Clause 22 - Failure to comply with certain requirements

137.     This clause inserts a new section 453C into the Companies Act 1985. It provides the sanction for failing to comply with a requirement imposed by the Secretary of State or an investigator under new section 447 or a requirement imposed by an inspector or an investigator under new section 453A.

138.     New section 453C allows the Secretary of State, an inspector or an investigator (depending on who imposed the requirement in question) to take the matter to the civil court, certifying to the court that there has been non-compliance with a requirement. This procedure is therefore known as "certification".

139.     Under new section 453C(1), certification proceedings can be brought:

• for any non-compliance with a requirement to produce documents or information under new section 447; or

• for any non-compliance with a requirement to allow an inspector or investigator to enter, and remain on, premises under new section 453A.

140.     After hearing any witnesses and any statement offered in defence, the court decides whether there was non-compliance with a lawful requirement and, if there was, whether the person on whom the requirement was imposed had any reasonable excuse for failing to comply with it. If the court decides that the person had no reasonable excuse, it can deal with him or her as though the non-compliance were a contempt of court. This means that the court can punish non-compliance with imprisonment and/or a fine. But in appropriate cases, the certification procedure enables the court to give the alleged "offender" a precise indication of what he or she needs to do in order to comply and so escape punishment.

Clause 23 - Minor and consequential amendments; and Schedule 2 - Minor and consequential amendments relating to Part 1

141.     This clause gives effect to Schedule 2, makes transitional arrangements for the application of penalties shown in that Schedule and makes specific provision in relation to Scotland.

Schedule 2, Part 1 - Amendments relating to auditors

142.     Paragraphs 1-3 make consequential amendments to the Companies Act 1989 to reflect the fact that:

• ???clause 2 inserts a new Part 3 to Schedule 11; and

• ???clause 3 provides that the Secretary of State can delegate her functions to a body designated under section 46 rather than a body established under that section.

143.     Paragraph 4 makes a minor amendment to the Companies (Northern Ireland) Order 1990 to bring the competition scrutiny regime in Northern Ireland (under which the Secretary of State must seek competition advice from the Office of Fair Trading when recognising professional audit supervisory and qualifying bodies) in line with the law in the rest of the UK.

Schedule 2, Part 2 - Amendments relating to accounts and reports

144.     Paragraph 6 amends section 249E(2) of the Companies Act 1985 which contains provisions applying with respect to certain exemptions from audit to reflect the alterations made by clause 8.

145.     Paragraphs 7 to 9 apply the provisions concerning offences by bodies corporate and criminal proceedings against unincorporated bodies to the offences relating to disclosure of information in clauses 11 and 12.

146.     Paragraph 10 amends the Schedule to the Companies Act 1985 setting out the punishments for offences under that Act.

147.     Paragraphs 11 to 15 make amendments to the Northern Ireland legislation resulting from the provisions of clause 11 amending legislation in Northern Ireland.

Schedule 2, Part 3 - Amendments relating to investigations

148.     Part 3 makes certain amendments to the Companies Acts 1985 and 1989 in respect of company investigations.

149.     Paragraph 17 inserts new section 447A into the Companies Act 1985. It re-enacts existing section 447(8), (8A) and (8B) with minor drafting changes. New section 447A(1) indicates that statements made to the Secretary of State or an investigator in compliance with a requirement to provide information under section 447 can be used in evidence against the maker of the statement in legal proceedings. But the general effect of new section 447A(2) is to prevent such compulsorily required statements being used against their maker in most types of criminal proceedings (which new section 447A(2) refers to as criminal proceedings in which the maker of the statement is charged with a "relevant offence"). Such statements can, however, be used against their maker in proceedings for the three offences listed in new section 447A(3), which are not "relevant offences". These three offences exist to deter and punish the making of false statements. They comprise the offence under section 451 of the Act of providing false information to the Secretary of State or an investigator and the offences of making false statements otherwise than on oath under section 5 of the Perjury Act 1911 and its Scottish equivalent. It would not be possible to prosecute such offences if the false statement itself could not be used in evidence against its maker.

