Please note, this blog post has been significantly extended and updated since it was first circulated.
I have recently discovered that the members of the subpostmaster's trade association were not actually permitted to vote in the association's affairs: the National Federation of Subpostmasters' members are required to nominate a board-approved intermediary to exercise their vote on their behalf! Now in pratice the board has been letting subpostmasters appoint themselves as their representatives, but in principle, the directors have a veto over who can exercise the subpostmaster's vote.
This is a long post, but there are recaps and summaries along the way.
Where I'm coming from is a rather idealistic and romantic view of membership organisations. I think it's great that in the UK, moreso than in many other places, and as part of a very long tradition, strangers from different families can get together, organise themselves and solve their problems amongst themselves, without troubling the government for money or having to ask much in the way of permission from outsiders. Dissenting religious groups could for centuries get together and employ their priests, without having to ask the officially Anglican government for permission. Nowadays we have societies, associations, clubs, trades unions, building societies, social enterprises and all manner of other private collective enterprises. I really don't like it when the proper balance between a group's management and its wider membership gets out of kilter. And if the little guys can't call a meeting and make their case that the group should think again, it never, ever, ends well.
But it's not clear that the NFSP is really a membership organisation in that ideal sense.
The public inquiry into the Post Office scandal has recently taken evidence from a former NFSP general secretary, concerning that body's role in the Post Office scandal. So it's appropriate now to subject NFSP to a bit more scrutiny.
The NFSP used to be a trades union. but about ten years ago, the it was decertified and struck off the list of trades unions. This deprived it of its quasi-corporate status, and restored it to being purely an unincorporated association. Lacking corporate status complicated the enforcement of contracts and ownership of property, so around 2015, NFSP negotiated a funding deal with the Post Office(!), and incorporated as a company limited by guarantee.
Mark Baker, formerly of the NFSP and latterly of the Communication Workers Union, gave evidence to Parliament to the effect that
"Also the formation of the company arrangements of NFSP ltd should be called into question as such a company should be owned and controlled by its members as detailed in their Articles of Association of NFSP Lrd. I am still in contact with many Postmasters who thought they were such company members but they have all confirmed that they have never been asked to legally take on company membership nor have they ever voted at an AGM or appointed the Directors which is the normal practice for members of a company limited by guarantee. Democracy within NFSP Ltd does not appear to exist. The free membership of the NFSP that the Post Office claims they pay for appears to be nothing more than a sham."
(I think Baker is accidentally referring to a subsidiary company here; the names are confusing, a point to which I shall return ...)
Companies all have public constitutions, called the articles of association, available on Companies House. Due to my interest in the leasehold scandal I have read the articles of association of several hundred companies, normally those which are used to allow (or not allow) owners of dwellings to have a say in the collective management of shared facilities. So I know most of the tricks used for pretending that members have power when they don't. (Side track: DLUHC launched a consultation about this yesterday, 1 December 2022).
Do regular NFSP members have a vote?
Section 284(4) of the Companies Act 2006 provides that company members' votes are to be counted in accordance with the company's articles. Unless the articles say otherwise, it's one share one vote if the company has shares, and one member one vote if it hasn't a share capital (as is the case for NFSP).
So for a company limited by guarantee like NFSP, any restrictions on voting rights will be found in the company's articles, and will therefore be a matter of public record. From my experience of Residents Management Companies, I've found that the basic mechanisms whereby members' votes might be restricted are things like:
- clauses that give the company's founders' appointees a supermajority of the votes
- clauses that give certain members a veto
- classes of membership that carry no votes at all
- "friends of" and "supporter" membership schemes that don't amount to formal membership of the company at all
And there indeed legitimate and arguable grounds for using some of these, particularly on a time-limited basis. There's even a company that weights members' votes according to how many internet domains they've registered. I myself am director of a company that allows upgradable, non-voting membership for registered supporters. But we don't go round pretending those individuals are full members.
What matters is how the company holds itself out. If it holds itself out as a bona fide membership organisation, then the members should be able to vote, particularly in elections for the board of directors. Anyone who is liable for the debts of the company should get a vote. Anyone paying for voting membership ought to get a vote, and a vote that's usable.
