Public & private

Industrial and provident societies are coming of age. The 2003 Cooperatives and Community Benefit Act brought the 1965 Industrial & Provident Societies Act into line with section 35A of the 1985 Companies Act.

An IPS can now be bound by the actions of its committee members irrespective of the fact that the action in question is, ostensibly, "ultra vires" (outside the scope of its rules).

The doctrine of ultra vires was developed to protect creditors and investors against unauthorised corporate activities. Any transaction beyond the scope of the constitutive documents of a company would be void and not capable of ratification by the members. Protection for third parties when dealing with companies was introduced by statute in 1989, and largely rendered the doctrine redundant as far as third parties (such as banks) dealing with companies were concerned.

However, those protections did not extend to people dealing with IPSs, and so, until now, such parties have had to think about whether a particular transaction is within an IPS' corporate powers. The new act, however, has put IPSs in a similar position, in this respect, to companies.

A third party entering into a transaction in good faith with an IPS need not now be concerned about the capacity of the latter to enter into the transaction. Committee members have the power to bind the IPS to a particular transaction whether or not (subject to certain exceptions) it is within the corporate powers of the IPS. The relevant ultra vires transaction may be ratified subsequently by special resolution. This is a welcome concept for IPSs where there is any ambiguity as to a particular transaction.

The new act puts industrial and provident societies in a similar position to companies in respect of ‘ultra vires’

Liability for the ultra vires transaction will remain with the relevant member of the committee, or the committee itself, that has bound the IPS. A member of the IPS may still bring proceedings to stop an action that is beyond the powers of the committee. The committee members are personally liable to account for any loss or damage sustained by the IPS and to account for any gain that the members might have made by the transaction. However, a separate special resolution may be passed in order to effect relief from any liability incurred by a member of the committee or any other person.

There is, however, different treatment of a non-charitable IPS and a charitable IPS here. Whereas for a non-charitable society the person dealing with the IPS is not regarded as having acted in bad faith by reason of his or her knowing that the act in question is ultra vires, the same is not true for a charitable IPS. In the latter case, these new provisions do not apply where the person dealing with the IPS is aware of the fact that the action is ultra vires or if he or she is aware that the IPS is a charity.

The advantages of this new legislation are mainly in favour of the third party in that, in the case of a non-charitable IPS, the third party can feel confident in the knowledge that dealing with an IPS will afford him or her similar protections to those afforded to him or her when dealing with a company. There will be fewer bureaucratic hoops for a third party to jump through when dealing with a non-charitable IPS in that the contents of the rules will not have such a bearing on a transaction from the third party's point of view.