House of Commons - Explanatory Note
Companies (Audit, Investigations And Community Enterprise) Bill [HL] - continued          House of Commons

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Clause 27 - Official Property Holder; and Schedule 5 - Official Property Holder for Community Interest Companies

186.     This clause creates the office of Official Property Holder, which is to be filled by one of the Regulator's staff. Provisions relating to this office are set out in Schedule 5. The Official Property Holder's functions are as set out in the Bill or any other legislation (subsection (3)). The Official Property Holder's role is to hold property where the Regulator has made an order under clause 46(1) vesting that property in the Official Property Holder, so as to safeguard it for the community interest.

187.     Subsection (4) gives effect to Schedule 5. Schedule 5 sets out the Official Property Holder's status, his relationship with the Regulator, his financing arrangements and his reporting requirements (paragraphs 1 to 3 and 5 to 6). Paragraph 4 provides that the Official Property Holder shall hold property as a trustee. The Official Property Holder will hold the property vested in him on trust for its rightful owner. The Official Property Holder may release or deal with property that he holds so as to give effect to the rights of third parties in that property, or to comply with the request of various office-holders appointed under insolvency legislation in respect of the community interest company. Otherwise the Official Property Holder may only release or deal with the property in accordance with the directions of the Regulator. The general duties and requirements of trust law will apply to the Official Property Holder in his capacity as a trustee of the property vested in him, subject to the provisions of the Bill.


Clause 28 - Cap on distributions and interest

188.     This clause provides for limits to be placed on the ability of CICs to make distributions to members and interest payments on debentures and debts. It also provides for the role of the Regulator in setting these limits. It therefore forms an important part of the 'asset lock', which is one of the distinguishing features of the CIC (see 'Summary and Background' to Part 2, above).

189.     Subsection (1) prohibits CICs from distributing assets to their members, unless regulations allow such a distribution. The prohibition covers every description of distribution of the company's assets to its members, made in their capacity as members, such as dividends, issues of bonus shares, and payments on the purchase or redemption of shares or on the reduction of share capital. Subsection (2) allows such regulations to place limits on any distributions that regulations do permit. Subsection (4) allows the regulations to provide for the limits to be set by the Regulator.

190.     It is intended that regulations will allow a CIC limited by shares that issues dividend-bearing shares to make limited distributions by way of dividends to the members of the company holding those shares. It is also intended that regulations will allow unlimited distributions to be made to members which are themselves CICs or charities, since such members will themselves be subject to an asset lock.

191.     Subsection (3) provides for limits on the payment of interest on debts or debentures. It is not intended that regulations under this subsection will be used to set limits on conventional interest payments - that is, payments at a level fixed for the term of the debt. Regulations will be targeted at payments that are related in some way to the performance of the CIC - for instance, payments that rise or fall according to the turnover or profit of the CIC. The intention of this provision is to prevent such instruments - sometimes known as 'debt with equity characteristics' - being used to avoid the restrictions that are to be imposed on dividend-bearing shares under subsection (2).

192.     The provisions in subsections (4) to (8) set out the role that the Regulator will have in setting the limits to be imposed under subsections (2) and (3). Subsection (5) sets out various ways in which the Regulator may set those limits. Subsection (5)(a), in providing for a limit to be set by reference to a rate determined by someone else, will allow the Regulator to set a limit which is linked to, and may rise and fall with, an index such as the Bank of England base lending rate. Subsection (5)(b) gives the Regulator scope to set a number of different limits applying to different categories of CICs. For instance, it may be considered desirable to set a less restrictive limit on dividends payable to shareholders investing in CICs carrying on certain types of activity, or those operating in certain geographical areas so as to encourage investment in such activities or such areas.

193.     In considering how to set the limits, the Regulator is bound by subsection (6), which refers back to the statutory objectives set out in clause 25, and requires the Regulator to apply these in a particular way when exercising this function. The requirement in subsection (6)(b) to "have regard to [a limit's] likely impact on community interest companies" is intended to point the Regulator toward considering both the beneficial effect which a less restrictive limit may have on the availability of investment in CICs, and the need to maintain public confidence in CICs as primarily non-profit-distributing organisations.

