APPENDIX 1: Winding Up and Dissolution of building societies: summary of legislative provisions

APPENDIX 1: Winding Up and Dissolution of building societies: summary of legislative provisions References in italics are to provisions in the Building Societies Act (i) Methods 1. There are only four ways in which a building society may be dissolved or wound up (the two terms mean broadly the same thing the termination of the society) - Wound up voluntarily (ie with member consent) Wound up compulsorily Dissolved by instrument of dissolution (ie with member consent) Dissolved following a merger or a transfer of business (ie by court order) (section 86). (ii) Winding Up 2. The main legislation governing the winding up of a building society is the Insolvency Act. The Building Societies Act applies relevant insolvency legislation provisions to building societies, with certain modifications (Schedule 15 applies the companies winding up legislation to building societies and Schedule 15A applies the other companies insolvency legislation to them; eg administration orders, voluntary arrangements etc). 3. The main substantive provisions from the Insolvency Act now applicable to building societies relate to Voluntary arrangements (Part I) Administration Orders (Part II) Receivership (Part III, Chapter I)) Winding Up (Part IV) Preferential Debts (Part XII) Insolvency Practitioners (Part XIII). 4. A society may be wound up voluntarily by special resolution. The Act contains a number of administrative requirements, such as prior notice to the FSA (section 88). (See also regulation 8(1) of the Credit Institutions (Reorganisation and Winding Up) Regulations 2004 (SI 2004 No 1045). 5. There are several grounds for compulsory winding up; namely, that (a) The society has resolved by special resolution to be wound up by the court (b) The number of members has fallen below 10 1

(c) The number of directors has fallen to one or none (d) The society has not been granted authorisation despite being registered for more than 3 years (e) The FSA has revoked the society's authorisation (f) The society exists for an illegal purpose (in practice, this seems to mean that the society has ceased t comply with the Act requirements about purpose or principal purpose) (g) The society is unable to pay its debts (h) The court is of the opinion that it is just and equitable to wind the society up (section 89(1)) (i) The FSA exercises one of its powers of control, under section 37(1), including a winding up order. 6. The practice and procedures in relation to a building society winding up are, as noted, those set out in the Insolvency Act and are much the same in substance as for companies. (iii) Dissolution by Instrument 7. A building society may be dissolved with the consent of three-quarters of the members, holding not less than two-thirds of the shares in the society. They must sign a dissolution instrument that sets out a number of details, such as the assets and liabilities of the society, the number of members, the amount standing to their credit etc. The dissolution by instrument process is of very long-standing. 8. The instrument of dissolution binds all members from the date when it is placed on the public file of the society (section 87). 9. The rest of section 87 contains a number of administrative and procedural provisions. Also note certain provisions in Schedule 2 especially paragraphs 7(5) and 8(5), which state that, for instruments of dissolution, only the shares of representative joint holders and representative joint borrowers count with regard to the consent and calculations. 10. Dissolution differs from voluntary winding up in a number of ways. For example, there is no need for a society resolution for dissolution provided a valid instrument is prepared (voluntary winding up requires a special resolution). Also, it seems that creditors may continue to enforce judgments while dissolution is in process this would not be possible with a winding up (Browne v Royal Permanent Building Society (1898) 18 VLR 397). (iv) Voluntary Arrangements 11. A society in serious financial difficulty might be able to use the voluntary arrangement procedure set out in Part I of the Insolvency Act. The procedure must be approved by a meeting of creditors and is then binding on all of them (paragraphs 7 9A of Schedule 15A). 2

