I would like to observe the distinction between an intervention and a speech.

Thank you, Mr. Deputy Speaker. Nevertheless, I thank my hon. Friend for his contribution on the amendment, whether it was an intervention or a speech.

First, the wording ensures that the period should be at least 21 days. I recognise that my hon. Friends's examples involved shorter periods, but there is no reason why a society should not say that it will hold the meeting in 28 days' time or after a longer period, bearing in mind the initial point that he made, which was extremely sound. Indeed, that is why I said that my reference to mirroring company law was perhaps an inadequate answer. The institutions are very different and there are strong arguments for giving a decent interval. Before he intervened, I was setting out the sort of interval in which a genuine debate could take place about the implications of the decision. It is perfectly possible that substantial numbers of society members will profoundly disagree with a decision and wish to hold their officers and the committee instructing them answerable for that decision. This should not be some token paper process.

It is important to reflect on whether the proposed approach is the right one. My hon. Friend referred to an example that, I would argue, set aside some of the democratic constraints under which a society should operate. If there were a requirement that the meeting should be held within seven days, those who would be concerned about the decision might well have very little opportunity to gather their arguments and inform their colleagues about the implications. The point is that the provision happens to be the same as that which applies in company law, but I certainly believe that any society should take the view that at least 21 days means just that. There may be circumstances in which a matter is of such substance that longer notice and greater information flow is required among members to ensure that they are properly informed about the implications of the decision that has been taken.

I understand the logic of my hon. Friend's argument, but I am not sure whether he has addressed my concern. A society with a very long-standing membership could, for example, use the validation of that membership as an excuse for delaying a vote for a very long time. That would mean that the society had been operating outside its original terms of reference. What are his thoughts on that particular issue?

I thank my hon. Friend for his intervention. Such a lengthy delay would have two important implications. The first is a positive one that relates to the content of the Bill: the third party that engaged innocently in a contract with the society is protected, whatever the delay. That is an important issue to grasp. Where a contract has been struck with a third party by a society acting outside its objects, that individual or business will be protected because they acted unknowingly of the breach of the objects. As was mentioned on Second Reading, no such protection previously existed and such parties simply had to consult the constitution of the society themselves to be sure that the contract lay within the bounds of its objects.

The implications of lengthy delay within the society take me back to one of the Bill's foundations. Societies are democratic bodies, which is one of the reasons why they interest me, and presumably one of the reasons why hon. Members have been concerned and interested during the Bill's passage. They are interested in the fact that societies are the means of carrying out activities based on democratic will. A society might take the view that lengthy delay was required while the membership database was cleaned up to ensure that the correct people were notified of a meeting, although I cannot recall a circumstance in which such a decision was taken in my experience of societies. Most societies of which I know readily concede the inadequacy of their membership databases and recognise that it is inadequate to rely entirely on postal notices to inform people of a meeting of such substance. Members regularly do not notify societies of their changes of address, so the membership database would not be a full tool with which to notify people of a meeting. A retail society would achieve proper notification by placing notices in shops and places connected with the society's trading activities and by publicising the meeting in the relevant local media. I do not anticipate that my hon. Friend's argument about the quality of membership databases would be used to delay the process.

Most societies' constitutions—or at least those of all the societies that I have encountered—allow members who are worried about a matter to call a meeting about it. If there were evidence that a retail society's board had prevaricated about the process and delayed calling a meeting to discuss such an important matter, its members could, and should, take the opportunity to call a meeting.

The importance of general meetings for industrial and provident societies means, as my hon. Friend knows, that there is much reference to such meetings in current legislation on such societies. However, there is no requirement for 21 days' notice to be given before the meetings. Will my hon. Friend and the Minister reflect on why a 21-day notice period is so important for a general meeting to consider some issues, but not others?

It is the same notice period as that under company law to cover similar circumstances, although I qualify that by saying that it is not an overpowering argument. If a company trades outside its objectives, there is an opportunity for retrospective correction of that position, and the notice period is applicable to that. Nevertheless, it is reasonable to ensure that a proper notice period exists for a process of such substance. One could argue that a society's ordinary general meeting should be governed by the society's rules. The governance of a society is a combination of this country's law and the society's democratic will because it sets many of its own rules. The precise process of how general meetings may be legitimately called is a combination of the society's legal obligations and its democratic decision on how to conduct its business. I have never argued that the law of this land should cover every possible aspect of how a society or company should conduct its affairs. The law should adopt a relatively light touch.

