2.8.1 Guiding principles

Section 2 (1) of the Co-operative and Community Benefit Societies Act 2014 requires all societies to be carrying on an “industry, business or trade” which means that a society cannot be registered if its purpose is to raise share capital to invest in other legal entities.

Section 2 (3) of the Act explicitly prevents co-operative societies from carrying on activities with the object of making profits to pay dividends, interest or bonuses to members on the money invested. It also restricts community benefit societies to business which is of benefit to the community.

Section 27 of the Act allows societies to invest funds in other registered societies, building societies, companies or securities issued by a “relevant authority”, meaning certain types of local government body. It makes no provision for investment in partnerships, including limited liability partnerships. The Act also requires societies to state in their rules whether, and if so, by what authority and in what manner, any part of their funds may be invested.

It is permissible for a society to invest some of its general reserves in other legal entities, but it should only do so to further the objects of the society, and in a way that meets the needs of the society to maintain liquidity and solvency. This would include normal treasury practices of keeping cash in deposit accounts and other types of liquid investment.

A distinction should be made between investing the general reserves of a society, and investing capital raised through a public share offer where the purposes of that offer are to invest in another legal entity. In the latter case, a society should ensure that it invests the capital in a way that allows it to have control over the terms and conditions of the share capital it issued. This includes the terms and conditions for withdrawal of share capital.

A society should not raise capital with the specific intention of investing in other legal entities over which it has no overall control, or to act as a collective investment vehicle, unless it is authorised by the FCA to do so.

The guiding principles are:

  • Investment by a society in other legal entities should only be made when it furthers the objects and business of the society.
  • A society must always act within its own rules on investment.
  • Capital should only be raised to further the objects and business activities of a society, and not to invest in other legal entities over which it has no overall control.
  • Any capital raised by a society through a public offer should only be invested in other legal entities in a way that fully protects the terms of the public offer.
  • A society should not raise share capital with the specific intention of investing that capital in another legal entity over which it does not have overall control.

If you have any questions or suggestions for new information you would like to find in the Handbook, contact the team by email at communityshares@uk.coop