Freegle Trading Subsidiary Team Final Report

This is the final report from the Trading Subsidiary Working Team set up to look into providing trading opportunities for Freegle.
Discussion Group: http://uk.groups.yahoo.com/group/Freegle-TSW-Team/

Team discussions from 11th February 2013 to 25th July 2013

1. Summary

We unanimously recommend that Freegle changes to a better legal structure in order to secure its future, with most day to day operations continuing as now and local Freegle groups unchanged.

It is not possible to set up a subsidiary or trading arm, so we recommend that:

• Freegle changes from being an unincorporated association to become a charitable Industrial and Provident Society (IPS) for Community Benefit, where:
• The objects of the IPS are the same as the current Freegle UK aims
• Any Volunteer can be a member if they pay £1
• The new organisation diagram looks like this [1]
• The current Constitution is replaced by IPS Rules - [2]
• The current Representatives are replaced by a Board of Directors
• Director and member financial liability is limited to £1
• The IPS is called Freegle Limited but we can be known as "Freegle"
• There is an asset lock so IPS members cannot profit from the Society and if wound up any assets must go a similar charity.
• The IPS can own assets, receive grant funding and sell services if we wish to
• Employees cannot be directors
• Members and directors can sell services to Freegle, ie they can be sub-contractors
• No sub-contractor is involved in any decisions relating to the contract
• Anyone on a large contract should stand down as a director
• There are (up to) nine elected directors with an option to co-opt two more.
• Freegle continues to work almost exactly as currently
• IPS member votes are usually only needed once a year at AGMs and to elect directors
• Local Freegle groups carry on unchanged, with identical affiliation requirements as now.
• IPS setup costs should largely be covered by funding from the Co-operative Enterprise Hub.
• The policies and procedures need updating
• An annual return with £55 fee must be sent to the Financial Conduct Authority (FCA)

There is a reasonable amount of work to do here, and people might wonder why we need to do this. As the strategy reports from the Reps make clear, the current structure where we rely on a small and decreasing number of volunteers is not sustainable. We simply have to do this if Freegle is to secure its future.

2. Background

Team

The team is Chris (Penrith), Edward (Edinburgh), Jacky (Norfolk), Mark (Derby) and Neil (Northampton North and Central) . Mark was not able to contribute fully after the start of May 2013.

Brian Titley joined us as an expert adviser from Co-operative Assistance Network Limited. His time was funded by the Co-operative Enterprise Hub - thanks!

Role/Purpose/Remit

The team's role is to recommend a structure and remit for a Trading Subsidiary (TS) [3] for Freegle taking into account previous discussions on Structure (points [4] and summary [5]) and various Structure tasks.

The need for a recommendation arose because Freegle is potentially unsustainable due to (a) the reliance on several volunteers who put in many hours and (b) financial insecurity. The team was formed to suggest a trading subsidiary structure that would allow funds to be received, and consequently funds could be used to pay people to undertake specific items of work as need be.

The Reps 2011 Strategy paper [6] outlined the possible strategies open to Freegle, while the 2012 paper [7] gave a gloomy update, saying that Freegle is unsustainable with vital national work being undertaken by a small and decreasing number of volunteers. There is a pretty urgent need to set up a structure to secure funding to keep key individuals involved - who might otherwise drop out with severe consequences for Freegle.

Freegle UK is currently an unincorporated association where individuals have to take financial responsibility for projects etc. It is not reasonable for individuals to accept such responsibility. Outside bodies see this problem and we think this may be why we haven't received some grants.

In the team’s February report to Structure we reported that we could not set up a trading subsidiary for the reasons outlined below. Our proposal to extend our remit to look at the alternatives was accepted.

3. Possible Structures

The current structure is an unincorporated association which cannot legally own any assets or sign contracts. In addition each member of the association may have liability for any debts of the organisation. This was fine when Freegle had limited financial activity. However in one current project, one individual has had to take financial responsibility for the project - which is not reasonable.

There are various possible legal structures [8]. We assessed these with the help of the Co-operatives UK Select a Structure tool [9] and extensive discussions with Brian Titley.

The fact that unincorporated associations cannot own any assets almost immediately ruled out the prospect of the current Freegle owning a trading subsidiary. It would be possible for certain people to individually own the trading subsidiary (on behalf of Freegle), but it was thought that the accountability would be very blurred.