150.     As far as the broad range of criminal proceedings is concerned (proceedings for "relevant offences"), new section 447A(2) provides exceptions to the general rule that statements made under compulsion cannot be used in evidence against their maker. So, for example, a statement can be used in this way if the defence itself seeks to rely on evidence relating to the statement.

151.     Paragraph 18 replaces section 449 of the Companies Act 1985. Much of the information, including documents, obtained during the course of an investigation under section 447 of the Act is confidential. Section 449 recognises this by restricting its further disclosure. It is an offence under that section for any person to disclose information relating to a company which has been obtained under section 447 unless the company consents to the disclosure. However, there are circumstances where such information needs to be disclosed, for example to allow a criminal investigation to take place or to enable a regulatory or professional body to take action where some wrongdoing or irregularity has been exposed. Section 449(1) lists a number of purposes for which information can be disclosed and section 449(3) lists a number of bodies to whom it can be disclosed. These provisions are known as "gateways". Section 449(1B) and (1C) also enables gateways to be opened by order, and as a result there is a series of orders containing further gateways.

152.     The restrictions and gateways in section 449 also apply to documents seized under a search warrant in a section 447 investigation.

153.     In addition, by virtue of section 451A, the gateways in section 449 apply to information obtained by inspectors appointed under Part 14 of the Companies Act 1985, so that the Secretary of State can disclose, or require or authorise an inspector to disclose, such information to a person or for a purpose permitted under section 449. They also apply, in a similar way, to information obtained by the Secretary of State in an investigation of share ownership under section 444.

154.     In substituting the existing section 449, paragraph 18 has three main purposes:

• to consolidate the many amendments which have been made to section 449 since its enactment and to put the various gateways currently provided for by order on the face of the legislation;

• to provide for a small number of new gateways, in particular a gateway for the Regulator of Community Interest Companies and a gateway for a body appointed under clause 14; and

• to apply the restrictions on disclosure and gateways to information obtained by the Secretary of State under new section 448A and to information obtained by investigators exercising powers under new section 453A.

155.     New section 449(1) applies the disclosure restrictions and gateways to information obtained by the Secretary of State or an investigator exercising powers under section 447, information volunteered to the Secretary of State under new section 448A and information obtained by investigators during a visit to premises under new section 453A (for example, things the investigators have learned by seeing how the company operates). However, because of new section 449(9), the disclosure restrictions do not apply to information which already is, or has been, made available to the public.

156.     New section 449(2) prohibits the disclosure of any of this information other than to a person specified in new Schedule 15C to the Companies Act 1985 or in any circumstances described in new Schedule 15D to the Act. In other words, these new Schedules provide for the gateways. The new Schedules are inserted by paragraph 25.

157.     Disclosure is no longer permitted solely because the company to which the information relates has consented.

158.     New section 449(6) provides that to disclose information other than through a gateway is (as it currently is) an offence. The Bill makes no change to the penalty except that it raises the maximum term of imprisonment on summary conviction in England and Wales from 6 months to 12 months (see clause 23 and Schedule 2, Part 3, paragraph 26(2)).

159.     New section 449(3), (4) and (5) contains a qualified power to amend the two new Schedules by statutory instrument allowing the Secretary of State to open new gateways and make changes to existing gateways.

160.     Paragraph 19 substitutes existing section 451 of the Companies Act 1985, with modifications to take account of the changes made by new section 447. The offence of knowingly or recklessly providing materially false information in response to a requirement imposed by the Secretary of State or an investigator under section 447 is re-enacted under new section 451(1). But because new section 447 gives the Secretary of State and investigators a new, general power to require answers to questions, the offence under new section 451(1) applies to any materially false information (other than information contained in a pre-existing document produced to the Secretary of State or an investigator) rather than just to materially false explanations of documents or materially false statements about the whereabouts of documents. The Bill makes no change to the penalty for the offence in section 451 except that it raises the maximum term of imprisonment on summary conviction in England and Wales from 6 months to 12 months (see clause 23 and Schedule 2, Part 3, paragraph 26(3)).

