BIM24110 - Mutual trading: essential requirements: surplus must go back to contributors
And to no one else
Arrangements must be in place to ensure that any surplus ultimately finds its way back to the contributors, with no arrangements for it to go to anybody else. Viscount Cave in Jones v The South-West Lancashire Coal Owners’ Association Ltd [1927] 11TC790, said at page 838:
Sooner or later, in meal or in malt, the whole of the association’s receipts must go back to the policy-holders as a class, though not precisely in the proportions in which they have contributed to them...
The company was limited by guarantee. The company’s only
activity was the mutual insurance of colliery owners against
liability in respect of accidents to employees.
Viscount Cave’s comments concerning the proportions of
returned contributions have been clarified in later cases where the
courts have indicated that the amounts returned to a contributor
should bear a reasonable relationship to the contributions made by
that contributor.
This does not mean that the surpluses in the years prior to
winding up have to be returned to contributors, either in the form
of reduced contributions in the future or as a return of those
contributions, merely that the intention is that any surplus will
eventually be returned to the contributors. Upjohn J. in the
Faulconbridge v National Employers’ Mutual General Insurance
Association Ltd [1952] 33TC103 case, rejected the proposition that
a requirement of mutuality was that a contributor must be entitled
to share in the annual surpluses prior to winding up, when he said,
at page 125:
The authorities show that the only essential conditions are that any surplus must ultimately come back to the contributors in meal or in malt on a winding-up or otherwise.
An entity that includes in its rules/constitution/articles a
requirement that in the event of a winding up any surplus is to go
to an entity with similar aims or to a charity cannot be carrying
on a mutual trade. The surplus at a winding up must go back to the
contributors and to no one else. It does not matter that in
practice the surplus only goes back to contributors, there must be
no possibility of it going to non-contributors.
The requirement that the surplus must go back to the
contributors does not preclude a mutual trader from, for example,
making a donation out of its surplus to (say) a charity. But to
retain mutual trading status such a donation would have to be
approved by the contributors. The contributors in effect
collectively agreeing to give away some of their own money.