194.     There is provision in subsection (7) for regulations to give a power to the Secretary of State to require the Regulator to review limits. It is intended that the Secretary of State might use this power to ask the Regulator to consider using the flexibility in setting limits provided by subsection (5) in particular ways. The power is limited to the ability to request a review, so as not to prejudice the independence of the Regulator.

Clause 29 - Distribution of assets on winding up

195.     This clause provides for regulations to impose restrictions on the distribution of a CIC's assets on winding up, so that the Regulator can ensure that such assets are preserved for community benefit. The restrictions will only apply to any assets which remain after the company's liabilities to creditors have been satisfied. It is intended that regulations will provide that any such assets may only be transferred to other CICs or charities, as these organisations have an asset lock. Regulations may in due course allow the transfer of such assets to an industrial and provident society ("IPS") with an asset lock, once regulations establishing such an asset lock for IPSs have been made under the Co-operatives and Community Benefit Societies Act 2003.

Clause 30 - Memorandum and articles

196.     This clause sets out requirements relating to the memorandum and articles of CICs. Each CIC will be required to register a memorandum and articles of association, which together form its constitution. Ordinary companies limited by shares have the option of not registering tailor-made articles, in which case they are automatically given 'Table A' articles, but this option will not be available to CICs (subsection (2)).

197.     Subsection (3) provides for regulations to set out provisions which must be included in the constitution of each CIC, and provisions which cannot be included in the constitution. Subject to such regulations and the requirements of company law, a CIC is free to include any other provisions it wishes in its memorandum and articles. However, if a CIC's constitution contains any provision which is inconsistent with regulations made under this clause, that provision will have no effect (subsection (5)). Subsection (4) expands on this by indicating particular provisions which regulations may require CICs to include in their constitution:

  • provisions about the transfer and distribution of assets (subsection (4)(a) and (b)). These will establish the 'asset lock' on distributions to members in each CIC's constitution (see also the note on clause 28), and will also set out the terms on which CICs may transfer assets to third parties. CICs will not be allowed to transfer assets to other bodies or individuals for less than the value of the asset, except in pursuit of their community interest aims. However, where a CIC wishes to transfer assets to another organisation with community interest aims and an asset lock (i.e. a CIC or charity), regulations will allow it to do so, subject to certain safeguards;

  • provisions intended to limit the ability of investors to control a CIC with a view to maximising the return on their investment, at the expense of the CIC's community interest purposes. These provisions will enable directors to refuse to register the transfer of shares, and will restrict the voting rights of investors and their ability to appoint and remove directors (subsection (4)(c) to (f)).

198.     Regulations may also restrict a CIC's ability to amend its objects as stated in its memorandum (subsection (6)). It is intended that a CIC will need to seek the Regulator's approval if it wishes to change its objects. This is so that the Regulator can ensure that:

  • the altered objects are consistent with the requirement that CICs carry on activities in the community interest, and

  • the CIC has made reasonable efforts to notify those affected by its activities (its "stakeholders") of the proposed change.

Clause 31 - Names; and Schedule 6 - Community interest companies: names

199.     This clause imposes requirements and restrictions on the names CICs are permitted to use. It also gives effect to Schedule 6. Schedule 6 amends the Companies Act 1985 (c.6) so as to apply that Act's restrictions on the use of company names and trading names to the use of the name "community interest company" and specified variants. It:

?     amends section 26 of the Companies Act 1985 so that

o     companies may not be registered with names that include, otherwise than at the end of the name, the expressions "community interest company" or "community interest public limited company", or their abbreviations or Welsh equivalents (paragraph 2(2));

o     in determining whether one name is the same as another (in which case it cannot be registered), the terms "community interest company", "community interest public limited company" and their abbreviations and Welsh equivalents are to be disregarded when they appear at the end of a name (paragraph 2(3));

?     amends section 27 of the Companies Act 1985 so as to add alternative statutory designations for CICs (paragraph 3);

?     amends section 30 of the Companies Act 1985 to ensure that CICs cannot benefit from the exemptions available under this section (paragraph 4);

