To satisfy the conditions for carrying on a mutual trade the trader must show that any surplus arising from the trade will go back to the contributors and to no one else - see BIM24110. The surplus must go back in the form of returned contributions and not in any other form. This can pose difficulties for a company limited by shares. Rowlatt J. commented on this difficulty, at pages 822-823 in Jones v The South-West Lancashire Coal Owners’ Association Ltd [1927] 11TC790 (see BIM24110):
The principle laid down in the New York Insurance Company [see BIM24035] case is that no one can make a profit out of himself. Now that is very true, but I am not at all certain that it does not confuse us in this particular case. It is true to say a person cannot make a profit out of himself, if what is meant is that he may provide himself with something at a lesser cost than that at which he could buy it, or if he does something for himself instead of employing somebody to do it. He saves money in those circumstances, but he does not make a profit. But a company can make a profit out of its members as customers, although its range of customers is limited to its shareholders. If a railway company makes a profit by carrying its shareholders, or if a trading company, by trading with its shareholders - even if it is limited to trading with them - makes a profit, that profit belongs to the shareholders, in a sense, but it belongs to them qua shareholders. It does not come back to them as purchasers or customers. It comes back to them as shareholders, upon their shares
You should not interpret Rowlatt J’s remarks as always
precluding a company limited by shares from carrying on a mutual
trade. Rowlatt J makes the point that it makes no difference that a
mutual association takes the form of an incorporated body. This is
because what was returned to the members of the association was
returned to them in their capacity as contributors to a surplus and
not as shareholders sharing in a profit. If there is no profit
where people do something for themselves, there will be no profit
if they incorporate a legal entity to do it for them.
Incorporation can present a significant hurdle to be overcome
when considering the constitutional and financial framework
necessary for mutuality. That is, for mutual trading to be present,
the profits/surpluses have to be distributed to the contributors in
that capacity, i.e. as contributors, not as shareholders. To
achieve mutual trading a company limited by shares may need to
override Company’s Act provisions.
The normal Company’s Act rules provide that in the
event of a winding up any surplus available to distribute to
members will be distributed pro rata to shareholding. The normal
rules also provide that any such distribution will only be to the
members on the register at that time. To satisfy the conditions for
mutual trading the company’s rules/articles will need to
specify that:
From a practical point of view you may limit consideration to those who have been shareholders at any time in the previous five years - see BIM24115.