According to its articles of association, NFSP members aren't supposed to be able to directly vote, even though they are liable for the company's debts. Now there is a £1 limitation on that liability, but obviously the amount is beside the point. The gory details of how the NFSP has rigged this up are in article 8 of their articles of association (filed on 10 Sep 2015). They provide that
- "All Members shall exercise their membership rights and fulfil their membership responsibilities through one or more Organisational Representative(s)." (a8.2)
- "The Council may not accept, or require the replacement of an individual as an Organisational Representative provided an alternative is possible. If an alternative is not possible the Council may exercise constitutional rights in respect of the Member directly." (a8.10)
- "Voting rights under the Articles may be exercised only by Organisational Representatives." (a8.11)
- "To become a Member [...] a sole trader [...] must [...] nominate [...] one Organisational Representative [...]" (a9.2)
I've never seen anything like this. If you don't want people to have voting rights in a company, you can say so. For companies with share capital, it's routine to have non-voting shares, which often come with better dividends, and there's a nice wizard on the Companies House website to help you write the legalese that you have to publish to describe the situation. For companies without share capital, like NFSP, you can write it in plain English. You don't need a convoluted scheme like NFSP's Organisational Representatives unless you're ashamed of the arrangements and don't want to own up to them. I find it difficult to believe that NFSP's peculiar voting arrangements obtained when it was still a trades union; they might have their roots in an attempt to ensure that unincorporated businesses are equitably represented in voting weights, solving a problem like the relative voting strength of a two-person partnership that runs one sub post office, versus a sole trader who operates two sub post offices, and so. But nonetheless, you don't need to give the board control over members' votes to fix this.
What NFSP membership amounts to formally is a written agreement to obey the NFSP's regulations, an agreement to accept limited liability for the NFSP's debts, the various non-voting powers available to members under the Companies Act, such as zero fees for requesting certain information from the company, and the notional power to nominate a board-approved Organisational Representative to vote in one's own place. Oh, and the right to sue the board for discriminating between members, pursuant to section 994 of the Companies Act ...
It's not clear that most people who had been members of the previous NFSP structure before incorporation as a limited company ever actually formally joined the company, or they'd have been aware of the indirect voting scheme and complained about it. Someone should demand access to the NFSP's membership register to see if anyone other than the subscribers ever managed to join.
But my point here is not really how many members the NFSP has on its books, but the fact that the NFSP's constitution seems to say that members can only vote through intermediaries; that might work when everyone is content, but when push comes to shove, members could find it extraordinarily difficult to exercise their rights. That's the sense in which it's a "sham membership organisation". It's obviously not a sham organisation, it's there on Companies House and actually provides unusually transparent publications, e.g., on its finances, that go beyond the legal minimum requirements. But I suspect it's not really a membership organisation in practice.
There remains the question how much the Post Office influenced these arrangements ...
Why does NFSP's membership model matter?
One would tend to assume that a company limited by guarantee is not for the profit of its own members. This isn't formally the case. You can have a for-profit company limited by guarantee, and a not-for-profit company limited by shares, like St John's College, Durham.
The National Federation of Subpostmasters can apparently hand its assets over to its own members in expectation of the organisation being wound up. It therefore matters who the members actually are. A lot of those assets seem to have come from Post Office Limited, a company wholly owned by the British government. Since the net assets of NFSP were £3,627,700 in its 2021 accounts, that would amount to about £250,000 each if it only the directors were members. I suspect that the membership is much broader than that.
But we don't actually know how many members NFSP really has, and it would be useful for someone to request access to the NFSP's membership register to find out.
Who are the NFSP's members?
NFSP's unusual constitution requires that members nominate an Organisational Representative to exercise their voting rights in their stead. You can find the constitution on Companies House, in the very first document filed for the company, in September 2015. In principle, you can't now join NFSP without nominating an Organisational Representative, as we shall see.
NFSP is now incorporated as a company limited by guarantee. Purportedly, in 2015, all the members of the predecessor unincorporated association were to have been admitted to membership of the new company. This is in article 9.1 of the new NFSP's constitution. It's not clear whether this kind of arrangement really works legally without each of those transferring members formally agreeing to take on some liability for the new entity and agree to be bound by its rules, provide an up-to-date service address, and so on. Some former or serving subpostmasters have repeatedly questioned the membership arrangements.
(NFSP's articles may be found here or as its first filing on Companies House.)