(v) Administration Orders 12. An administration order is a court order that gives an organisation a moratorium (breathing space), during which time creditors may not bring proceedings. The main objective is to help the society to survive as a going concern, if possible. The FSA or a shareholding member may apply to the court for an administration order. The arrangements are set out in paragraphs 10 24 of Schedule 15A). (vi) Application of Assets 13. The requirements concerning application of assets are understood to be, in effect, the same on compulsory and voluntary winding ups. However, because of a rather complicated set of legislative arrangements, they derive from different legislative sources. 14. By virtue of Paragraph 1 of Part I of Schedule 15 to the Act, the provisions on priority of payment in a compulsory winding up of a company are found in Rule 4.181 Insolvency Rules, as follows Debts other than preferential debts rank equally between themselves in the winding up and, after the preferential debts, shall be paid in full unless the assets are insufficient for meeting them, in which case they abate in equal proportions between themselves. Rule 4.181 is not expressly applied but probably applies to building societies because it stems from section 143 of the Insolvency Act and is not disapplied by the building societies legislation. 15. Paragraphs 15 29 of Part II of Schedule 15 to the Act also deal with compulsory winding up of building societies. Rule 4.181 is not disapplied by those paragraphs, so presumably applies to the compulsory winding up of building societies. 16. Schedule 15 applies most provisions of the Insolvency Act (IA) to the voluntary winding up of building societies building societies, except the provisions relating to the order of application of assets on a voluntary winding up, contained in section 107 IA (save for those on preferential debts) see paragraph 12(1) of Part II of Schedule 15. By paragraph 12(2) Subject to the provisions of Part IV [of IA] relating to preferential payments, a building society s property in a voluntary winding up shall be applied in satisfaction of the society s liabilities to creditors pari passu and, subject to that application, in accordance with the rules of the society. Model Rule 45(1) is relevant in this context 1. The following table sets out the position regarding payment of debts on a building society winding up that the BSA understands to apply. 3

COMPULSORY WINDING UP VOLUNTARY WINDING UP Payment/Debt Legal provisions Payment/Debt Legal provisions 1. Expenses of winding up, including liquidator s remuneration 2. Preferential debts ranking equally ie pari passu, meaning each creditor is paid pro rata in accordance with the amount of his claim, abating in equal proportions unless sufficient assets to pay them all Rule 4.127(1) Insolvency Rules Rule 4.181 Insolvency Rules 1. Expenses of winding up, including liquidator s remuneration 2. Preferential debts ranking equally ie pari passu, meaning each creditor is paid pro rata in accordance with the amount of his claim, abating in equal proportions unless sufficient assets to pay them all Rule 4.148A(1) Insolvency Rules Section 107 IA this applies by virtue of para 12(2), Part II, Sch 15 Act debts to HMRC social security contributions contributions to occupational pension schemes 2 certain employee remuneration 3. Society s creditors rank equally ie pari passu (see first column of this table) Rule 4.181 Insolvency Rules 4. Society s members Follows from Rule 4.181 Insolvency rules 5. Society s members, as contributories FOOTNOTES Para 25 of Part II of Schedule 15 to the Act; Rules/instrument of dissolution debts to HMRC social security contributions contributions to occupational pension schemes 2 certain employee remuneration 3. Society s creditors rank equally ie pari passu (see first column of this table) 4. Society s members in accordance with its rules 5. Society s members, as contributories Para 12(2), Part II, Sch 15 Act; Rules/Instrument of dissolution Follows from Para 12(2), Part II, Sch 15 Act; Rules/instrument of dissolution See Para 7(9) of Part II of Schedule 15 to the Act 1 BSA Model Rule 45(1) (fifth edition) states Upon the winding-up of the Society, or upon its being dissolved by consent, any surplus remaining after payment in full of the Society s creditors and repayment to Members of the amount of their shares (together with interest due thereon) shall be applied in accordance with the instrument of dissolution (if any) or otherwise shall be divided among qualifying Members in proportion to the values of their Shareholdings at the date of commencement of the dissolution or winding-up. 444 4