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I would argue against my hon. Friend if he were suggesting that time limits should be written into law to cover other aspects of societies' operations because they should usually be left to make their own decisions. However, the provision covers an important legal obligation because individuals could face legal action if they fail to comply with their society's objectives, as was suggested previously. A time limit in such circumstances is important for individuals' protection and, especially, societies' protection. The amendment is important and I am glad that it was thought of after Committee.

I fully appreciate my hon. Friend's points about a light touch and his wish to avoid over-regulating essentially democratic organisations in which decisions are taken by members. However, he earlier referred to ways in which the notification of the meeting might be given to members, such as by post or through advertisements. Did my hon. Friend consider whether there was any need to add such requirements to the way in which notice is given in the Bill, or does he think that that is already covered by existing guidance and legislation?

My hon. Friend's point relates to two arguments. First, such societies are extremely diverse. I have given examples of retail societies because my personal experience is based on them, but there are many other co-operatives and community benefit societies that are organised in wholly different ways. A prescriptive approach to provide that a general meeting must be called in a specific way and publicised through a specific medium would be an unrealistic legal intervention that disregarded the different ways in which societies operate.

Secondly, as I have already said, such prescription would interfere with a society's democratic right to make its own judgments. When the House considers this and other matters, we should weigh carefully the balance between the legal protections for people on which we should insist and freedom for our citizens to carry on their affairs as they wish, whether as individuals or when they act collectively in the way in which we are discussing.

I understand my hon. Friend's belief that we must balance regulation and criteria for sending notices. Does he agree that even if it is possible to have a 21-day notice period, the way in which the notices are sent out is equally important? If the majority of members could not access the notices, whether they were in the press or otherwise, the value of the 21-day notice period would be diminished.

It is a valid point that societies could choose to implement the obligations in the clause, including the notice period for which the amendment would provide, in a nugatory way. They could conduct a token process of informing people whereby members had no genuine opportunity to find out about a decision to call a meeting or, therefore, to participate in it.

However, the activities of those organisations and the democratic constraints under which they operate are already tightly regulated. They have to pass a regulatory test on members' involvement in order to be registered. We should therefore rely on the organisations' regulatory wisdom. Those who were fortunate enough to serve on the Committee know that we discussed the regulatory framework that might be applied to societies in future. The regulators would be obliged to consider such matters, as they do now.

As I predicted, the amendment has generated a good deal of interest. It is a rational and sensible addition to the Bill.

I am happy to say that I believe that the amendment is sensible and justifiable. Like the hon. Member for South Derbyshire (Mr. Todd), I am glad that it has been tabled after our deliberations in Committee.

The hon. Gentleman made several important points in highlighting the reasons for the amendment. First, he dealt with third parties, who may transact with any entity that the Bill encompasses. They rightly start with the expectation that they are entitled to believe that those with whom they transact from the co-operative or community benefit society carry authority. That principle has informed the Bill's drafting. It is right that a transaction that may extend beyond the vires of the relevant entity's objects is called into question. If one purports to transact on behalf of an entity, it is vital that one has the authority to do that. It is important for third parties to know that the transaction has bound the entity, or whether they have left themselves personally liable for not acting within the proper authority of the co-operative or community benefit society.

The importance of the matter renders special resolution ratification procedure wholly appropriate. An ordinary resolution, albeit democratic, means that a majority of one is enough. Special resolution shows the intention, in the case of a problem, to have the full backing of all those who have at least a stakeholder interest in the co-operative or community benefit society.

The amendment would introduce a minimum time period. Should a maximum period also be introduced?

Like me, the hon. Gentleman has the benefit of having acted as a professional company secretary before his political life. He makes an important point, which is of genuine practical importance to those who are responsible for ensuring full democratic notification and involvement. I shall deal with it in the course of my remarks.