The next possibility was a structure that runs in parallel with Freegle, but not owned or controlled by Freegle members. Again, this is a possibility, but with no control in place, it did not seem that this would be a suitable structure.

The team decided that the two above models would not work as there is no real control or accountability, and there will be complexity and confusion which is neither wanted nor easy to manage.

The final possibility, and our proposal, is that Freegle changes to become a new structure. This will potentially require some more work and will need a full vote of all current Freegle volunteers. However it is worth the effort to ensure a lasting solution.

The proposed new structure is a charitable Industrial and Provident Society (IPS) for Community Benefit. This meets our requirements for:

• limited liability for members
• charitable status
• one-member one-vote democratic control
• benefitting the community
• asset lock on profits if wound up
• allowing our existing internal systems to continue

4. The Proposal

The team proposes that Freegle changes from being an unincorporated association to become a charitable Industrial and Provident Society (IPS) for Community Benefit. See the (10) below for details of the change process. The IPS provides limited liability and a suitable legal and financial structure, eg so Freegle can own assets, receive grant funding and sell services if we wish to.

Local groups can carry on their duties unchanged, with identical affiliation requirements as now.

The "new Freegle" IPS will be set up while the "old Freegle" unincorporated association still exists. Once the new Freegle is set up and has charitable status confirmed, the old Freegle will transfer its assets and responsibilities to the new Freegle. The old Freegle will then be dissolved. We are therefore not technically converting from the old Freegle to the new Freegle, even though that is the simple way of describing it.

The team decided that the best option was for Freegle itself to incorporate to become an IPS. The new structure does require some changes, eg the constitution will be replaced by rules and the representatives would be replaced by a board of directors. However we have found that it is possible for most of Freegle's working practices to carry on as they do currently, eg using the current working group structure and local group affiliation requirements. There will be work required to update our policies and procedures, but most of these will not change significantly.

The new IPS will be owned by its members but has aims that benefit the community. Each member must pay £1 to have a share to get one vote at formal general meetings. The £1 is each member's total liability. All current Freegle local group owners, moderators and volunteers (called volunteers from now on) are eligible to become formal members if they wish - but they will not be required to do so.

The current system of votes within Central will be maintained, ie open to all volunteers. Any such votes will need to be formally ratified by the board of directors who will meet monthly. At Annual General Meetings (and any other special General Meetings) only members will be able to vote. In the unlikely event of any disputes, members can call for a General Meeting; at such meetings the policy votes by the members overrule the board of directors and any votes at Central. Only members can vote in the elections for the board of directors.

The IPS will not trade for profit, ie members will not receive dividends. Instead, any surplus will be retained to further the aims of the organisation. If the IPS decided to wind up, any remaining assets must be transferred to a similar charitable body, ie there is no benefit to the members. These provisions are called an "asset lock".

As stated above, the IPS will be governed by a set of Rules. The rules are based on a standard model provided by the Co-operatives UK. The Freegle rules will include our objects, ie the current Freegle aims, and various minor decisions as outlined below. The proposal includes further amendments to the model rules to meet with Freegle's particular requirements, again outlined below.

If the IPS ever had any employees, these people could not be board members. However we propose that contractors may be board members subject to standard rules that they are not involved in decisions in which they have an interest. Members and volunteers will be able to be contractors or employees. We recommend that a policy is set up to put larger contracts out to tender and that a director involved in a larger contract a must stand down for the duration of the contract. This avoids any suggestion of impropriety.

Although the IPS will provide a suitable legal structure to secure Freegle financially in the future, it does not in itself immediately give access to any money. The team recommend that we carry on working on a Business Plan while Structure and Central decide whether to proceed with the structure change.

We are grateful for the support provided by the Co-operative Enterprise Hub (CEH) in funding our adviser, Brian Titley. We felt it very important that we we receive outside expert advice to ensure we had a solid proposal to put to Freegle. The CEH has also agreed to cover most or all of the costs of incorporation - thanks again for this.

5. The new structure

The way Freegle works will have to change a little in order to be an IPS. However most everyday activities will be unaffected. And local groups can carry on unchanged.

Brian Titley has put together an organigram [10] of Freegle as the proposed new IPS. This shows the parts that are required for an IPS along with the existing Freegle components that will be retained.

Let's start with the Local Freegle Groups.

The local group volunteers (owners, moderators and other volunteers) can join Central, exactly as now. They can also join working groups and teams - as happens now; some of these teams have a restricted membership, also as now.

