PART ONE: UNDERSTANDING CO-OPERATIVES
Legislation
Positive changes in legislation for co-operatives in Australia have been made in recent years. Up until recently, co-operatives have contended with inconsistent state and territory legislation and competitive disadvantages in comparison to entities that operate under the Corporations Act 2001.
The previous state-based legislation had outdated corporate governance provisions and non-risk based financial reporting requirements, imposed additional compliance costs on co-operatives that wanted to trade across state and territory borders, and was inconsistent in regard to cooperatives having access to capital markets for external funding for expansion. It is believed the regulatory environment was a disincentive to the formation of new co-operatives, and many larger co-operatives transferred incorporation to become companies because of a need to access external capital not available to co-operatives.
In 2001, states referred their power to make laws to regulate the formation and activities of companies, but not co-operatives, to the Commonwealth, resulting in the Corporations Act 2001. Co-operatives (except for financial co-operatives) were still governed by the legislation of the state or territory in which they operated. Inconsistencies meant that legislation differed in each state and territory.
In 2007, State and Territory Ministers agreed, via the Ministerial Council on Consumer Affairs (MCCA), to implement nationally uniform legislation to address the inconsistencies and competitive disadvantages that the previous legislations imposed on co-operatives compared to entities operating under the Corporations Act 2001.
Co-operatives National Law
NSW was the lead jurisdiction and, in May 2012, the NSW Parliament enacted the Co-operatives (Adoption of National Law) Act 2012. The other states and territories, with the exception of Queensland at the time of writing, have adopted the same laws, or corresponding co-operatives law, in their jurisdictions. A co-operative which was registered under a repealed Act is taken to be registered under the CNL.
The CNL does not make any conceptual changes to the nature of a co-operative, nor does it make any changes to the existing regulatory environment under Commonwealth legislative responsibility, but it does remove variations between jurisdictions and it updates some provisions. Its intention is to make it easier for co-operatives to set up and conduct business. The NSW Fair Trading Minister at the time, Anthony Roberts, said the legislation would empower co-operatives, slash red tape and reduce costs.
The processes in the CNL are designed to be fair, uphold co-operative principles, be good for business, and provide guidelines for day-to-day operation. It is in a co-operative’s best interests to follow the processes set out in the CNL and its regulations.
In essence, the Co-operatives National Law:
- Allows co-operatives to have the freedom to operate on a national basis with reduced compliance costs. Previously, co-operatives, unlike companies, were prohibited from carrying on business across a state or territory border unless they were registered as a “foreign co-operative” in the other jurisdiction, which was costly and involved annual obligations in each jurisdiction.
- Provides co-operatives with better access to external capital funding. Access to capital markets by co-operatives has long been a problem, as shares in a co-operative are not permitted to be quoted on a stock exchange and can only be acquired by active members. Co-operatives can now issue a hybrid security, called “co-operative capital units” (CCUs), to access external capital without compromising member democratic control. Subject to a co-operative’s rules, CCUs can be issued to non-members anywhere in Australia.
- Distinguishes and more clearly defines the reporting obligations of small and large co-operatives. It removes the requirement for small co-operatives to lodge financial reports with the Registrar, and enables simplified financial reporting to members and has provisions that allow the directors not to appoint an auditor unless directed to do so by a vote of the members.
- Puts the statutory duties of Directors and Officers of a co-operative in line with corporate governance standards under the Corporations Act 2001. The civil penalty regime ensures compliance with duties that aren’t considered criminal in nature. As in the Corporations Act, there is a “business judgement rule” defence for Directors and Officers facing proceedings for breach of their duty of care. This takes into account co-operative principles. A Director or Officer faces liability where there is a clear link between the Director’s or Officer’s responsibility and action or inaction, and the alleged breach. Liability for contraventions of compliance matters (e.g. lodgement of annual reports) lies with those Officers who have a duty to ensure compliance. The role of the Secretary is more clearly defined under the CNL and is linked to the requirement to lodge specified particulars or documents.
- Allows a business to use “co-operative” or “co-op” in their business name.
- Allows use of the CNL model rules providing for quick and affordable formation and ensuring appropriate governance.
- Ensures the co-operative’s purpose is safeguarded with super majorities required for important decisions and the co-operative principles mandated.
Co-operatives National Regulations
The Co-operatives National Regulations (CNR) support the CNL.
There are two types of regulations under the CNL:
- National regulations provide additional information about CNL laws. These are uniform across all the states and territories (e.g. the minimum annual financial reporting requirements for a small co-operative).
- Local regulations deal with matters that vary between the states and territories. Local regulations will cover limited matters that are necessarily different in each jurisdiction, such as local administrative officials, fees and court processes.
Important inclusions in the CNR (Schedules 5, 6 and 7) are the model rules. These are rules that are compliant with the CNL and provide a basic model of good governance for a co-operative. Model rules are not compulsory under the CNL but they were drafted as part of the CNR and may be used in whole or in part by new or existing co-operatives. If registering a co-operative in Western Australia the equivalent model rule reference points are Schedules 2, 3 and 4 of Co-operatives Regulations 2010 (WA) that support the Co-operatives Act 2009 (WA) which is corresponding co-operatives law under the CNL.
