PART TWO: FORMING A CO-OPERATIVE

Making the rules

A co-operative’s rules are its most important document. It is the foundation for the ways in which it operates and fulfils its obligations to its members, and a contract with its members, binding them to obey the rules. The rules are also a contract between the co-operative and each director, the CEO and the secretary of the co-operative, and between each member.

Not all co-operatives have the same rules, as not all co-operatives have the same activities and active membership requirements.

Once the rules are registered, they can only be changed by a special resolution passed by the members, or a resolution of the board in some circumstances (see Altering the rules, below), and by obtaining the Registrar’s approval, so it is important to take the time to think them through and get them right from the start.

Model Rules

Model rules are available from the Registrar of Co-operatives in your state or territory, and are useful in drafting rules which comply with the CNR. Different sets of model rules will be available for each type of co-operative – distributing, non-distributing with share capital and non-distributing without share capital.

The model rules will suit many co-operatives with only a few changes, e.g. co-operative name, share allocation, number of directors, primary activities, and membership provisions.

You do not have to use the model rules, but using them as a basis for your own co-operative’s rules will save a lot of time and help ensure your rules comply with the legislation. If you make your own rules, remember that the rules must cover all the matters that are listed in Chapter 2 of the CNL and the CNR.

You can choose to use the model rules and make them static, meaning that the model rules as adopted will not change unless the co-operative makes a change in the manner authorised under the CNL. Or, you can adopt the model rules as they are from time to time. This means any change to the model rules contained in the CNR will automatically change your co-operative’s rules, so you don’t need to amend your rules if the model rules change.

What the rules contain

The rules include information on a number of matters, including:

  • The co-operative’s name.
  • Primary activity/activities of the co-operative.
  • What a member must do to establish and maintain an active membership.
  • Procedures to admit new members, any entry fee to be paid, and the shares to be acquired.
  • The charges or regular subscriptions payable by a member.
  • Qualifications for membership and directors, the number of directors, method to elect, remunerate and remove directors and fill a vacancy, the period directors hold office, delegation, the holding of annual elections, other committees, and the chairperson’s role and election.
  • Chief executive officer’s appointment and entitlements.
  • The restrictions on the powers of the co-operative and its board.
  • Procedures for calling general and special meetings, quorum, attendance and business to be conducted.
  • The rights of members in voting, the way to vote, the majority required to pass a resolution, proxy votes, any special majority required for specific resolutions, minutes and notices to members.
  • The rights and liabilities of members, the estates of deceased members and representatives of members under bankruptcy or mental incapacity.
  • The circumstances in which membership ceases or shares are forfeited or cancelled.
  • How members may resign, be expelled or suspended, and their rights and liabilities.
  • The maximum amount of a fine a member may pay for breaking the rules (it must be no more than $1000).
  • Grievance procedures for settling disputes between the co-operative and any of its members, and between a member and another member.
  • How funds are to be managed, including accounts, the drawing and signing of cheques, drafts, bills of exchange, promissory notes and other negotiable instruments, electronic accounts.
  • The device, custody and use of the seal of the co-operative.
  • The custody of securities belonging to the co-operative.
  • How debentures may be transferred and CCUs issued and transferred.
  • How shares and fundraising (if any) will be handled.
  • The ways surplus funds can be used.
  • How rules may be changed.
  • Financial reporting requirements, including the basic minimum financial statements required to be given to members of a small co-operative and whether or how the reports will be audited or reviewed.
  • The date the financial year ends.
  • How a loss from transactions is to be provided for.
  • How a co-operative may be wound up.
  • Any other matters that appear necessary or desirable to the co-operative.

Additional rules need to be included for co-operatives with share capital, depending on whether the co-operative is distributing or non-distributing:

  • The nominal value of each share and periodic subscriptions to pay for shares.
  • The forfeiture, repurchase, sale or transfer of shares.
  • How capital is raised, the value and quantity of shares, calls and amounts payable.
  • The amount of contingent liability (if any) attached to shares.
  • The terms on which all shares except bonus shares are to be issued.
  • How a surplus of a distributing co-operative can be distributed.
  • How a deficiency will be allocated if the co-operative is wound up.

Additional rules are also required for non-distributing co-operatives:

  • Confirmation that there will be no return or distribution of surpluses or share capital to members other than the nominal value of shares (if any) at winding up.
  • How surplus property will be distributed to another entity, that also prevents distribution to its members, at winding up.

If the co-operative plans to access tax concessions available to non-profit organisations, the rules should include two statements to indicate its non-profit character:

1. Non-profit clause

The assets and income of the organisation shall be applied solely in the furtherance of its abovementioned objects and no portion shall be distributed directly or indirectly to the members of the organisation except as bona fide compensation for services rendered or expenses incurred on behalf of the organisation.

2. Dissolution clause
In the event of the organisation being dissolved, the amount that remains after such dissolution and the satisfaction of all debts and liabilities shall be transferred to another organisation with similar purposes which is not carried on for the profit or gain of its members.