New subpostmasters joining NFSP post-2015 are required under article 9.2 to nominate one of these "Organisational Representatives" as a condition of admission. This shows that the automatic transfer of members is a bit of a fudge: all members, auto-enrolled or otherwise, must nominate an Organisational Representative in order to vote, but only in the case of new members admitted post-2015 is this stated to be a requirement of admission. That may leave the auto-enrolled members without a duly appointed Organisational Representative.
Anecdotally, it would seem that subpostmasters may not have been asked to agree in writing to be transferred to the new NFSP in 2015, or to nominate an Organisational Representative subsequently. NFSP's membership application paperwork makes it absolutely explicit that new applicants are agreeing to abide by the NFSP's articles of association. But it doesn't mention the requirement under article 9.2.2 to nominate an Organisational Representative. Either that requirement is improperly being waived, or it is being fulfilled separately from the membership application form, or no-one is actually really being registered as a new member of NFSP. Of course, it's not in the NFSP's interests to draw attention to this requirement, so maybe if it's being fulfilled at all, it's by correspondence after the membership form has been submitted.
In any case, article 16 suggests that the identities of Organisational Representatives of Members must be stored together with the Register of Members. So NFSP really is supposed to be recording this data.
There is a form, which I've linked, for appointing an Organisational Representative, on the NFSP's website. The question is whether that form is really being used.
To summarise so far: it's not obvious which persons have been properly registered as members of the NFSP. And it's important to understand that, according to the NFSP constitution, these questions are linked, as new members are required to nominate their Organisational Representative as a condition of joining the company.
Association or Foundation model?
There are two basic models for the membership of non-profit organisations, which in the case of one special type of non-profit organisation (CIOs) have even got semi-official names: the Foundation model and the Association model; sometimes also called "small membership" and "large membership". The Association model is where a large group of members elect a smaller committee to be in charge, and can hold that committee to account. The Foundation model is where the only members are the committee. One is a self-selecting democracy, the other is a self-selecting oligarchy. But these two models are just two points on a spectrum, and an organisation may combine elements of both.
The committee in either of these models has power day-to-day. The question is, is there a wider group with a final say, above the committee, or not? Both models are perfectly legitimate; they're just different.
What is not legitimate is holding yourself out as following the Association model, whilst actually operating on the Foundation model.
There'll now be a little digression about how trivial mistakes by accountants can sometimes shed light on the nature of membership, and they'll crop up later on, too ...
I became interested in this problem a few years ago in relation to residents' associations (RAs): the RA for my ward, Trumpington Residents Association, was clearly set up on the Association model, and indeed was both a limited company and a registered charity, but its annual accounts stated explicitly that it was the Foundation model: supposedly, the only members were the board of directors/trustees. I pointed this out at a meeting, wondering if I myself were really a member, in the sense of the Companies Act, of the Trumpington Residents Association; the alternative was that the statement in the accounts was right and the only members were the board of directors, and that the elections weren't really binding and the people who thought they were members, and paying for the privilege, weren't really members --- what I'd sometimes call a "sham membership organisation". There was a little headscratching, but they quickly confirmed that the organisation was operating on the Association model and made sure the accountants didn't misrepresent this in future years. It had simply been a harmless mistake by the accountants, including boilerplate language more appropriate to a Foundation-style organisation.
(By contrast, the residents association for my own development, Trumpington Meadows Community, operated on the Foundation model but held itself out as a bona fide association: it simply was not prepared to permit outsiders to have any influence, any ability to hold the committee to account, and indeed TMC did not maintain a register of members. Given that it also held itself out as a conduit of communication with the developers and managing agents, this caused considerable tension; it had a strange resemblence to the NFSP in this regard.)
To summarise: the committee managing an organisation might be accountable to a wider group of members, or it might not. It is illegitimate, in my view, for there to be too great a divergence between theory and practice: if the rules say the committee is accountable to a wider membership, that should be true in practice too. That is why I described NFSP as a "sham membership organisation": when push comes to shove, the board can refuse to accept a member's choice of who should exercise his/her vote.
These Organisational Representatives sound very much like proxy voters. The right to vote by proxy on company business is provided by section 324 of the Companies Act. The NFSP's articles of association go to some length to try to circumvent the possibility that a member might appoint someone other than an Organisational Representative to this role, article 50 providing that "It is expected (but not required) that [...] Organisational Representatives, rather than the Members they represent will exercise any power to appoint proxies".
