Today I conclude my examination of the amendments to the New Building Society Limited Act passed by the National Assembly two Thursdays ago despite the arguments from the opposition members and the pleas from the members of the Society for consultations to take place. With the government’s overall majority in the National Assembly, passage became a formality.
In terms of building societies, Guyana is a unique animal. It does not have a generic Building Society Act like the UK, Jamaica and Trinidad. This country’s sole building society enjoys a huge monopoly and because the NBS is a creature of parliament, the government exerts over it an unchallenged and powerful influence. The government can amend the NBS Act at will, without any consultation with the members or the directorate of the Society. On the occasion of the NBS Amendment Bill 2010, the government indecently ignored the members and is proceeding to implement unilateral changes to the laws under which the members of the Society are forced to operate. It is hard to see how the changes will enhance governance and transparency in the Society, but we will wait and see.
I will continue my clause-by-clause examination of the amendments before looking at some of the general principles governing building societies’ legislation.
Several members have pointed out on more than occasion that the Society has been in breach of section 7 of the act which in its proviso restricts the amount of borrowings outstanding, whether by way of deposit or loan, to two-thirds of the amounts lent on mortgage. What the amendment does is allow for the two-thirds to be varied by the Bank of Guyana, conceivably to more than 100%. That would be reckless and against all the principles of financial structuring of a building society. Perhaps the architects of the amendment were more concerned about correcting a misunderstanding that has persisted over decades, and in the process, it seems that the object of the original provision was lost.
A building society has to ensure that of its total assets, there must be sufficient liquidity to enable it to meet its liabilities as they fall due. If a disproportionate amount is kept in mortgages and other long-term assets, it would be in danger of being unable to liquidate a sufficient amount to meet demands as they fell due. A building society is not like a limited liability company where there is a share capital which can only be withdrawn in narrow circumstances.
New Buildings Society
A fine balance therefore has to be maintained between short-term and long-term assets depending on the range and scale of the society’s business and the character and composition of its assets and liabilities. The UK legislation seeks to draw the line by providing that the assets held by the society to enable it to meet its liabilities as they arise should not exceed 33⅓% of its total assets and must be composed of assets of an authorised character, and no others (emphasis mine).
Unfortunately, in its haste to pass legislation, these fundamental considerations were completely overlooked. In the longer term, this could have serious repercussions for the NBS.
When I first saw the proposed amendment (a) to amend section 11 of the act, I thought it was either an editing or drafting mistake. Section 11 of the original act vested in the Board the management and affairs of the business of the Society. Deleting the word “management” and replacing it with the word “policies,” we have the position that the policies of the Society are vested in the board. That is as absurd as it gets, but clearly Minister Irfaan Ali did recognise that policies are not vested but are formulated by the Board and that yes, the management is vested in them for which proper discharge they are responsible. He would have saved us the comical justification if only he had familiarized himself with the corresponding provision in the Companies Act, 1991.
Section 59 of that act holds the director responsible for directing the management of the business and affairs of the company. Section 96 of the act imposes on the company’s directors, obligations to act honestly and in good faith with a view to the best interest of the company and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
The NBS is a financial institution and one would expect its directors to have higher standards of obligations than those of the directors of the run-of-the-mill company. Sadly, the danger is that with existing mechanisms in place, the Society will have to wait a very long time before it is served by independent-minded directors.
This clause virtually abolishes the right of members to requisition a special meeting in the Society. Ever since the formation of the NBS in 1940, 10% of the membership or 50 members, whichever is less, could have requisitioned a special meeting, stating the object for which the meeting is being requisitioned. Under the amendment, such a meeting can only be called by 10% of the entire membership, currently estimated at 100,000 members, which means it would require 10,000 members to sign a requisition for such a meeting.
The government side made much of the fact that the size of the membership has grown since 1940 and the change is therefore justified by circumstances. They also argued that 10% is the percentage required for the requisitioning of a special meeting under the Companies Act. Such arguments are not only wrong but also ignore the importance of minority protection. Let us deal with the first argument. In the UK where some building societies have as many as a million members, 100 members can requisition a special meeting.
The Minister of Finance in arguing the case referred to section 135 of the Companies Act 1991 and was correct as far as the 10% was concerned. He did not, however, point out that in the case of the Companies Act it is 10% of the share capital. This is so fundamental that the Minister should have been more forthcoming with the facts. It is wrong and disingenuous to compare the Companies Act – which is explicitly excluded from application to the NBS – with the NBS Act. A more reasonable comparison would have been with the Co-operative Society Act Cap.88:01 since the NBS is a mutual, co-operative society formed under statute. Under the Co-operative Society Act twenty-five persons may requisition a special meeting.
Clause 14: Repeal of section 19 of the Principal Act
One of the most infamous amendments was the deletion of section 19 of the principal act which allowed 100 persons to apply to the minister to appoint an accountant or actuary to inspect the books or an inspector to examine into and report on the affairs of the Society. That right is now being completely removed. No one argued that because the NBS would now come under the Bank of Guyana the provision was superfluous. But since they were drawing comparisons with the Companies Act, they may have wished to consider that Section 496 of the Companies Act allows for an application by one person for the appointment of an Inspector. Or that section 506 allows for a single shareholder or debenture holder, or the Registrar to apply to the court for an investigation order.
Sections 496 and 506 apply to all companies including those financial institutions supervised by the Bank of Guyana under the Financial Institutions Act, so there really was no justification for the removal of section 19.
Clause 20: exclusion from taxes, reserve requirements
By virtue of clause 20, the NBS will not be subject to a reserve requirement. My understanding is that the basis for this exemption is that such a requirement would have carried up the cost of funds, an argument equally applicable to all financial institutions. Again I think this is short sighted and ill informed, since the reserve requirement helps to meet any suspected run on the financial institution and is the next best security for depositors. While exemptions from taxes are justified in the case of mutual entities, to give the NBS such carte blanche exemption from the reserve requirement applicable to deposit-taking financial institutions is to court bad management.
There was a need for the NBS Act to be modernised and amended and to enhance governance in the NBS. The existing rules which allow the directors to entrench themselves by the abuse of proxies, no age/term limits for directors, pensions paid to directors, and general corporate governance weaknesses would be considered inappropriate and unacceptable in the 21st century and dangerous in a financial institution. But these ills are not addressed. More importantly, it was necessary to silence the minority.