What follows is more information on some of the sections of the co-operative rules.

Primary activity

One or more primary activities must be included in the rules. Not every activity of a co-operative is necessarily a primary activity, and an act of the co-operative is not invalid just because it is different to the activities in the rules.

The primary activity/activities need to form the basic purpose of the co-operative, and the cooperative must carry on its primary activity, or be likely to do so, within two years of formation. The primary activity must also make a significant contribution to the co-operative’s business, contributing at least 10% of the co-operative’s turnover, income, expenses or surplus. (If the cooperative didn’t conduct that activity, its business would be reduced by 10%.)

Section 273 of the CNL, and Regulation 3.20 impose provisions regarding the purchase and sale of assets if they are related to the primary activity.

Members must approve any change to a co-operative’s primary activity.

Membership

The model rules state that every application for membership must be considered by the board, and the board does not have to give reasons for rejection of an application. Consider if this needs to be changed in your co-operative’s rules. Keep in mind the first co-operative principle of voluntary and open membership and the obligations under equal opportunity legislation.

Active membership

The rules must state the level and type of active participation a member must have in relation to a primary activity of the co-operative.

Active membership provisions in the rules must state:

  • Which activities of the co-operative are primary activities.
  • The way and extent a member must use or support an activity, or keep a relationship or arrangement with the co-operative for carrying out a primary activity, for them to be
    considered an active member.

The way and extent of the required use, support, relationship or arrangement should be reasonable in comparison to the entire activities of the co-operative.

The active membership provisions allowed in a distributing co-operative’s rules are provisions requiring a member to use an activity of the co-operative for carrying on a primary activity or any other active membership provisions the Registrar may approve. An “active membership provision” usually states the level of participation required of members. The rules must also define the consequences for not being an active member. The CNR stipulate that if a member is inactive for three years, that member’s membership is to be cancelled. The co-operative’s rules may stipulate a shorter period than three years. There are however, exclusions to the cancelation requirement in certain prescribed situations.

Active membership provisions for a non-distributing co-operative may include a provision that the payment of a regular subscription by a member be applied to a primary activity of the cooperative and be enough to establish active membership.

Drafting and submitting rules

Ensure the proposed members are involved in designing, and accept, the draft rules, including the active membership provisions, and at least two-thirds of potential members are likely to adopt them at the formation meeting. Otherwise the rules will need to be changed and approved by the Registrar before the formation meeting can reconvene. Ensure all prospective members have a copy of the proposed rules. It would be worthwhile to hold a pre-formation meeting to ensure consensus.

The proposed rules are to be submitted to the Registrar of Co-operatives, to ensure they comply with the CNL, before the formation meeting, as well as a written notice of intention to apply for registration as a co-operative.

If the co-operative is to be a distributing co-operative, the draft formation disclosure statement will be submitted at the same time. The Registrar will return an approved copy of the rules for the formation meeting. If the rules are not approved the Registrar can approve different rules to those submitted, or refuse to approve the rules altogether. The person who submitted the rules will be notified in writing of the Registrar’s decision.

Rules that have been approved by the Registrar are called approved rules; once adopted at the formation meeting and officially registered they are called registered rules.

Altering the rules

Sometimes a co-operative will find that the rules no longer suit it. This might be because the rules aren’t working, are out of date or the co-operative membership or primary activities have changed.

To change the rules, a draft of the proposed amendment must be drawn up and approved by a special resolution of members.

A resolution to amend the rules can be passed by the board rather than by a special resolution of members only if the amendment relates to a requirement, direction, restriction or prohibition imposed or given under the authority of the CNL. If approval to amend the rules is given by the board, the members must be notified in writing as soon as possible after the amendment takes effect, and at least by the day when notice of the next annual general meeting is given to members.

If a proposed rule involves changing the active membership provision, or will result in the conversion of a co-operative from a non-distributing to a distributing co-operative (or vice versa), the Registrar must give formal pre-approval to the rule before it is approved by members.

Once approved by the members, the amendment of the rules does not take effect unless, and until, it is approved by and registered by the Registrar.

The proposed amendment must comply with the requirements of what is necessary to be contained within the rules.

The application for registration of the amendment must be made in the approved form, be accompanied by a statement explaining the reasons for the amendment, made within 28 days from when the amendment is made (unless a different timeframe is given by the CNR), and be sent with a consolidated copy of the rules which includes the amendment.

The Registrar may require further information before approving the amendment, approve a different amendment, or refuse to approve the amendment.

The Registrar will register the amendment and provide a certificate of registration of an amendment of the rules unless it is considered contrary to the CNL, or the Registrar has another reasonable cause to refuse to register the amendment.

The Registrar is taken to have approved the amendment as submitted after 28 days unless, before the end of that time, the Registrar gives written notice to advise that a different amendment has been approved to that submitted, or to advise that the Registrar is still considering the amendment or refuses to approve it.

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