It may be the case that every Member since 2015 has always been able to appoint himself, or a preferred individual, as his Organisational Representative (and I say "him" for brevity here, though the public statistics show there are lots of female subpostmasters, as you'd expect). But when push comes to shove, the NFSP board could easily nobble the votes of hostile members.
What I suspect is going on is as follows: the NFSP did indeed register as members the people who had been members of the previous unincorporated association, on or shortly after the NFSP turned itself into a company. It probably has been registering those who've subsequently joined as well. The register of members is held by the NFSP and anyone wishing to access it must give ten days' notice. This allows companies to correct an "out of date" register before disclosure.
What I'm much less confident of is the possibility that the NFSP has ensured that all members even have a duly appointed Organisational Representative.
But, the register of members' Organisational Representatives is an NFSP-specific thing, rather than a statutory requirement, and so is not subject to a right of access, and it is doubtless also restricted by GDPR.
The fact that a member can appoint a proxy other than an Organisational Representative is a chink in the armour of this scheme; I imagine very few succeed in doing so in practice, and that there are no general meetings at which such member-appointed proxies could vote. After all, under the Companies Act, to call a general meeting requires a requisition supported by five percent of those entitled to vote at the meeting, so that would involve dozens or hundreds of members each persuading their board-approved Organisational Representatives to sign the paperwork. An a general meeting is the only way to hold the board to account.
Effectively, the NFSP constitution creates by the back door a non-voting membership class. Of course it may be that the board has always allowed members to appoint themselves as their Organisational Representatives, but it still amounts to the board having a veto on members' voting rights.
What do the accounts say?
The accounts of the old NFSP are available for a few of its final years, at the National Archives. The figures around 2012 note membership income of £893194 from 7168 members, implying a subscription fee of £125 per annum.
When it was deregistered as a trades union, the NFSP could have swiftly incorporated a company limited by guarantee, with members paying the same subscription fees to the new company. That's not what seems to have happened; instead a Grant Framework Agreement between the NFSP and the Post Office provided that the Post Office would top up NFSP's subscription income to £1,500,000 beyond what was raised in member subscriptions, and the subscription fee was effectively reduced to zero. Some weeks after the initial Agreement was concluded, NFSP incorporated, and registered its articles of association; article 12.8 provides "subscription policy may take account of funding arrangements between NFSP and POL.", which is quite the understatement.
Before the funding agreement with the Post Office, the NFSP was fiscally accountable to its members; if they didn't like what the NFSP board was doing, they could vote with their wallets as well as their feet. Of course, much of that income was really down to the fact that the NFSP had a monopoly on representing subpostmasters to the Post Office. By tying itself to the Post Office's purse strings, the NFSP untied itself from its own membership.
Accounting for members' funds
That £1,500,000 figure comes from Schedule 1(II) of the Grant Framework Agreement.
Is this figure borne out by the accounts? NFSP to its credit provides nice searchable PDFs of its more important Companies House filings, and for the 2021 accounts it does so with additional detail. NFSP turned over about £1.8 million in 2021, slightly above the guaranteed grant income. I tried comparing the version of the accounts filed at Companies House with the more detailed figures on NFSP's website, as the documents seemed to be from different time periods (the list of directors had changed).
When the light came it on almost blinded me.
It was another of those harmless accountant's errors. All limited companies in the UK must publish their balance sheet, which shows that the net assets of the company match the members' funds. In company law, "member" and "shareholder" are fairly interchangeable; if a company has shares, then the members are all the shareholders and only those shareholders. If a company doesn't have shares, then its members are just members; we would only call them shareholders very loosely. In a company with shares, the equity line on the balance sheet might be called something like "Shareholders' funds". For a company without shares, it might be "Members' funds" or similar.
Yet NFSP balance sheet says "Shareholders' funds".
Why do the accountants think of the members as shareholders? Are they entitled to those funds?
