When charity is all in the act

The 2003 Co-operatives and Community Benefit Societies Act received royal assent on 10 July 2003, although not all provisions are in force yet. Most registered social landlords formed as industrial and provident societies will be community benefit societies for the purposes of this act, so the rules are important. Here, we examine some of the main changes.

Notice of charitable status
Section 2 of the act imposes a new obligation on charitable industrial and provident societies whose names do not contain the word "charity" or "charitable". From 1 April 2004, these societies must ensure that all the following documents clearly state the organisation is a charity:

• notices, advertisements and "other official publications"
  
• business letters
  
• bills of exchange, promissory notes, endorsements, cheques and orders for money or goods that are signed by or on behalf of the society
  
• bills, invoices, receipts and letters of credit of the organisation
  
• conveyances executed by or on behalf of the society.

The wording must be clear on the face of the document and legible. The kind of statement that will probably suffice (no guidance is currently available) is: "XYZ Housing Association Ltd is an industrial & provident society (registered number 12345R) with charitable status."

It is important this rule is complied with, since criminal sanctions will apply to individual officers.

Governance issues
As a result of the act, where non-charitable societies are in breach of their rules, their actions will be enforceable by any third parties with whom they have contracted.

A society's board must observe any limitations on their powers in accordance with the society's registered rules, but the board can ratify acts carried out by a society that would be invalid but for this new rule by passing a special resolution.

Also, nothing in the rules of a non-charitable society can fetter the power of the board to transact with a third party, and third parties will be presumed to have acted in good faith, even if they know the board is acting beyond its powers.

These rules do not apply to acts of the board of a charitable society, except in favour of a third party who gives full consideration (in money or monies' worth), and who does not know the act is not permitted by the rules, or is beyond the powers of the board, or who does not know at the time he or she is transacting that the society is a charitable organisation.

The individual and board members involved become personally liable to account for any gain made and must indemnify the society for any loss

Where a charitable society wishes to ratify an act that would otherwise be beyond the society's capacity, such ratification will not be effective unless the society has the prior written consent of the charity commissioners. This is curious, since industrial and provident societies are exempt charities and currently do not have to seek Charity Commission consent for any of their acts.

Transactions with board members
The act provides that a transaction between a society and an individual board member (or a person connected with such a member or a company with whom such a member is associated) will be capable of cancellation by the society, unless it is clear that the society had the power to make the transaction.

The individual and the board member(s) involved become personally liable to account to the society in question for any gain made, and must indemnify the society for any loss or damage incurred as a result.

Again, there is provision for the members of the society to ratify the transaction, with the same proviso about the consent of the Charity Commission for charitable societies.

Execution of deeds and documents
The most well-known change introduced by the act is the removal of the requirement for a registered society to have a common seal. This is optional. To take advantage, societies will have to amend their rules and standing orders.

Having done so, a document signed by a board member and the secretary, or by two board members, and expressed to be executed as a deed by the society, will have exactly the same effect as if it had been executed by the affixing of the seal.