?     amends section 33 of the Companies Act 1985 so that a private limited CIC must not trade under a name that indicates in English or Welsh that it is a public limited company (paragraph 5);

?     inserts into the Companies Act 1985 a new section 34A which

o     makes it an offence for companies to trade under a name which includes at the end of the name, or anywhere else in the name, the expressions "community interest company" or "community interest public limited company" or their abbreviations or their Welsh equivalents, unless they are a CIC; and

o     makes it an offence for anyone other than a company to trade under a name which includes at the end of the name the expressions "community interest company" or "community interest public limited company", or their abbreviations or their Welsh equivalents (paragraph 6).

New section 34A(5) introduces penalties for the improper use in a trading name of the words "community interest company" or "community interest public limited company" or their abbreviations or Welsh equivalents. These restrictions on trading names do not apply to anyone who was trading with such a name at any time during the period from 1 September 2003 up to and including 4 December 2003, the date of publication of the Bill. Nor do they apply to trade marks which are registered as at 4 December 2003, regardless of whether they have ever been used.

200.     The Schedule also:

?     amends section 43(2)(b) of the Companies Act 1985. A private limited CIC may re-register as a public limited company and vice versa. In each case its name must still comply with clause 31 (paragraph 7);

?     amends section 351(1)(d) of the Companies Act 1985. The name of a private limited CIC will not contain the word "limited" in its name. The effect of this amendment is that such a CIC should mention in legible characters in all its business letters and order forms the fact that it is a limited company (paragraph 8); and

?     amends paragraph 8(2) of the Schedule to the Limited Liability Partnerships Act 2000. A limited liability partnership may not be registered with the same name as a registered company. For the purposes of determining whether one name is the same as another, there is to be disregarded "community interest company" or "community interest public limited company" or their Welsh equivalents or abbreviations at the end of the name (paragraph 10).

Clause 32 - Community interest company reports

201.     This clause introduces a requirement for the directors of CICs to provide an annual community interest company report to the registrar of companies, who will forward a copy of it to the Regulator (subsections (1) and (4)). A copy of the report will be placed on the companies register. The time limits for compliance with the requirement, and the penalties for non-compliance, will be the same as those applying to the filing of annual accounts under section 242(1) of the Companies Act 1985 (subsection (2)). The relevant time limits and penalties are set out in sections 244 and 242A of that Act.

202.     Subsection (3) provides for regulations to set out what information is to be included in the report. Subsection (3)(a) requires the regulations to provide that the report must include information about the remuneration of directors of the CIC. Subsection (3)(b) allows regulations to provide for the inclusion of other information. It is intended that the content of the report will include statements of:

  • what the CIC has done during the year to benefit the community;

  • the steps, if any, that the company has taken to involve in its activities those affected by the activities (its "stakeholders"); and

  • the dividends paid on any dividend-bearing shares issued by the CIC, and equivalent information in respect of other financial instruments the return on which is capped under the provisions of clause 28.

203.     Regulations may apply to the report the same procedural requirements as apply to directors' reports (subsection (3)(c)). These requirements are set out in Part 7 of the Companies Act 1985, and include provisions as to the approval of the report, the laying of the report before any general meeting of the company, the revision of the report and the distribution of the report to members.

Clause 33 - Community interest test and excluded companies

204.     This clause makes provisions about the community interest test, which is used in determining the eligibility of a company to be formed as a CIC (clause 34(5)(b)) or to become a CIC if already incorporated (clause 36(4)(b)). The Regulator can also exercise certain supervisory powers if a CIC ceases to satisfy the community interest test (clause 39(3)(c)). All CICs will be expected to carry on their activities for the benefit of the community for as long as they remain CICs.

205.      The clause describes the community interest test (subsection (2)), and clarifies the meaning of the term "community" for the purposes of this test (subsection (5)), so that a community can be a section of a larger community (either geographic or a community of interest) and can be overseas. The test is that a reasonable person might consider that the activities being carried on by the CIC are being carried on for the benefit of the community. Therefore, if a reasonable person can conclude that the activities of the company are being done for the benefit of the community, those activities will pass the test, unless those activities are prescribed by regulations under subsection (4) as not satisfying the test.

