Procedure for Withdrawing Share Capital from a Cooperative

Introduction

Cooperatives in the Philippines operate under a unique legal framework that emphasizes mutual assistance, democratic control, and equitable distribution of benefits among members. The withdrawal of share capital is a critical aspect of membership rights, allowing members to exit the cooperative while recovering their investments. This process is governed primarily by Republic Act No. 9520, also known as the Philippine Cooperative Code of 2008, which amended the earlier Cooperative Code (Republic Act No. 6938). The Code ensures that withdrawals are handled fairly, protecting both the withdrawing member and the cooperative's financial stability. This article explores the legal basis, eligibility requirements, step-by-step procedure, limitations, documentation, financial implications, and potential disputes related to withdrawing share capital.

Legal Basis

The Philippine Cooperative Code of 2008 provides the foundational rules for share capital withdrawal. Key provisions include:

• Article 30: This outlines the rights of members, including the right to withdraw membership and recover share capital contributions, subject to the cooperative's bylaws and the Code's stipulations.
• Article 31: Specifies grounds for termination of membership, which can include voluntary withdrawal. Upon termination, the member is entitled to a refund of their share capital and any patronage refunds or other interests due.
• Article 53: Deals with the capital structure of cooperatives, emphasizing that share capital is withdrawable under conditions that do not impair the cooperative's operations or solvency.
• Article 72: Addresses the settlement of a member's account upon withdrawal, requiring the cooperative to pay the member's share within a reasonable period, typically not exceeding two years from the date of withdrawal.
• Implementing Rules and Regulations (IRR): Issued by the Cooperative Development Authority (CDA), these provide detailed guidelines on the process, including forms and timelines.
• Bylaws and Articles of Cooperation: Each cooperative's internal rules must align with the Code but can include additional specifics, such as notice periods or approval processes.

The Code distinguishes cooperatives from corporations; share capital in cooperatives is not akin to stocks in a corporation but represents a member's contribution to the cooperative's capital pool, often with limited interest or dividends.

Eligibility for Withdrawal

Not every member can withdraw share capital arbitrarily. Eligibility criteria include:

• Active Membership: The member must be in good standing, meaning they have no outstanding obligations, such as unpaid loans or dues, unless these can be offset against the share capital.
• Voluntary Withdrawal: Withdrawal is typically voluntary, initiated by the member. Involuntary termination (e.g., for misconduct) may also lead to share capital refund but follows different procedures.
• Minimum Membership Period: Some cooperatives' bylaws require a minimum period of membership (e.g., one year) before withdrawal is allowed, though the Code does not mandate this universally.
• No Prejudice to Cooperative: The withdrawal must not jeopardize the cooperative's financial health. If the cooperative is insolvent or undergoing liquidation, withdrawals may be suspended.
• Special Cases: For deceased members, heirs can claim the share capital through succession processes. In cases of expulsion, the member still has rights to a refund after deductions for liabilities.

Members of different cooperative types (e.g., credit, agricultural, or multi-purpose) may face slight variations, but the core principles remain consistent.

Step-by-Step Procedure

The withdrawal process is methodical to ensure transparency and accountability. Here is a comprehensive outline:

1. Submission of Notice: The member must provide a written notice of intent to withdraw to the cooperative's Board of Directors (BOD). The Code requires at least a 60-day notice period (Article 30), though bylaws may extend this. The notice should include the member's details, share capital amount, and reasons for withdrawal (optional but recommended for record-keeping).

2. Review by the Board: Upon receipt, the BOD reviews the notice within the notice period. They assess the member's account for any outstanding balances, compute the refundable amount (share capital plus accrued interests, minus deductions), and verify compliance with bylaws.

3. Membership Termination: If approved, membership is terminated at the end of the notice period. The BOD issues a resolution confirming termination and the settlement amount.