All volunteers can, if they wish, become formal members of the the IPS. Each must pay a £1 share and provide their postal address to go on the register of members. All membership requests must be approved by the board of directors.

The members elect the board of directors - this is like the current representatives. The board is officially in charge of the day-to-day running of the IPS. The rules allow the board to delegate responsibility to various sub-committees and people, ie the Freegle working groups and teams, and named officers such as the chairperson, treasurer and secretary, with the officers elected by the board. A third of the directors retire each year, so there is an election each year while providing continuity of experience on the board. The board can co-opt up to 2 more directors if they wish outside help. The secretary must maintain a register of directors and officers as well as the register of members. We are looking at the "Co-operatives UK One Click Digital Platform" open-source software at www.oneclickorgs.com as a means of storing the registers and handling elections and General meetings.

An Annual General Meeting takes place every year to approve the accounts and pass resolutions. Elections for directors take place during or before the AGM. Only members can vote at General Meetings and in director elections. Special General Meetings can take place at the request of the directors or upon application by a certain number of members. An annual return must be submitted to the Financial Conduct Authority [11] along with an annual fee of £55. Assuming Exempt Charity status is granted, no corporation tax is payable.

Within an IPS the Secretary of the board has a lot of neutral administrative responsibilities and therefore would be a logical home for the management of the Returning Officer, Auditor and Ombudsman, including making recommendations to members, after due process, of who should be appointed to the roles. The Secretary would report all nominations for these posts.

The regular activity of most Freegle working groups and teams can carry on unaffected, eg approval of local groups, etc. These ways of working will be governed by policies and procedures, as is the case now. As described in the summary, it is suggested such policies and procedures are created in the same way as currently, eg by vote of all volunteers on Central. The board will normally ratify all proposals from Central. If need be (eg in urgent cases), the board has the power to make official decisions and make policies and procedures. As described above, the IPS members can call for a Special General Meeting. At a General Meeting, the members can pass resolutions which will overrule the board of directors. Certain extraordinary resolutions require 75% of those voting to be in favour, eg to change the official rules.

For simplicity, we propose the IPS should be registered in England, and as such it would be granted charitable status by HMRC. This is the same position as Freegle is at present.

Summary - the structure is very much the same as now with (a) the Freegle IPS governed by rules and (b) representatives replaced by a board of directors.

6. IPS name

An IPS normally has a name that ends in "Limited". We asked if we could be exempt from this requirement. There are strict rules for this - we would not be eligible for this. The recommendation is that the IPS officially be called "Freegle Limited". However we can use a trading name of "Freegle".

The team felt that it isn’t necessary to include "UK" eg to call ourselves "Freegle UK Limited".

On headed notepaper and the website, we would have to have a declaration something like this: Freegle Limited. Registered in England as an Industrial and Provident Society for Community Benefit. Registration No: 12345R Registered office: Postal, Address, Town, Postcode

The team felt it important that the name "Freegle Limited" was secured while it was available. At our request the Reps bought a cheap holding Company Limited by Guarantee (CLG) for this purpose - Company No. 08553626. The CLG will be converted to the IPS if we proceed.

7. IPS rules

The main governing document for an IPS is called the rules. The proposed Freegle rules [12] would be based on a standard set of model rules provided by the Co-operative UK. These are tried and tested rules that satisfy the Mutuals Registrar at the Financial Conduct Authority. Once we are set up, they should not need changing very much, if ever.

The rules have these sections

• Objects
• Powers
• Members
• General Meetings
• Directors
• Proceedings of the Board of Directors
• Officers
• Disputes
• Regulations ie Policies and Procedures
• Liability of Members
• Application of Profits
• Amalgamation, Transfer of Engagements and Conversion
• Dissolution
• Administrative Arrangements

Notes on Auditor
The rules mention an Auditor. An IPS only needs a chartered accountant auditor if the turnover is high (more than £250k). However we need to pass a resolution at each AGM to disapply the requirement for an audit. Instead we can appoint lay auditors and submit unaudited accounts if the turnover is under £90k.

Notes on Borrowing
The model rules give the IPS power to borrow up to £10 million. It is prudent to include the power to borrow, eg to spend money before receiving a grant payment. Although the maximum figure looks high, it is simply to give the IPS room to do what it needs - it is extremely unlikely that we would ever borrow anything like this.

