Insolvency for Societies – What Happens When the Social Club Needs to Close?Posted: Nov 27, 2024

Sadly, organisations that come under the Co-operative and Community Benefit Societies Act 2014, are just as prone to changing times and difficult economic circumstances as any other business.

Whether they are groups for renting allotments, co-operative housing societies, fishing groups, or traditional trades clubs, when it is time to close, they need to be dissolved appropriately as either solvent or, sadly, often insolvent concerns.

What Does the Co-operative and Community Benefit Societies Act Cover?

To condense some rather complex laws down into a single rule of thumb, this article is looking at organisations that operate under a mutual ownership model. That will usually mean ownership is at least partly with the members. These kinds of groups will also often reinvest profits for the benefit of their members or community.

As you can see from the above, the Co-operative and Community Benefit Societies Act 2014 (CCBSA 2014) overarchingly governs co-operative organisations and community benefit societies. It replaced the legislation set by the Industrial and Provident Societies Act and was made to help modernise the framework under which these entities operate.

Common examples of the kind of organisations covered include:

Working Men's Clubs: Social clubs formed for the benefit of members, providing recreational facilities and fostering community spirit.
Societies and similar ‘clubs’: Good examples of these are allotment associations, fishing clubs,  and sports clubs that serve a community as a benefit.
Housing Associations: Non-profit organisations managing affordable housing for tenants.
Credit Unions: Financial co-operatives offering savings and loans to members.
Co-operatives: Businesses owned and run by members, such as retail co-operatives or agricultural co-operatives.

This list is a rather general one though because there are some seemingly grey areas if you are not familiar with the legalities. One is between charitable organisations which have a slightly different regulatory framework than those covered by the CCBSA 2014. A good example being ‘trades’ based associations. These often focused on a specific regional incidence of an industry such as mining. Here there could be a miner’s benevolent society which operates as a charity and a miner’s families and social club operating under the CCBSA 2014. There are important differences between the way these would work.

In all honesty, it can be a bit complex so one of the important first steps we often take towards winding down something like a working men’s club or a society, is defining what their legal and financial structure actually is.

What Is Insolvency in the Context of CCBSA 2014?

Well, in strict terms, solvency is about the ability to meet financial liabilities and that still applies here. Insolvency arises when a society governed by the Act is unable to pay its debts as they fall due or when its liabilities exceed its assets. However, CCBSA 2014 based organisations differ from conventional companies in some key core aspects. Often these unique characteristics are around the fact that their ownership and decision-making structures are focused on mutual benefit for a specific group (such as a sports club or trades society) or community welfare (such as housing or community projects) rather than shareholder profit.

In some cases, the assets may well be considerable (they could include land or property for example) but the society numbers and/or need for the organisation may have dwindled. In which case a solvent closure may be an option.

Common Types of Insolvency Situations

Societies under CCBSA 2014 may face insolvency due to various factors such as:

• Over-reliance on external funding that becomes unsustainable.
• Declining membership or reduced revenue streams.
• Goals or a focus that is no longer relevant to the modern world

And in some rarer cases:

• Mismanagement of funds or poor financial planning.

For example, a working men’s club may face insolvency if membership fees no longer cover operating costs. This could be coupled with inefficient practice in, or lack of expertise leading to the mismanagement of, areas such as bar and event revenues. Similarly, a housing association may face difficulties if it cannot maintain properties or repay loans due to increased maintenance costs, sudden changes in supplier rates, falling rental income and so on.

The Role of an Insolvency Practitioner

The role we play in managing the insolvency process when it comes to the CCBSA 2014 organisations is often a game of two halves. On the one hand you have the following rather formal legal definition. Then on the other hand you have the ‘real world, real people’, actions I talk about in the last paragraph.

Above all though, as licensed insolvency practitioners (IPs) we play a vital role in managing the insolvency process for societies under the CCBSA 2014. We ensure compliance with legal obligations, protect the interests of creditors, and aim to achieve the best possible outcomes for all stakeholders.

Key responsibilities of IPs include:

• Evaluating Financial Viability
• Communicating with Stakeholders
• Managing Asset Distribution
• Providing Expert Advice

The legal side of the process must be followed, and everything must be done with the attention to detail needed to ensure everything is settled.

The reality of the situation is more than the legal at times.

As Licenced Insolvency Practitioners, we clearly must offer essential expertise, especially in cases involving unique organisational structures like those governed by the CCBSA 2014. Our role is to ensure that societies facing financial distress are managed fairly and efficiently, preserving as much value as possible for stakeholders.

This is where things require more than just IP training because it often means we must define what is happening before we get to the legalities. This can mean challenges such as:

• The committee in charge may not always be there by formal agreement: It isn’t unusual for ‘Bob from down the road’ to be responsible for a role without having ever been formally recorded.
• What is a ‘member’ and who are they?: Records are not always up to date and what constitutes membership isn’t always clearly defined.
• Legal processes such as committee and member meetings may need resolving: Before some actions towards insolvency can be taken there may need to be member input (see the previous bullet point for a potential complication). Also, votes and consultations may be needed to be made to ensure things are fair and equitable.
• Who will benefit from any remaining assets: This may be a key point but who it relates to could have been lost in the mists of time or even never defined officially.

So, as well as the strict legal requirements, there is more to be considered. Not the least of these considerations is that the closure of the society could impact the members in many ways. Sometimes it could be financially positive if assets are to be distributed. It can also be emotionally difficult because many societies, such as working men’s clubs and sports societies, have been part of a community and part the fabric of the lives of residents for decades. Things change and societies come to an end, but that doesn’t mean the necessity of closure makes an insolvency any less emotional. When you are closing a sports society where three generations of local families have played, it is more than just a regular insolvency.

Licensed insolvency practitioners ensure these processes are conducted professionally, minimising disruption and optimising outcomes for creditors and members. Here at Smart Business Recovery we also understand that insolvency is not just about the reality, the common sense and the numbers… there is a human and community factor often involved with an insolvency under the Co-operative and Community Benefit Societies Act 2014

Your first consultation is free, so if anything in the article has made you think you need our help, please contact us.

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