161.     Paragraph 20 makes a change to section 451A so that the rules in section 451A(2) to (4) which currently apply to disclosure of information and documents obtained by inspectors, or by the Secretary of State under section 444, also apply to information obtained by inspectors during a visit to premises under new section 453A.

162.     Paragraph 21 substitutes existing section 452(1), (2) and (3) of the Companies Act 1985 to take account of the changes made by new section 447 and to deal expressly with confidentiality of communications in Scotland (the counterpart of legal professional privilege in England and Wales).

163.     The substance of existing section 452(1) is re-enacted by new section 452(1) and (5), with modifications to provide expressly for confidentiality of communications in Scotland.

164.     Existing section 452(2) provides (among other things) that documents which would be protected from disclosure in civil court proceedings on the grounds of legal professional privilege do not have to be produced to the Secretary of State or an investigator under section 447. It is re-enacted by new section 452(2) with modifications so that it also applies to non-documentary information which would be protected in this way and refers expressly to confidentiality of communications in Scotland. New section 452(5) provides, however, that a lawyer can nonetheless be compelled to disclose the name and address of his or her client.

165.     Existing section 452(3) provides a measure of protection for documents held by banks which relate to the affairs of their customers. It is re-enacted by new sections 452(3) and (4) with drafting changes. It is also modified so as to extend the protection to non-documentary information relating to the affairs of a bank's customer.

166.     Paragraph 25 inserts two new Schedules into the Companies Act 1985 for the purposes of new section 449 (which provides for restrictions on disclosure and gateways). The new Schedules operate in different ways. As far as Schedule 15C is concerned, disclosure is permitted to any of the persons or bodies listed or, by virtue of new section 449(8), to an officer or employee of such a person or body. But this Schedule does not itself allow onward disclosure by the person concerned. Information disclosed to such a person or body remains protected by the restrictions in section 449. Schedule 15D on the other hand permits a disclosure which is made in any of the circumstances it describes. So where a particular description does not refer to disclosure by or to a particular person, disclosure is permitted by or to anyone (so long as it is made in the circumstances described). The majority of the gateways in new Schedule 15D allow disclosure where it is made for the purpose of enabling or assisting a specified person to exercise a specified function.

167.     Paragraph 45 of new Schedule 15D contains a gateway to allow disclosures to be made for the purpose of enabling or assisting a body appointed under clause 14 (intended to be the Review Panel of the Financial Reporting Review Panel Ltd) to exercise the functions in clause 14(2).

168.     The Bill provides for two gateways, in respect of investigation material, for the Regulator of Community Interest Companies (see the note on clause 25 below). Paragraph 40 of new Schedule 15D contains a gateway to allow disclosures to be made for the purpose of enabling or assisting the Regulator to exercise his functions under the Bill. In addition, paragraph 29 of Schedule 2 to the Bill amends the Companies Act 1989 so that information obtained while assisting an overseas regulatory authority under section 82 of that Act can be disclosed for the same purpose.

169.     Paragraph 27 amends section 124A of the Insolvency Act 1986 so that the Secretary of State cannot base a decision to apply to the court for a company to be wound up in the public interest on the information obtained under new section 448A. The Secretary of State will, however, be able to make such a decision on the basis of information obtained under new section 453A (and will also continue to be able to make such a decision on the basis of information obtained under section 447).

170.     Paragraph 28 amends section 8 of the Company Directors Disqualification Act 1986 so that the Secretary of State can base a decision to apply to the court for the disqualification of a director on information obtained under new section 453A.

PART 2: COMMUNITY INTEREST COMPANIES

Summary and background

171.     Part 2 of the Bill establishes a new type of company, the community interest company, for use by social enterprises wishing to operate as companies. This Part of the Bill also establishes the Regulator of Community Interest Companies ("the Regulator"), whose role will be to maintain public confidence in the CIC model.