Earlier, the difficulty of validation and of identifying to whom notice should be given was mentioned. I appreciate and readily accept that it may be difficult to have a live and reliable record of the full constituency of those who are rightly interested in the relevant entities. It is therefore important to consider not only whether there is a database and whether everyone can be reached by post, but a method of distributing information more widely. There is therefore an argument for considering a maximum time, which the hon. Member for Edmonton (Mr. Love) mentioned. However, we should start with an appropriate minimum time, which was the focus of many interventions that preceded my contribution.

It is appropriate to set a minimum period of
"not less than 21 days".
I would hesitate to propose a read-across from company law precedents in statute and through court cases that sought to clarify—or not—the law. It has become clear that such a time period is 21 clear days. I should like to believe that that precedent, set by the courts as an interpretation of statute, applies to the Bill. Those who know the arcane technicalities realise that the 21 days do not include the day of posting. There are 22 days from the time that the document leaves the office. It is important to ascertain whether there is a true read-across from company law or whether the precedent could inform what happens in the case of the Bill.

I accept the need for a special resolution process. However, to revert to my intervention on my hon. Friend the Member for South Derbyshire (Mr. Todd), I am less clear about why the special resolution process in this case is more important than such a process for demutualisation, which does not require a 21-day notice period.

I shall try not to be led too far down a track that might incur your wrath, Mr. Deputy Speaker. However, I shall give a broad response to that important point. Statute must establish what requires special and ordinary resolutions. Today we are considering a matter that warrants special resolution. Perhaps the hon. Member for Harrow, West (Mr. Thomas) should leave until another day arguments for a special resolution process for demutualisation. There could be some valid and interesting arguments about that. If the Government proposed such a move, the hon. Gentleman and I might find ourselves on the same or opposing sides.

Demutualisation must reflect the entity's express wish. In the clause, we are seeking ratification of an action that has already taken place, which binds the entity to a third party. Although one could get into a principled argument about the hon. Gentleman's point, it is wholly appropriate to apply the special resolution process in the case that we are considering. He should wait for another day to present his arguments about demutualisation. Perhaps the Minister has more information, given that she is blessed with knowledge about the Government's intentions; I can only speculate on them.

A notice period of 21 days is appropriate, not least because delivery by post cannot always be guaranteed. It was argued earlier that large FTSE 100 plcs may have one or two shareholders who comprise 75 per cent. of the holdings. The plc of which I was group company secretary had 44,000 shareholders, of whom 24,000 represented approximately 67 per cent. of the shareholding. It is important to be able to demonstrate that one has made every effort to contact everyone to give them proper notice. That requires advertisements in appropriate newspapers. Many advertisements can make us flip the page over very quickly because they do not arrest the eye, but it is important that news should get around on the grapevine.

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The 21-day period arose because of a habit that developed in Lancashire. The north-west has a fine tradition of co-operatives, and I am fortunate enough to represent a seat in Cheshire, whose co-operatives are combined in the United Co-op. The co-operatives in Lancashire had a thing called wakes week, when, in the old days, almost everyone used to go off on holiday. Sometimes that week's holiday would extend to a fortnight. Some companies were choosing to give notice of these meetings just as people were going on holiday, so the 21-day provision was introduced to ensure that people had got back from their holiday and had the opportunity to see the notice. Otherwise these things could all have been nicely stitched up while they were away. That is the historical explanation, and it shows that there was a good reason for the provision. The normal practice of taking a fortnight's holiday has not changed much since then, so there is a reasonable practical basis for the period being not less than 21 days.

I thank the hon. Gentleman for giving way. I recall that the outcome of the 1970 general election might have been different if it had not been held in wakes week. He talked about sending out letters; in this day and age, would he regard the posting of a notice on a website, or the sending of e-mails to members of a meeting, as suitable ways of announcing a meeting?

One could get exceptionally excited about what constitutes a proper notice. It might be appropriate to ask the promoter of the Bill to bear that question in mind, so that he can answer it later. It is a well established practice that notices are either written or communicated by advertisement. I have not been involved in these technical matters in recent years, but I would be surprised if some form of letter—sent either by fax, e-mail or posting on a website—were not deemed to be a proper notice. That would seem to be a proper expectation, but all sorts of regulations and laws will be developed as our experience of these matters increases.