Working online
Freegle is somewhat unusual in that all of its proceedings happen online. We have checked, and the rules will allow this to practice to continue, including counting quorums, with some minor additions as outlined below.

Supporters
The team did consider having a new category of members called supporters - to allow people who are not local group volunteers to join as members. While this may be useful at some point in the future, we decided not to recommend this option now. This option can be made available in future by changing the rules using an Extraordinary Resolution at a General Meeting, requiring 75% of those voting to be in favour.

Health and Safety Officer
Although it is not required in the rules and as a legal requirement, it is best practice to appoint a health and safety officer, who need not be a board member. The health and safety requirements for Freegle Limited activity is not expected to be onerous. Local groups are responsible for their own health and safety, though Freegle Limited will continue to be able to offer insurance cover for local group events which have been notified to the Health and Safety Officer along with a risk assessment.

8. Changes to the standard rules

Our proposed rules for the IPS are here.

Standard decisions

The model rules have various standard options. These are the options and our proposals:

• Name

Freegle Limited

• Objectives

The current Freegle aims

• Quorum for General Meetings

20 or 10% of the membership whichever is smaller, subject to a minimum of 3.

• Board composition

The options are "as elected by members" and "as elected by members plus representatives of other organisation". We'll go for the first option.

Additional changes

In addition the team decided that we need to make additional changes to rules to fit in with Freegle's way of working:

Interpretations: Add definitions for "Paper ballot" and "Show of hands" to make it absolutely clear that we can do this online.

Rule 12: membership of the society is defined as through being an owner, moderator or other volunteer for a Freegle affiliated local group or who is a volunteer for the Society.

Rule 16: individuals will cease to be members if they are no longer a volunteer as defined above.

Rule 81: the current rule 81 forbids any member or director from receiving payments. A revised rule 81 will allow payments to subcontractors who are members or directors. Co-operatives UK will ensure that this revised rule will still allow us to be registered as charitable. The unchanged Rule 80 specifies that directors must declare an interest and not vote on matters that where they have an interest. This is the proposed new Rule 81:

The Society's income and property shall be applied solely to the promotion of the objects of the Society. and no portion shall be transferred directly or indirectly by way of dividend, bonus or otherwise whatsoever by way of profit to the Members of the Society and no Director or Connected Person may buy goods or services from the Company on terms preferential to those applicable to other members of the public, sell any interest in land to the Society, or be employed by the Society, unless the payment is in respect of payment of any reasonable expenses which the Directors properly incur in connection with their attendance at meetings or otherwise in connection with the exercise of their powers and the discharge of their responsibilities in relation to the Society. A Director or Connected Person may sell goods or services to the Society, receive remuneration from the Society and receive any other financial benefit from the Society, provided that person declares their conflict of interest and does not authorise or vote on the transaction or decision.

In addition to the above rule, the team recommends that a policy be put in place that says that a director who is a significant subcontractor must stand down as a director for the duration of the contract, for example if they are a contractor for longer than three months and doing more than 20 hours per week.

The team also recommends that financial procedures are set up to put larger contracts out to tender.

Rule 92: A Member must (rather than "may") provide their consent to receive communications from the Society by Electronic Means.

9. Financial and Resource Implications

The set up may cost up to £1212 in fees to Co-operatives UK to set up the IPS and obtain exempt charity status. Most of this cost will be paid by the Co-operative Enterprise Hub (CEH) who have very generously supported the development of this proposal.

The Freegle Limited IPS must make an annual return to the FCA along with the annual fee of £55.

Freegle Limited will need to set up a new bank account with Unity and apply for charitable status again.

The Rules say that the board and its sub-committees must keep minutes of their meetings. Board meeting minutes must be kept. The monthly reports of group activity (including the board) will be continued as per now, being considered as the minutes of the group.

The secretary must keep a register of members including their postal address and a separate register of directors and officers. Only IPS members can vote in votes at General Meetings.

The treasurer duties should continue much as present, with a small additional requirement to keep track of the members' shareholdings. If in the future the number and complexity of financial transactions increases then a financial software package may need to be purchased.

The transition to the new structure will require that all policies and procedures are checked and updated if need be. A list of new policies or procedures that may be needed is given below.

