From 6 April 2014 Industrial and Provident Societies (IPSs) will be able to enter administration or make a voluntary arrangement with creditors. Formerly winding up was the only option for an insolvent IPS. 

This is a significant development as it extends the corporate rescue culture to these societies, which would otherwise face closure in times of financial distress. 

What is an Industrial and Provident Society? 

An IPS can be either a co-operative society or a community benefit society. A co-operative society is run for the benefit of its members. A community benefit society is run for the benefit of the community in which it operates (such as a housing association). IPSs are registered with the FSA, but will only be regulated by the FSA if they are conducting financial services business. 

Social enterprises, small businesses, credit unions, agricultural co-operatives, charities, sports clubs (e.g FC United of Manchester) and friendly societies, for example, can all be incorporated as an IPS, so the impact of the legislation change will be far reaching. 

Until the new legislation takes effect the realistic options for IPSs in financial difficulty have been restricted. A secured lender to the IPS may be in a position to appoint an administrative receiver or an LPA receiver under the terms of security held or a liquidator could be appointed to wind up the business. Neither route was likely to facilitate the continuation of the business of the IPS. 

Rescuing an Insolvent Society 

The government has sought to promote the use of IPSs, and indeed 7,000 were registered in 2013. This trend is likely to continue. In the current economic climate it is inevitable that some of these societies will face financial difficulties. 

The forthcoming change will mean that a rescue package is now an option for an IPS. 

A society will be able to propose a voluntary arrangement to its creditors, as a method of restructuring its debt. In urgent cases, the society will be able to seek a moratorium to protect its assets pending the creditors' meeting. 

Societies will also be able to appoint administrators to seek to attempt to save the society or in appropriate cases effect the transfer of the business as a going concern. Likewise, lenders with the benefit of security over the assets of the IPS will be able to appoint administrators. 

These options present welcome alternatives to winding up, and will benefit members, employees and other stakeholders. However they also raise some constitutional issues for IPSs and some commercial issues for lenders to IPSs. 

The constitutions of IPSs are commonly based on the world as it was in 1965 when the Industrial and Provident Societies Act was first passed. As a result of this any decision making processes which involve members meetings can be very slow and hence ill equipped for the prompt action often needed where there is potential insolvency. It is unusual for accelerated decision making by way of meetings on short notice or written member resolutions to be possible under IPS constitutions (and in some cases this is not permitted on account of the express provisions of the 1965 Act). IPSs may nonetheless wish to review their constitutional processes in the light of the new legislation. 

Until now lenders to IPSs have not needed to have regard to the possibility of administration or to the impact which administration can have in particular on floating security. Lenders may therefore wish to consider updating security so that it is aligned more closely with conventional security which might be taken from limited companies. However existing lenders to IPSs are likely to wish to maintain any existing security in places as well since the prohibition on floating charge holders appointing administrative receivers, which will be introduced in April, will not apply to security granted prior to 6 April 2014. 

Administrators appointed in respect of IPSs will also need to be aware of the provisions in the Industrial and Provident Societies Act which enable specific procedures to be followed in order to “merge” one IPS with another through a resolution process. Whilst these procedures do involve the transfer of all assets and all liabilities of an IPS (and not partial transfers) they could well prove helpful in particular when used in combination with a CVA.