206.     Subsection (3) sets out the circumstances in which an object in the memorandum of a company is to be treated as a community interest object. The question of whether a given object is a community interest object is relevant for the purpose of clause 39(3)(d) (conditions for exercise of supervisory powers), and is discussed in the note on that clause below.

207.     The clause also provides for regulations to:

  • establish that certain activities are, or are not, to be considered as satisfying the community interest test (subsection (4)), and

  • specify what constitutes a section of the community (subsection (5)).

208.     For instance, it is intended that regulations will identify a group consisting of employees of a single employer (e.g. in a company sports association) as capable of comprising a sufficient section of the community for the purpose of the community interest test. These powers to make regulations are intended to make it possible to clarify the breadth of the community interest test over time.

209.     Regulations may also provide that certain descriptions of company are excluded companies (subsection (6)). Excluded companies are not eligible to be formed as a CIC or to become a CIC (clauses 34 (5)(b) and 36 (4)(b)). It is intended that initially political parties and companies owned by them, and political campaigning organisations, will be classed as excluded companies. If a CIC becomes an excluded company, the Regulator may order the transfer of shares or membership in that CIC under clause 47. It is intended that the Regulator would use this power to remove a CIC that became owned by a political party from the control of that party.

Becoming a community interest company

Clause 34 - New companies

210.     This clause sets out the process for an organisation not already incorporated as a company to incorporate as a CIC. Since CICs are companies under the Companies Act 1985, the standard company registration provisions apply along with the additional provisions set out in this clause. Applicants will be required to deliver to the registrar of companies both the normal documents required for formation as a company, and some additional documents called the 'prescribed formation documents' (subsection (1)). Regulations will set out what these additional documents should be (subsection (2)). It is intended that the documents will consist of:

?     a 'community interest statement' confirming the applicant's intention to serve the community rather than private benefit, and to pursue activities in the community interest; and

?     a declaration that the applicant, when formed, will not be a political party or controlled by a political party (it is intended that regulations under clause 33(6) will prescribe political parties and companies owned by them as excluded companies).

211.     The registrar will pass a copy of all the documents to the Regulator without registering them (subsection (3)). If the Regulator is satisfied that the company is eligible to be formed as a CIC under the terms of subsections (4) and (5), he notifies the registrar who completes the company registration process.

Clause 35 - Existing companies: requirements

212.     This clause sets out the steps that an organisation already incorporated as a company must take if it wishes to become a CIC. Subsection (1) requires the company to pass special resolutions to make the company's memorandum and articles consistent with the requirements laid down under clause 30, and to make the company's name consistent with clause 31. Where changes are made to the company's memorandum under section 4 (alteration of objects) or section 17 (changes to provisions in memorandum that could be included in articles) of the Companies Act 1985, section 5 of that Act gives members of the company a right to apply to court. Therefore, subsections (3) and (4) provide that where such changes to the memorandum have been made, the company must not submit its application to become a CIC until either the changes to its memorandum have been confirmed by the court, or the deadline for objecting has passed.

213.     Under subsections (2) and (6), the special resolutions are to be forwarded to the registrar of companies, along with the memorandum and articles in the form that they would take once altered by those special resolutions. The company must also submit some additional documents, called the prescribed conversion documents. Regulations will set out what these additional documents should be. It is intended that the documents will consist of:

?     a 'community interest statement' confirming the company's intention to serve the community rather than private benefit, and to pursue activities in the community interest;

?     a declaration that the company is not a political party or controlled by a political party (it is intended that regulations under clause 33(6) will prescribe political parties and companies owned by them as excluded companies); and

?     either a declaration that the company is not a charity or a Scottish charity, or in the case of a company that is a charity, the written consent of the Charity Commissioners as required under the terms of clause 37.

214.     All these documents and special resolutions must be submitted to the registrar of companies at the same time.

Clause 36 - Existing companies: decisions etc

215.     This clause sets out the process through which the Regulator will determine whether an existing company seeking to become a CIC is eligible to do so. Once the Regulator has made his decision, he must give notice to the registrar of companies. Any alterations to the company's memorandum and articles, as made by the special resolutions submitted with the application to become a CIC, will only be recorded and take effect once the Regulator has decided that the company is eligible to become a CIC and the registrar of companies has recorded its new name.