The proposal is that all Freegle UK assets and responsibilities are transferred to Freegle Limited. Freegle UK does not actually own very much, apart from its bank balance of donations, but it is important that everything is seen to be transferred. For one on-going project we will need to get agreement from the grant funder that it is OK to transfer the responsibility; this is very likely to be OK.

At the moment there are various Freegle assets which belong to individuals (e.g. domain names, Freegle Direct, logos). While there will be details to sort out, the owners of these have already indicated that they would gift these assets to a legal entity once one exists.

The insurance for Freegle and its local group events will continue, with both old and new Freegle covered during the transition; it is very likely that there will be no extra fee.

10. What happens next

1. Structure discusses and votes on the proposal. ✓
2. If approved, the proposal goes to Central, where it should be discussed again. ✓
3. A full volunteer vote is held on the following type of resolution:✓

• To transfer Freegle UK into an Industrial and Provident Society for Community Benefit called Freegle Limited
• To set up Freegle Limited as an IPS
• To transfer Freegle UK assets and responsibilities to Freegle Limited
• To dissolve Freegle UK

4. If approved, the Freegle Limited CLG has a general meeting to agree to convert to an IPS.
5. Reps to instruct Co-operatives UK to convert the Freegle Limited CLG to an IPS, ie register at the Mutuals Registrar at the Financial Conduct Authority (FCA). The fees will be largely paid by the Co-operative Enterprise Hub. Three or more named "founder members" and secretary are needed at this stage - these are probably the current directors of the CLG (we'll need to check with Co-ops UK). 6. Meanwhile Freegle UK elects who it wants as the final board of directors
7. Once set up, the Freegle Limited founder members appoint the initial board of directors
8. Freegle Limited initial board meets and agrees to:

• Admit as members any others needed for final board of directors
• Call an initial AGM (with 14 days notice)

9. The AGM elects the final board of directors and sets the maximum number of directors as 9.
10. Freegle Limited final board meets and agrees to:

• Set up a new bank account
• Obtain HMRC charitable status for Freegle Limited
• Adopts the Freegle policies and procedures, thereby setting up all the working groups and teams
• Affiliates local groups
• Chooses officers

11. Directors and officers each complete a form for the Freegle Limited register
12. Freegle Central and other working groups continue their work
13. Once Freegle Limited bank account and charitable status are sorted, all Reps available to vote must unanimously approve:

• Transfer Freegle UK assets to Freegle Limited
• Wind up Freegle UK
• Freegle UK will later present final accounts to Central

14. Volunteers apply for membership and pay £1 15. Freegle Limited board meets monthly

• admits volunteers as members - share certificates are subsequently issued

If the conversion is agreed, any material changes that might be required of the details of this report will be decided by simple majority vote on Freegle UK Central.

Parallel work
In parallel with the first stages, the Trading Subsidiary Working Group should work on: updating the Freegle policies and procedures creating a business plan

11. New policies and procedures needed

Director Conflict of Interest
How to declare an interest

At what point a director should step down if they are a large contractor, and how and when they are reinstated.

Tendering
In the financial procedures, guidance should be provided on when work needs to be put out to tender.

Making Policies and Procedures
A new policy may be needed to provide guidance on how policies and procedures should be made.

Policy should be set by the membership. In practice policies will usually start in Structure, go for approval in Central then be proposed to the board which will normally ratify them. However policy can also be set by the members at a General Meeting.

Procedures are the details of how a policy is implemented. These could follow the Structure/Central/Board route but may also be set by working groups or the board with notification to Central.

General Meeting quorum and votes
The existing AGM procedure will need updating to state

• how the quorum is counted
• what constitutes a "show of hands" and a "paper ballot".

Quorum
A quorum must be present for the entire AGM period, ie the AGM week.

• A 24-hour poll on Central can establish a count of those members present at the start of the AGM.
• If any subsequent vote does not have a total vote count of at least the quorum, then another poll will be run to ensure a quorum is present.

Voting
Both a "show of hands" and a "paper ballot" can be done online.

Update: Structure recommends that Central be used for general AGM discussion. However AGM votes by members should be held elsewhere, eg on a separate Yahoo group or a tool such as FluidSurveys or One Click mentioned earlier.

A show of hands could be done with a quick poll on Central, eg over 24 hours

A paper ballot will be done using formal member vote. Note: holding a paper ballot does not hold up the rest of the meeting, so the formal member vote can take place during and/or after the rest of the meeting.

Link: Freegle Structural Change