Note 444 to Rule 45(1) states This Rule was prepared in the light of full consideration of the possible position of subordinated loan creditors and also, for example, pari passu creditors. The wording does not prevent the payment of subordinated loan creditors after members and other creditors. Accordingly, it constrains a society as little as possible in terms of the commercial loan arrangements it may reach. 2 By Schedule 6 IA this is any sum which is owed by the debtor and is a sum to which Schedule 4 to the Pension Schemes Act 1993 applies - Earner s contributions to occupational pension scheme 1 This Schedule applies to any sum owed on account of an earner s contributions to an occupational pension scheme being contributions deducted from earnings paid in the period of four months immediately preceding the relevant date or otherwise due in respect of earnings paid or payable in that period. Employer s contributions to occupational pension scheme 2 (1) This Schedule applies to any sum owed on account of an employer s contributions to a contracted-out scheme, being contributions payable (a) in the period of 12 months immediately preceding the relevant date; and (b) in respect of earners in employment which is contracted-out by reference to the scheme towards the provision for those earners of guaranteed minimum pensions under the scheme. (2) This Schedule applies to any sum owed on account of an employer s minimum payments to a contracted-out scheme falling to be made in the period of 12 months immediately preceding the relevant date. (3) In so far as contributions or payments cannot from the terms of the scheme be identified as falling within sub-paragraph (1) or (2), the amount of the debt having priority by virtue of that subparagraph shall be deemed to be an amount equal to (a) 4.8 per cent. of the total reckonable earnings paid or payable, in the period of 12 months referred to in that sub-paragraph, to or for the benefit of non-contributing earners; and (b) 3 per cent. of the total reckonable earnings paid or payable in that period to or for the benefit of contributing earners. (4) For the purposes of sub-paragraph (3) (a) the earnings to be taken into account as reckonable earnings are those paid or payable to or for the benefit of earners in employment which is contracted-out by reference to the scheme in the whole or any part of the period of 12 months there mentioned; and (b) earners are to be identified as contributing or non-contributing in relation to service of theirs in employment which is contracted-out by reference to the scheme according to whether or not in the period in question they were liable under the terms of the scheme to contribute in respect of that service towards the provision of pensions under the scheme. (5) In this paragraph employer shall be construed in accordance with regulations made under section 181(2); and reckonable earnings, in relation to any employment, means the earner s earnings from that employment so far as those earnings (a) were comprised in any payment of earnings made to him or for his benefit at a time when the employment was contracted-out employment; and (b) 5

exceeded the current lower earnings limit but not the current upper earnings limit. State scheme premiums 3 (1) This Schedule applies to any sum owed on account of a state scheme premium payable at any time before, or in consequence of, a person going into liquidation or being adjudged bankrupt, or in Scotland, the sequestration of a debtor s estate, or (in the case of a company not in liquidation) (a) the appointment of a receiver as mentioned in section 40 of the [ c. 45.] Insolvency Act (debenture-holders secured by floating charge), or (b) the appointment of a receiver under section 53(6) or 54(5) of that Act (Scottish company with property subject to floating charge), or (c) the taking of possession by debenture-holders (so secured) as mentioned in section 196 of the [1985 c. 6.] Companies Act 1985. (2) Where any such premium is payable in respect of a period of service of more than 12 months (taking into account any previous linked qualifying service), the amount to be paid in priority by virtue of this paragraph shall be limited to the amount of the premium that would have been payable if the service had been confined to the last 12 months taken into account in fixing the actual amount of the premium. (3) Where (a) by virtue of this paragraph the whole or part of a premium is required to be paid in priority to other debts of the debtor or his estate; and (b) the person liable for the payment would be entitled to recover the whole or part of any sum paid on account of it from another person either under section 61 or under any provision made by the relevant scheme for the purposes of that section or otherwise, then, subject to sub-paragraph (4), that other person shall be liable for any part of the premium for the time being unpaid. (4) No person shall be liable by virtue of sub-paragraph (3) for an amount in excess of the sum which might be so recovered from him if the premium had been paid in full by the person liable for it, after deducting from that sum any amount which has been or may be recovered from him in respect of any part of that payment paid otherwise than under that sub-paragraph. (5) The payment under sub-paragraph (3) of any amount in respect of a premium shall have the same effect on the rights and liabilities of the person making it (other than his liabilities under that sub-paragraph) as if it had been a payment of that amount on account of the sum recoverable from him in respect of a premium as mentioned in sub-paragraph (3)(b). Interpretation 4 (1) In this Schedule (a) in its application in England and Wales, section 196(3) of the Companies Act 1985 and section 387 of the Insolvency Act apply as regards the meaning of the expression the relevant date ; and (b) in its application in Scotland, that expression has the same meaning as in Part I of Schedule 3 to the [1985 c. 66.] Bankruptcy (Scotland) Act 1985. (2) In this Schedule references to a contracted-out scheme, contracted-out employment and a state scheme premium include references to a contracted-out scheme, contracted-out employment and a state scheme premium (other than a personal pension protected rights premium) within the meaning of any provisions in force in Northern Ireland and corresponding to the provisions of this Act. 6

