The government has recently published a series of proposed amendments to the Cooperative Societies Act and these are now open for consultation.

Most of the changes refer to detail; while the general framework of how coops are set up and administered under current law remains in place.

Cooperatives are set up by persons joining together to pursue a common objective. They are regulated by special legislation and are overseen by a specialised public authority and not by the Malta Business Registry.

While similar in some respects to companies, the distinctions between a coop and a company are significant and must be safeguarded. There are about 70 coops compared to over 120,000 companies in Malta.

The current law is the Cooperative Societies Act 2001, which sought to replace and improve upon the 1978 law with the same name, introducing several new features and provisions aimed at creating a more modern and workable statutory framework for the setting up and operation of cooperative societies. 

A cooperative society is defined in article 21, which lists the seven international principles that cooperatives the world over are expected to comply with. Coops are registered by and with the Board of Cooperatives and must have a minimum of five members. Some see this figure as too high and this is indeed a matter addressed among the proposed changes. There is no mandatory minimum share capital.

The Cooperatives Board, originally set up in the 1978 Act, is still in operation. The law in article 3 assigns it with varied and extensive regulatory functions and powers and it acts as both regulator and registrar.

The registration process is more complex and time-consuming than for companies. This is regularly cited as a particularly significant disadvantage.

Upon receiving an application, the board may decide to register it, reject it or register it provisionally. These pre-formation responsibilities are peculiar to coops. The law sets out a comprehensive list of matters that a coop statute would need to include, while the board has made available a model statute that can be used by prospective applicants. The board must approve any proposed amendment to a coop statute and it checks that the proposed changes are legal and consistent with that statute.

A coop’s affairs are administered by a committee of management, which is similar or equivalent to the company board of directors. Coops have a special accounting model that uses the word ‘surplus’ rather than profit and where a departing member does not benefit from any asset appreciation or depreciation during their membership. The law envisages one ‘Apex Organisation’ representing the majority of registered coops and establishes the Central Cooperative Fund (CCF) to support coop development, constituted by a five per cent annual distribution by coops that have registered a surplus. Coops are also exempt from paying company tax.

A minimum of three members is likely to dilute the principle of member cooperation

The most significant of the recently proposed amendments are:

• the minimum number of members is reduced from five to three;

• members shall contribute a minimum of €300 each as share capital;

• the current single Apex Organisation is replaced by a new Apex National Association (ANA), with the authority to oversee multiple cooperative associations;

• the current CCF is replaced by a new Apex Fund administered by the ANA and new rules will dictate how these funds shall be allocated; the five per cent surplus contribution remains unchanged. 

• the option to provisional register coops is being removed; and

• a coop’s option to set up a supervisory body is being removed.

The proposed changes should have been better explained and justified. Overall, they suggest that certain roles and authority will shift from the current Cooperatives Board to the new Apex National Association.

They also take cognisance of the existence and operation of two organisations – Koperattivi Malta and the Malta Cooperative Federation –that have each served de facto as coop society federations in Malta for over a decade.

The establishment of a minimum share capital value helps to establish a more robust and serious share capital base while the proposed amount is not so excessive as to deter would-be membership.

The change in the minimum number of members from five to three is arguably being proposed in order to make coops more attractive. Yes, but probably to the wrong kind of members. A minimum of three members is likely to dilute the principle of member cooperation, with an individual member’s control of the coop rising from a maximum of 20 per cent to 33.3 per cent.

The measure is also likely to spawn a number of ‘fake’ coops, composed exclusively of family members, who apply for coop registration with the understanding that they would be exempt from company tax.

What these new cooperators may fail to realise is that once funds generated by and in the coop are transferred out of the coop – as wages, rents or patronage refunds – they become liable to normal taxation. Plus the five per cent CCF obligation actually makes coops fiscally disadvantaged in relation to limited liability companies.

We support most of the amendments proposed. However, we urge the government to seriously reconsider reducing the minimum number of members for setting up a coop and instead maintain the current threshold of five.

If the intention is to expand the number of viable coop societies, then the solution is an educational and informational campaign, not a dilution of the principles of cooperation.

David Fabri and Godfrey Baldacchino served as members on the Board of Cooperatives during the period 1994-2003 and were involved in the drafting of the Cooperative Societies Act (2001).