Insolvency rules fail co-ops, say MPs

An all-party Commons committee has called for the urgent revision of
insolvency legislation as it applies to co-operatives in the wake of the
collapse of the Farmers Milk Marketing Organisation.

Food and Rural Affairs Committee
said the affair showed existing
rules were “not fit for purpose” and the legislation “needs to be updated”.

Chairman Michael Jack said: “Dairy Farmers of Britain did not go to the wall
because it was a co-operative, but the demise of the business and the challenges
faced by the receiver have highlighted a number of significant weaknesses in the
relevant legislation.”

The committee was told by
that difficulties had arisen because of DFB’s status as an industrial and
provident society and therefore outside the provisions of the Insolvency Act
1986 and Enterprise Act 2002.

It had to go to court to clarify its position concerning communication with
creditors and told the committee that at a time when to maintain stability in an
insolvency it was necessary to move very quickly, the delay going to court “was
not helpful”.

The report said there was no statutory obligation on PWC to conduct the
insolvency according to the standards that apply to limited companies but it had
followed “best practice” in spite of this.

There were also concerns about whether a pension fund was covered by the
Protection Fund

The committee “calls on the government to amend the relevant legislation as a
matter of urgency, to ensure that in future insolvency appointments over
co-operatives are made on the same basis and governed by the same rules as
insolvency appointments over limited companies”.

It praised receivers PricewaterhouseCoopers “for doing a good job in spite of
the legislative confusion”.

DFB sought to add value to farmers’ milk at a time of depressed prices by
purchasing processing facilities, but was over-ambitious, including the purchase
of a creamery with a loss-making contract which cost it millions of pounds, and
by late 1998 was caught in a vicious circle with a loss of confidence provoking
member resignations which fueled a further loss of confidence and more
resignations until the customers lost confidence too.

The committee complained the tax system discourages investment in
agricultural co-operatives by taxing money retained within the business and only
notionally paid out to farmers.

Some 1,800 farmer members suffered “substantial financial losses”.

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