Explanatory note

This Order is made under section 119(1) of the Building Societies Act 1986 which provides that “deferred shares” means shares of a class defined by order. Definition of such a class has two primary effects. Before a society is authorised under section 9 of the Act to raise funds and borrow money it may nevertheless accept payments by way of subscription for deferred shares up to limits specified in section 9. By virtue of section 27(8) of the Act deferred shares are not to count as protected investments for the purposes of the investor protection fund set up under Part IV of the Act.

In addition to these effects the definition has a relation to section 45 which sets out criteria of prudent management for building societies the first of which is maintenance of adequate reserves and other designated capital resources. A separate order made under that section will designate deferred shares as capital resources which may be aggregated with reserves for the purposes of this criterion up to certain limits and to that extent the deferred shares will also be “qualifying deferred shares” for the purposes of granting an authorisation under section 9.

This Order defines a class of shares to be deferred shares within the meaning of section 119(1) if they are issued fully paid upon terms to the effect of the key terms set out in paragraph 1 of the Schedule to the Order, or to that effect subject to the permitted exception set out in paragraph 2 of the Schedule.

The key terms are to the effect that the deferred shares shall have no greater rate of return than the lowest rate of return on any other class of shares issued by the same society and rank behind all other shares for payment of the return and payment of capital is only permitted, apart from the permitted exception mentioned below, on a dissolution of the society, ranking after all other classes of shares and creditors in respect of debts subordinated to other shareholders.

The return on the deferred shares may be cancelled if the board of directors of the society are not satisfied that the criterion of prudent management mentioned above is satisfied and that a return can be paid or credited without prejudicing that criterion and pass a resolution for cancellation or reduction of the return.

The permitted exception allows the board of directors of the society with the prior approval of the Building Societies Commission to pay a special rate of interest or a special dividend on the specified shares if they are satisfied that the capital of the society is adequate for its present and foreseeable needs without counting the capital representing the deferred shares.

The shares can only be issued as deferred shares if the subscribers for them give written notice to the directors of the society stating that they are aware of the terms and accept them (article 3(1)). Similarly the shares cannot be transferred unless the transferee gives a written notice that he knows of the terms and accepts them (paragraph 1(g) of the Schedule).