Clause 37 - Existing companies: charities

216.     This clause contains additional provisions applying to an existing company that wishes to become a CIC and that has charitable status. These provisions do not apply to companies that are "Scottish charitable companies" as defined in clause 38(8), to which clause 38 will apply instead (subsection (4)). The key procedural provision is that the Charity Commissioners must consent to the change of name required under clause 35(1)(c), and thus to conversion to CIC status (subsection (1)). The Charity Commissioners have a right to apply to the High Court for an order quashing the conversion of any charity that was made without their consent (subsection (2)). The Charity Commissioners' right to apply for such an order is, of course, without prejudice to the power of the Attorney General to apply to court to quash a registration which has been improperly or erroneously allowed. The clause also provides that the assets held by the charitable company at the moment of its conversion to a CIC must remain applicable to the company's original charitable purposes (subsection (3)).

Clause 38 - Existing companies: Scottish charities

217.     Subsection (1) prevents a Scottish charity, or a company which is not a Scottish charity as defined in clause 61 but that is registered in Scotland and established for wholly charitable purposes, from becoming a community interest company. If, despite this prohibition, such a company attempts to become a CIC and changes its name to comply with clause 31, the altered certificate of incorporation issued on the change of name may be quashed by order of the Court of Session (subsection (2)). The right of the Commissioners of Inland Revenue to apply for such an order is, of course, without prejudice to the power of the Attorney General to apply to court to quash a registration (by a company registered in England and Wales, or in Wales) which has been improperly or erroneously allowed.

218.     Charity law is a devolved matter in Scotland. Scottish charities are prohibited from altering their purposes, as set out in their constitution, in any way which would result in the loss of their charitable status. Since CICs are excluded from charitable status (clause 24(3)), Scottish charities should not be able to lose their charitable status by converting to a CIC. A consultation draft of a Charities and Trustee Investment (Scotland) Bill was published on 2 June 2004. Clause 15 of that draft Bill contains provisions making it possible for Scottish charities to lose their Scottish charitable status. Those provisions, if enacted, will make it appropriate to use the mechanism in subsection (3) whereby the prohibition on Scottish charities converting to CICs may be lifted, via regulations. The conversion process that would then apply contains similar safeguards to the conversion mechanism in clause 37.

Supervision by Regulator

Clause 39 - Conditions for exercise of supervisory powers

219.     This clause restricts the circumstances in which the Regulator is able to exercise the supervisory powers conferred by clauses 40 to 49. It constrains the Regulator in three respects. First, subsection (1) imposes a general requirement on the Regulator, to make use of these powers in such a way that his supervisory activity is not greater than is needed to maintain confidence in CICs.

220.     Second, subsection (2) prevents the Regulator from exercising the powers listed in that subsection unless the company default condition is satisfied. The purpose of this provision is to ensure that the Regulator can only use these relatively intrusive powers where it is necessary to do so and there are particular grounds for doing so. The grounds are set out in subsection (3).

221.     One of the four triggers of the company default condition relates to community interest objects (subsection (3)(d)). These are defined in clause 33(3). If they wish, CICs will be able to state wide objects in their memorandum, such as commercial trading objects. Alternatively, they may choose to limit themselves to 'community interest objects' that only include specific activities for the benefit of the community. A CIC may wish to do this, for instance, to demonstrate to potential investors, grant-givers or other stakeholders that it is restricted to particular activities. If a CIC chooses to limit its objects in this way, then a failure to carry on activities in pursuit of those objects will be sufficient grounds to trigger the company default condition.

222.     The third constraint is applied by subsection (4). This prevents the Regulator from exercising the power to order a transfer of shares or other membership interests in a CIC under clause 47 unless the CIC in question is an excluded company within the meaning of clause 33(6). It is intended that regulations will provide that companies subject to the control of a political party will be excluded companies (see also the note on clause 33(6) above).

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Prepared: 16 July 2004