172.     The CIC is intended to be used by non-profit-distributing enterprises providing benefit to a community. Such businesses are presently active in areas such as childcare, social housing, leisure and community transport. Many of them already incorporate as companies, either as a company limited by guarantee ("CLG") or a company limited by shares ("CLS"). The special characteristics of the CIC are intended to make it a particularly suitable vehicle for some types of social enterprise - essentially, those that wish to work for community benefit within the relative freedom of the non-charitable company form, but with a clear assurance of non-profit-distribution status.

173.     Companies that are formed as, or become, CICs will continue to be subject to the general framework of company law. In particular, CICs and directors of CICs will have to comply with their obligations and duties under the Companies Acts and the common law, as modified by this Bill. The CIC will be a new variant of existing forms of company. It can take the form of a CLG or CLS, and existing companies limited by guarantee with a share capital will also be able to become a CIC. CICs will be registered as companies with the registrar of companies in the usual way, and will be subject to the usual regulatory constraints and powers associated with company status, including the oversight of the Department of Trade and Industry's Companies Investigation Branch.

174.     The distinguishing features of the CIC will be:

• in order to become a CIC, a company will have to satisfy a community interest test, confirming that it will pursue purposes beneficial to the community and will not serve an unduly restricted group of beneficiaries. The test is whether a reasonable person could consider the CIC's activities to benefit the community - it is therefore wider and simpler than the charitable test of public benefit;

• companies of a particular description may be excluded from CIC status by regulations; it is anticipated that political parties, companies controlled by political parties, and political campaigning organisations will be excluded in this way;

• CICs will not be able to have charitable status, even if their objects are entirely charitable. However, charities (and all other organisations except political parties) will be able to establish CICs as subsidiaries;

• each CIC will be required to produce an annual community interest company report containing key information relevant to CIC status. The report will be placed on the public register of companies;

• CICs will have an asset lock - that is, they will ordinarily be prohibited from distributing any profits they make to their members;

• however, it is intended that regulations will allow CICs that are limited by shares to issue dividend-paying "investor shares". The dividend payable on such shares will be subject to a cap;

• when a CIC is wound up, its residual assets will not be distributed to its members. Instead, they will pass to another suitable organisation that has restrictions on the distribution of its profits, for example another CIC or a charity;

• the Regulator will approve applications for CIC status, receive copies of the community interest company reports and police the requirements of CIC status, including compliance with the asset lock. He will have close links with the registrar of companies. The key role of the Regulator will be to maintain public confidence in the CIC model. He will aim to impose the minimum necessary regulatory burden on CICs, but will have powers to investigate abuses of CIC status and to take action where necessary, for instance to remove directors, freeze assets or apply to the courts for a CIC to be wound up. He will also set the cap on CIC dividends.

175.     Clauses 24 to 27 introduce the concept of the CIC and establish the Regulator, Appeal Officer and Official Property Holder. Clauses 28 to 33 set out special requirements which CICs must satisfy. The processes for becoming a CIC are set out in clauses 34 to 38. Clauses 39 to 49 set out the supervisory powers of the Regulator. The conditions under which it is possible to cease being a CIC are set out in clauses 50 to 54. Supplementary clauses 55 to 61 provide for various aspects of CIC operation and regulation, including fees and information gateways for the Regulator.

Introductory

Clause 24 - Community interest companies

176.     This clause establishes the concept of the CIC. Subsection (1) provides that the CIC is to be a new type of company ('company' here meaning a company registered under the Companies Act 1985 or a former Companies Act). New organisations applying to be incorporated as a CIC will incorporate as a CLS or CLG (subsection (2)). Existing registered companies limited by shares or guarantee can also apply to become CICs, and subsection (2)(b) additionally allows a company limited by guarantee having a share capital to convert to a CIC. It has not been possible to register as a company limited by guarantee with share capital since 1980, so any new company being formed as a CIC will be either a CLS or a CLG without a share capital.