The 21-day provision is important because, when dealing with these serious matters, time must also be allowed in which to marshal the advice as well as the people. These matters can often involve quite technical legal and accounting issues, and it is important, for example, if people have an objection to what is taking place and wish to exercise their democratic right, that they have the chance to take proper legal advice on the matter. That can be difficult because they often have to go on a fundraising exercise first, to ensure that they can afford the legal bill. That happens in relation to popular objections to planning applications just as it does to members of a co-operative society who might feel that they have not been properly served by those in executive charge. Those are remote circumstances, but we must give people every opportunity, in the process that we enact, to get the best possible advice.

We must also bear in mind that the 21-day provision will provide the opportunity for a number of meetings to take place in which the matter could be resolved in a rather less flamboyant way. That is often the best way to resolve these issues, and the meeting could always be withdrawn if they had been resolved in a satisfactory manner. Sometimes that can be better for the society. Seven or 14 days would not be enough. I do not think it necessary to have a maximum period, because there would be serious objections from those who wanted to exercise their rights if the matter were not resolved with sufficient dispatch. There is nothing like adverse publicity to make people act rather fast. I am happy to add to some of the arguments that the hon. Member for South Derbyshire has already made in support of the amendment, and I am happy to give our support to it at the same time.

I rise simply to ask the Minister to clarify the point that I made in interventions on my hon. Friend the Member for South Derbyshire (Mr. Todd) and the hon. Member for Eddisbury (Mr. O'Brien) about why a 21-day notice period is so important in regard to a special resolution but not to other ordinary resolutions or to what is surely the most important resolution that can come before a co-operative or a community benefit society, namely, a resolution to transform the organisation into a company or some other corporate structure. I should say that I do not intend to go to the barricades over this issue. Clearly, that would be daft. I recognise already that my point is not accepted by my hon. Friend the Member for South Derbyshire or by the Conservative Front Bench. I fear that it would probably not be accepted by my own Front Bench either. Nevertheless, I must ask whether this is Treasury prudence gone too far, whether a lawyer has run amok while giving advice to my hon. Friend the member for South Derbyshire, or whether there is some other genuine reason, which I have missed, that a 21-day notice period is so important in this instance yet not in the instance of any other general meeting or resolution process for a co-operative.

The hon. Member for South Derbyshire (Mr. Todd) made a persuasive case for his amendment in the face of some vigorous cross-examination, which he was bold enough to invite on himself at the beginning of his speech. He seems to be adopting a belt and braces approach, in that the rules of a society should anyway allow a decent period of notice to be given before a meeting to discuss an issue of such importance, but some may well not do so. He is trying to prevent a board from bouncing the membership into accepting an action that it has taken that is outside its terms of reference, and it is entirely proper that he should do so.

Comparisons have been drawn with the period of time allowed for a company to hold such a meeting. A better comparison would be with the time that we allow for an election to take place. The hon. Gentleman made the point very effectively that it is the democratic nature of the society that is important, and that there has to be a decent period of time for the democratic debate to take place. I accept that that supports the point that was made about demutualisation—

I was merely trying to make a full round by taking on the Liberal Democrat Front Bench on this issue at the same time as every other Front Bench. If the hon. Gentleman fears that a board might seek to bounce members on this issue, why might it not seek to do so on a demutualisation issue? That was certainly a feature of building society demutualisations in the 1980s. Why should there be a 21-day notice period for this issue and not for others?

Speaking personally, I have every sympathy with the hon. Gentleman's argument. Sadly, we are not able to debate demutualisation today. Instead, we are debating the more specific requirements of the Bill. In that context, the hon. Member for Eddisbury (Mr. O'Brien) made the important point that this provision relates to a very important special resolution because it deals with contracts made with third parties and with powers being exercised ultra vires. He built a persuasive case for the 21-day notice period.

The hon. Gentleman rightly points out that this measure is important—to answer the question posed by the hon. Member for Harrow, West (Mr. Thomas)—because it affects third parties, not because they would find that their contract had been voided, but because the executives could have a personal liability. In demutualisation cases, those who have an interest determine the interest for themselves and each other. There is, therefore, a difference between a third-party interest and a mutual interest.

