Since the last Farm water bulletin climate change and environmental issues have remained firmly at the forefront of the political and social agenda, leading some farmers to consider how best to manage this precious resource. Any group of farmers who wish to cooperate to abstract water face a number of set up issues, ie, financing, feasibility, equipment purchase and maintenance as well as deciding how to come together to deal with management and distribution of the water. This article looks at two models – a limited company structure and an association.
Setting up a company
A limited company can provide a defined model within which water abstraction can take place. The farmers incorporate the company, drawing up articles of association (the instrument that governs the company) and memorandum of association (which sets out how the company deals with the outside world) along guidelines laid down by the Companies Act. The farmers become the shareholders by investing capital into the company in return for shares. The shareholders can be appointed as directors or they can employ independent directors (like Water Transfer Ltd). The Companies Act 2006, which has recently been enacted, is intended to make it easier to set up and run companies.
The water can then be distributed in proportion to the allotted shares, with the water acting as a ‘dividend’. Alternatively the farmer/shareholders can pay for their water at a rate set by the directors. Any profits made can be paid out to the shareholders as a dividend, so effectively the farmer gets a percentage of his initial investment repaid. Any profits not distributed can be used for reinvestment into the company. Abstracting and using water is not without cost, so the second option could be used to cover the company’s running costs.
If a farmer wants to sell their shareholding, with a view to leaving the scheme, then agreements can be put in place to oblige that departing farmer to either offer their shares to the other shareholders or to the company before transferring to an unknown party. As a further safeguard for the remaining shareholders, it is usual for the directors to reserve the right to refuse to register a new member’s share purchase at their discretion. If the scheme ends, or does not get past the feasibility stage, then the company will be wound up according to statutory law. After any creditors have been paid off, remaining funds are divided and distributed to reflect the farmers’ initial contribution.
Setting up an association
If there are a small number of farm ers wanting to set up a scheme and they wish to have more flexibility, whilst still maintaining some form of governance, then they may consider setting up an association. Associations are set up and run on the basis of an agreement made between its members. The scheme and all the start up issues will be run in accordance with that agreement. For example, the Isle of Wight Group designed a scheme where members pooled all their abstracted water for communal use with division governed by the agreement entered into by members of the group.
Pros and cons
The company model provides a structured and tested platform on which a new venture can be built. It is subject to company law and thoroughly regulated. Consequently the scheme will already have an administrative and financial framework designed to protect its members’ investment and the company’s integrity. This may be of particular comfort if a substantial number of farmers, who are unknown to each other, wish to set up an abstraction scheme. A company is a separate legal entity and an individual’s liability (ie, to suppliers) is limited to the value of their shareholding. However, shareholders should be aware that employed directors and company administration has to be paid for. This, along with maintenance and running costs, will mean that the company will always need to make money from water distribution.
Running a scheme through an association avoids company regulation and associated costs. However, associations may not always be suitable. Much will depend upon the number of farmers who want to take part and how familiar they are with each other. It may be helpful for farmers to view an association in the same light as a club or society. Farmers are likely to shoulder the association’s liability jointly and severally, ie, one farmer may be liable for the total debt of the association unless the governing agreements expressly provide otherwise.
This article is intended to serve as a starting point for those considering an abstraction scheme. Essentially a scheme promotes cooperation between farmers to create a stable water supply as well as reducing abstraction costs to any one individual. Beyond the legal intricacies, the entity which farmers choose will depend on the people they are venturing with. Ultimately the attitudes and views of participants, and their cohesion, will determine the success of a scheme. As such it is important that farmers consider which entity is best for running their particular scheme on a case by case basis – a rule of thumb does not exist.