177.     Even if a CIC has charitable purposes, it will be treated as not being established for such purposes, so it will not be a charity (subsection (3)(a)) and it will not be able to be recognised as a Scottish charity (subsection (3)(b)). Therefore, CICs will not be subject to the benefits or obligations of charitable status, nor will they be subject to regulation by the Charity Commission or the charitable jurisdiction of the High Court. CICs, and outright bequests to them, will not be eligible for any tax reliefs or exemptions which are only available to charities or for charitable giving. So a donation to a CIC for its own purposes will not attract relief, since a CIC is not to be treated as established for charitable purposes. However, a donation to a charitable trust of which a CIC is trustee will be eligible for relief. The charitable status of the trust is unaffected by the status of the trustee.

Clause 25 - Regulator; and Schedule 3 - Regulator of Community Interest Companies

178.     This clause creates the office of the Regulator and makes some general provisions about the Regulator's functions and the way in which they are to be carried out.

179.     The Regulator must be appointed by the Secretary of State (subsection (2)). Subsection (3) identifies the functions of the Regulator. One such function is the provision of guidance and assistance. Subsection (5) allows the Regulator to issue guidance or to provide assistance about any matter relating to CICs that he wishes. The Secretary of State can also compel the Regulator to provide such guidance or assistance (subsection (6)). Other functions are conferred or imposed on the Regulator in the Bill, or provision is made for further functions to be imposed by regulations, in clauses 26(6), 27(2), 28(4) to (8), 34(4) and (6), 36(3) and (5), 39 to 49, 53(3) and (5), 57(5), 59(3) and (5), and 60(3).

180.     Subsection (4) imposes a duty on the Regulator to carry out all his statutory functions with regard to three specific factors, or 'statutory objectives', relating to good regulatory practice. This provision complements the common law requirements that apply to all those exercising administrative and regulatory functions, such as the requirement to act reasonably. It is intended to guide the Regulator towards a particular style of regulation which takes into account the nature of those affected by his actions. This intention is reflected in subsection (7), which sets out the approach that the Regulator is to take when carrying out his guidance and assistance function.

181.     Subsection (8) gives effect to Schedule 3 which contains detailed provisions concerning the Regulator. Schedule 3 sets out the Regulator's terms of appointment (paragraph 1), and makes provisions about the Regulator's remuneration, staffing, and financial and reporting framework (paragraphs 2 to 7). The Regulator's staff will be civil servants. Paragraphs 8 and 9 make the Regulator subject to investigation by the Parliamentary Commissioner, and disqualify the Regulator from membership of the House of Commons.

Clause 26 - Appeal Officer; and Schedule 4 - Appeal Officer for Community Interest Companies

182.     This clause creates the office of Appeal Officer and sets out his functions. The Appeal Officer is to be appointed by the Secretary of State (subsection (2)), and the terms of appointment are set out in Schedule 4. These provisions are intended to ensure that the Appeal Officer remains independent of the Regulator.

183.     The Appeal Officer's role is to hear appeals against decisions of the Regulator (subsection (3)). Only those decisions against which a right of appeal is provided in the Bill, including regulations made under the Bill, or in other legislation, may be the subject of an appeal to the Appeal Officer. Such a right of appeal is provided for in clauses 34(10), 36(10), 43(13), 45(14), 46(13) and (14), 47(5) and (6) and 53(8). It is intended that additional rights of appeal to the Appeal Officer will be included in regulations relating to the distribution of assets on winding-up (clause 29) and approvals of changes of objects (clause 30(6)).

184.     The Appeal Officer will be able to consider appeals on matters of law and of fact (subsection (4)). The Appeal Officer will be able to report his findings on the facts and his rulings on the law to the Regulator, who will then be obliged to review the decision in the light of those findings and rulings (subsections (5) and (6)). The decisions of the Regulator will, of course, also be subject to judicial review.

185.     Subsection (7) gives effect to Schedule 4. Schedule 4 sets out the Appeal Officer's terms of appointment, remuneration and financing (paragraphs 1 to 3), and provides for the Secretary of State to make regulations about the procedures to be followed by the Appeal Officer. The Appeal Officer will be able to establish his own procedures within the parameters laid down by the regulations. Paragraphs 5 and 6 make the Appeal Officer subject to investigation by the Parliamentary Commissioner, and disqualify the Appeal Officer from membership of the House of Commons.