That point is well made. It is open to the membership of an organisation to change its own rules so that any demutualisation vote would be able to take place only after a specified period of time. The fact that one can set one's own rules covers many of the potential difficulties that have been mentioned today—the way in which notices are sent out, the conduct of the campaign of notification ahead of a meeting, and the issue of a maximum notice period, for example. One would hope that all those issues would be covered by the general rules of the society. Indeed, one would hope that it would not have been registered as a society if its rules did not cover such issues. The membership should ultimately have the power to take action if they feel that the board is behaving inappropriately by, for example, causing excessive delay. The essential point, however, which has been well put, is that we are dealing with third-party contracts and liability of board members. That means that there is a reason to specify the minimum period, and 21 days seems entirely appropriate to allow the democratic debate that must take place before such a meeting should occur.

As I read the proposal, I imagined the scenario at a special meeting when the vote had been lost. What would occur in a society then? It could face meltdown, although we would have set out rules to allow the process to take place properly. That is outside the scope of today's debate, but, all those thresholds having been set, a board would clearly have to be careful in terms of undertaking the procedure. There is no sense in the clause that we are trying to give the green light to people saying, "Go outside your powers and simply go through the procedure to get support." That would be risky, so we are trying to make the procedure as empowering as possible for the members so that they do not feel, at any point, that they have been bounced through it.

I congratulate Members on the quality of the debate. My hon. Friend the Member for South Derbyshire (Mr. Todd) set out a persuasive case for his amendment and the hon. Member for Eddisbury (Mr. O'Brien) brought a touch of his experience and history to these matters. I have learned some things in the Chamber today. My hon. Friend the Member for Harrow, West (Mr. Thomas) also brought his experience to the issues, which I intend to touch on in a few moments. My other hon. Friends also made valuable interventions.

My general principle in working on the amendment with my hon. Friend the Member for South Derbyshire, and on the provisions in clauses 2 and 3, has been to allow industrial and provident societies to benefit from the same freedoms that apply to companies. We have therefore taken companies legislation as our base and mirrored those provisions as closely as possible, where appropriate, for industrial and provident societies. I should perhaps emphasise the words "where appropriate", because I agree with my hon. Friends that, in any particular area, it is important to consider carefully whether exactly the same provisions that apply to companies should equally apply to industrial and provident societies. Of course, it is relevant to consider each and every case, including the 21-day notice period.

Clause 3 sets out the implications for acts done by a society that are beyond the powers given to the society and its rules. It would allow members of societies to ratify such acts retrospectively and grant relief from any resulting liability to committee members, in each case through a special resolution. The clause goes on to define the procedures for a special resolution. For example, it specifies that the resolution must be
"passed by not less than 75 per cent. Of"
members entitled to vote. That mirrors the procedures required in company law for a similar resolution to be passed.

Company law also requires at least 21 days' notice of a general meeting to pass such a special resolution, and the amendment would make the same provision in society law. I say to the House that 21 days is a minimum protection. The decision is perhaps equally important for companies as for societies in considering a special resolution, so 21 days seems appropriate, but, beyond that, we do not want to be too prescriptive for many of the reasons set out today, particularly by my hon. Friend the Member for South Derbyshire. Those include the diverse nature of societies, how they inform members, their constitutional rules and so forth. As a minimum period, 21 days seems reasonable.

To return to the point raised by my hon. Friend the Member for Harrow, West in relation to other resolutions that are debated and required minimum notice periods, the debating of such resolutions by societies is extremely important in the example of demutualisation. Indeed, one might argue that it is equally important, although I understand the point made by the hon. Member for Eddisbury that third parties are affected by the issue under discussion today.

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Other important checks are in place in respect of demutualisation resolutions. For example, two meetings are required, with notice being given before each. For the first meeting, the notice period is left to the society's rules. For the second, there is a minimum of 14 days. One might consider the combination of the two to be more onerous than a 21-day minimum period required for a special resolution under the amendment, so 21 days strikes me as a reasonable minimum for debating such a resolution. I therefore support the amendment on those grounds and agree that we should align the procedures in this area more closely with the provisions in company law. I commend it to the House.

Amendment agreed to.

Amendment made: No. 8, in page 6, line 25 [Clause 3], at end insert—

'(c) in relation to a society whose registered office is situated in one of the Channel Islands, means a society established for charitable purposes only ("charitable purposes" having the meaning given by the law of the Island in question).'.—[Mr. Todd.]