APPENDIX 2: Sending out Electronic AGM Packs E-Packs General Under the Electronic Communications Order, amendments were made to the Building Societies Act to enable electronic communication. Briefly, this allows Notice of Meetings and the Summary Financial Statement (SFS) to be sent to an electronic address notified to the Society by the member or for the documents to be accessed by the member on a website if the member has agreed to that form of publication (and the member is notified of where it is published and how it can be accessed etc). These provisions are contained in Sections 76(8B) and (8C) of the BSA in relation to the SFS and paragraphs 22A and 22B of Schedule 9 in respect of Notice of the Meeting. From a practical point of view it would be envisaged that the latter option referred to above would be used ie. once the original consent procedure has been undertaken, then the member would be sent an email with links to the relevant website which contain the Notice of Meeting, SFS and any other relevant (non statutory) documents. To send these documents as an attachment to an email could potentially clog up the member s system. Appointment of Proxies The amendments to the BSA in relation to the appointment of proxies is not as flexible. Under paragraphs 24(1A) and 24(1B), which are reproduced below, there is only a provision for the proxy form to be sent electronically (ie. there is no provision for the proxy form to be accessed via a link to a website). (1A) A form for the appointment of a proxy may only be sent electronically to a person if it is sent to an electronic address notified by that person to the society for the purpose. (1B) The appointment of a proxy may be contained in an electronic communication sent by a member to an electronic address notified by or on behalf of the society for the purpose. Online Voting to Date A number of societies, including the Yorkshire, have undertaken internet voting. We have done it on the following basis:- The member is sent a paper pack, including a personalised paper proxy form. The member is informed that they can vote either by returning the paper proxy form or voting online by accessing a website. The personalised paper proxy form contains a two-part security number unique to the member which they use if they wish to submit the vote on line. The Yorkshire (and confirmed by Adam Bennett) believes that paragraph (1B) above is a stand alone provision and enables the appointment of a proxy to be made electronically without the proxy form having to be sent to them electronically in the first place. 7

Practical Issues The legislation, as currently drafted, would mean that in order for a society to send to members an e-pack for the AGM then whilst the Notice of Meeting and SFS etc could be accessed via a link to a website (as members would expect), a proxy form would have to be sent as an attachment to the email. This presents problems, not only in terms of having to send an attachment to the email which may clog up a member s system, but also that emailed proxy form is not in itself interactive. For a member to vote they would have to: (i) (ii) (iii) Print off the emailed proxy form, complete it by hand and return it through the post (hardly conducive to encouraging members to vote when elected to receive e-packs); or send a proxy form as an attachment to satisfy paragraph 24 (1A) but then ask members to go to a website to actually vote as per the current procedure (assuming that the security numbers were printed on the emailed proxy form or in the accompanying email); or Undertake an electronic ballot under paragraph 33(A) of Schedule 2 which appears to enable voting to be accessed via a website. However, this presents its own problems as it may require rule changes as suggested in the BSA s commentary on the Order which was published in November 2003. 8