All societies are required to state in their rules the terms and conditions on which they may borrow capital from members and others, including commercial sources. These terms may include details of the security offered to lenders and the maximum amount that can be borrowed. Society legislation makes an important distinction between loans and deposits: loans are used for the business purposes of the society, whereas deposits can be used for other purposes. However, deposit-taking is a regulated activity and most societies adopt rules which expressly forbid it.
There are no legal restrictions on the terms and conditions of the loan arrangements a society enters into. This is treated as a commercial decision of the society. There is no limit on the amount of money a member, or other person, may lend to a society, other than the maximum amount stated in the society’s rules. This means that members who want to invest more than the legal maximum for withdrawable share capital could lend additional capital, on terms agreed with the society. These loans can be secured against specific assets, or subject to a floating charge against all assets, or not secured at all. Both parties are free to agree whatever interest rates and repayment terms they choose.
Sections 59 to 64 of the Co-operative and Community Benefit Societies Act 2014 make provisions for a society to register a charge against its assets with the FCA. There are separate provisions for England and Wales, for Scotland, and for Northern Ireland. In Scotland it is only possible to register a floating charge against the assets of a society. In England and Wales, it is possible to register fixed and floating charges. In both cases the provisions of the 2014 Act form one part of a complex set of legal rules which decide the effect and priority of the security given to the creditor over the society’s assets. Most secured creditors will insist on the registration of their charge with the FCA, so to this extent it is required. Also, registered charges are available for inspection on the FCA Mutuals Register, which will be of interest and reassurance to a society’s creditors and has a role in fixing the priority of charges over the society’s property.
A society seeking to raise capital through the offer of non-transferable debt instruments, including bonds, loan stock, debentures or any other form of debt instrument, is exempt from financial promotions and prospectus regulations. Transferable debt instruments issued by societies are also exempt from financial promotion regulations, but this only applies to non-real time or solicited real time communications (see Section 7.3.3).
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