4. Computation of Refund: The refund includes:

   • Paid-up share capital.
   • Patronage refunds (proportional share of surplus from operations).
   • Interest on share capital (limited to a rate set by the bylaws, often not exceeding the prevailing bank rates).
   • Other equities, such as reserve funds allocations. Deductions may apply for unpaid loans, penalties, or damages caused by the member.

5. Payment: The cooperative must pay the refund within a reasonable time, not exceeding two years (Article 72). Payment can be in cash, check, or installments if agreed upon. For large amounts, the cooperative may opt for deferred payment to maintain liquidity.

6. Issuance of Certificate: The cooperative issues a certificate of termination and settlement, detailing the transaction. This serves as proof for tax or legal purposes.

7. Notification to CDA: The cooperative reports the withdrawal to the CDA as part of annual reporting requirements, ensuring regulatory oversight.

In practice, smaller cooperatives may handle this informally, but adherence to the Code is mandatory to avoid penalties.

Documentation Required

Proper documentation is essential for a smooth process:

• Withdrawal Notice: A formal letter or form provided by the cooperative.
• Membership Records: Proof of share capital contributions, such as receipts or passbooks.
• Account Statement: A detailed ledger showing balances, interests, and deductions.
• Board Resolution: Documenting approval and computation.
• Release and Quitclaim: Signed by the member upon receipt of payment, waiving further claims.
• Identification: Valid IDs to verify the member's identity.
• For Heirs: Death certificate, affidavit of heirship, and court orders if applicable.

Cooperatives are required to maintain records for at least five years under CDA rules.

Limitations and Restrictions

Several safeguards prevent abuse or financial harm:

• Solvency Requirement: Withdrawals cannot proceed if they would render the cooperative insolvent (Article 53). The BOD can defer payments during financial distress.
• Ceiling on Withdrawals: Bylaws may limit the total withdrawals in a fiscal year to a percentage of the cooperative's capital (e.g., 10%) to preserve stability.
• Non-Transferability: Share capital cannot be transferred to non-members; withdrawal is the primary exit mechanism.
• Tax Implications: Refunds may be subject to withholding taxes under the Tax Code (e.g., final tax on interest income). Cooperatives enjoy tax exemptions on certain transactions, but members report refunds as income if applicable.
• During Liquidation: In dissolution (Articles 64-70), share capital is refunded after settling debts, pro-rata among members.
• Penalties for Premature Withdrawal: Some bylaws impose fees or forfeit interests for early withdrawals.

Violations can lead to CDA sanctions, including fines or deregistration.

Financial Implications

Withdrawing share capital affects both the member and the cooperative:

• For the Member: Provides liquidity but ends benefits like loans, dividends, and voting rights. Members lose access to cooperative services and may face reinvestment challenges.
• For the Cooperative: Reduces capital base, potentially affecting lending capacity or operations. Cooperatives often maintain reserve funds (at least 10% of net surplus, per Article 86) to cushion such outflows.
• Accounting Treatment: Withdrawals are recorded as reductions in members' equity, with corresponding cash outflows. Audited financial statements must reflect these accurately.

Dispute Resolution

Disputes over withdrawal, such as contested refund amounts or denials, are resolved through:

• Internal Mechanisms: Mediation by the cooperative's Mediation and Conciliation Committee (Article 137).
• CDA Adjudication: Appeals to the CDA's regional offices or the Authority's Board.
• Courts: As a last resort, civil courts handle cases, but the Code encourages alternative dispute resolution.
• Common Issues: Delays in payment, miscomputations, or allegations of bad faith.

The CDA provides guidelines and templates to minimize conflicts.

Conclusion

The procedure for withdrawing share capital from a Philippine cooperative balances individual rights with collective sustainability. By adhering to the Philippine Cooperative Code of 2008 and cooperative bylaws, members can exit gracefully while ensuring the entity's longevity. This process underscores the cooperative principle of voluntary and open membership, fostering trust and economic empowerment in the sector.