From the point of view of accounting, it doesn't make any difference whether the equity is described as belonging to shareholders or members, but it got me thinking. We tend to think of the difference between companies limited by shares and companies limited by guarantee as the difference between "for profit" and "not for profit". The shareholders / members must contribute funds if the company hasn't got enough money when it is being wound up, up to a defined limit. But before winding up, while the company is still in business, it can pay dividends to shareholders / members out of its accumulated profits, but not out of money they've invested. The reason is that the invested money has to be kept in case it's needed to repay creditors. This is a basic quid pro quo in return for being able to limit the members' liability to creditors. Companies limited by guarantee are not allowed to distribute profits to non-members. But what about distributing profits to members? They can do so; however, a very large proportion of companies limited by guarantee choose not to do that, and instead their constitutions provide something like the following:
"The income and property of the Association, whencesoever derived, shall be applied solely towards the promotion of the objects of the Association as set forth in these Articles of Association, and no part thereof shall be paid or transferred, directly or indirectly, by way of dividend, bonus, or otherwise howsoever by way of profit, to the members of the Association."
There are thousands of organisations that include some variation on this formula in their governing documents: charities, non-profit associations, every block of flats' Right To Manage company, even some Royal Charters have it. Having this provision or something equivalent is a statutory requirement, for limited companies that omit "Limited" from their official name. As we know, the official name of NFSP is "National Federation of Subpostmasters". Not "National Federation of Subpostmasters Limited".
The requirement in regulation 3(3)(b) linked above relates to the behaviour of the company while it is in business, not when it is being wound up. Winding up is covered by regulation 3(3)(c), which requires that "all the assets that would otherwise be available to its members generally to be transferred on its winding up either [...] to another body with objects similar to its own, or [...] to another body the objects of which are the promotion of charity and anything incidental or conducive thereto [...]".
So I looked in NFSP's articles again, and sure enough, there was a variation on the "No profit distribution to members" formula in article 5, and I say "variation" advisedly. But when I found the provisions as to winding up, in article 61, that warning light became an alarm bell. For on winding up, NFSP's articles provide that the assets can indeed be given to other organisations fitting the rubric of "similar objects" or "charitable or community purposes", but also "distribution among the Members on a reasonable basis determined by the Council"!
So that disqualifies NFSP from entitlement to the benefit of the section 59 exemption from using "Limited" in their name, which has stood as a provision of English company law since time so ancient the memory of the Internet runneth not to the contrary. These sections of the Companies Act go all the way back to an origin in the Companies Act 1867, section 23. If anyone has a digital copy of that, please do send it me.
A closer look at NFSP's article 5 shows there's a loophole: "No part of the income and property of NFSP may be paid or transferred directly or indirectly by way of dividend, bonus or otherwise by way of profit to any Member (subject to Article 61)." [italics added, natch] Some variation!
This means that NFSP's constitution is, at best, self-inconsistent. The previous article (4) says NFSP's "income and property shall be applied towards the promotion of its objects in pursuit of its authorised activities", but those objects are drawn very widely indeeed.
If people see a limited company without "Limited" or "Ltd" or "Plc" or their Welsh equivalents in its name, they're entitled to expect that it's not ultimately being run for its members' benefit or allowed to give the Members its assets if they decide to wind it up. Now there is a benefit of membership that the NFSP has probably failed to tell its members about!
There are no prizes for slipping one past Companies House; they don't check the paperwork submitted. But NFSP should really change its articles, or change its name. NFSP is a for-profit company, and it should bear the name of a for profit company, included the "Limited".
Large membership organisations that are sitting on piles of cash come under pressure to demutualise, and release the accumulated cash pile for the benefit of the current members, who therefore might have an incentive to vote for winding up. This might be a reason why the members are impeded from voting. In any case, the question who is a really a member of NFSP, and the question can NFSP members really appoint Organisational Representatives in defiance of the board, are questions with a potentially significant price tag attached. And that price has basically been paid out of Post Office funds.
As a matter of public policy, the Post Office should not be handing what's effectively public money to an organisation which holds itself out as not being for its own members' benefit when in principle it is. Nor should public funds be doled out to an organisation with such peculiar governance arrangements. I shall be writing to my MP on this question promptly.
What NFSP can do to fix this is either of the following:
- change its name, to add "Limited", and remove the impression that its assets cannot be distributed to members
- or remove the inconsistency in its articles, and actually unambiguously prohibit distribution of assets to members
It should also remove the absurd paraphernalia about Organisational Representatives. Either:
- reclassify the members as non-voting (good luck with that if there are a lot of them)
- remove the concept Organisational Representatives and let members vote directly
It should be more explicit, when asking people to join, about what the constitutional terms of the membership offer actually are.