Clause 40 - Investigation; and Schedule 7 - Community interest companies: investigations

223.     This clause gives the Regulator powers to investigate the affairs of CICs, and to appoint people other than members of the Regulator's staff to carry out such investigations. This means that where necessary the Regulator can use third parties with appropriate expertise in particular areas, such as accountancy. The Regulator may also authorise members of his own staff to carry out investigations (paragraph 5 of Schedule 3). Subsection (3) gives effect to Schedule 7, which details the investigation powers conferred on the Regulator by clause 40. These are powers to require a CIC or any other person to provide documents and information (paragraph

1). The powers, and the further provisions contained in the Schedule (paragraphs 2 - 5), are based on the powers conferred on the Secretary of State under section 447 of the Companies Act 1985 as amended by Part 1 of the Bill. It is intended that if, after using these powers, the Regulator concludes that a full investigation of a CIC may be required, he will refer the matter to the Companies Investigation Branch of the DTI, which will consider whether to carry out an investigation under Part 14 of the Companies Act 1985.

Clause 41 - Audit

224.     This clause gives the Regulator a power to require an audit of a CIC's annual accounts. Any auditor appointed under this clause will have all the rights of an auditor as set out in section 389A of the Companies Act 1985 (as amended by clause 8 of the Bill) (subsection (3)). The offences for non-compliance with that section of the Companies Act 1985 will also apply.

Clause 42 - Civil proceedings

225.     This clause gives the Regulator the right to bring a derivative action on behalf of a CIC. It is intended that the Regulator would use this power to bring court proceedings in the name of a CIC where the directors of a CIC fail to bring such proceedings, in a situation where it would be in the interests of the CIC or the community to bring those proceedings. For instance, the power will allow the Regulator to bring a claim in respect of a breach of duty by the directors themselves. The Regulator will have to reimburse the CIC for any costs it suffers as a result of the action (subsection (6)) and in return any costs awarded must be paid to the Regulator (subsection (7)).

Clause 43 - Appointment of director

226.     This clause gives the Regulator a power to appoint a person to be a director of a CIC. This power may only be used if the company default condition is satisfied (clause 39(2)). It enables the Regulator to take action to remedy the circumstances that have caused the company default to arise, such as mismanagement or failure to satisfy the community interest test. For instance, the Regulator may wish to appoint a director with financial expertise to remedy mismanagement of a CIC's assets.

227.     The clause contains provisions to ensure that a director appointed under this power will be capable of influencing the direction of the CIC. For instance, the appointment cannot be blocked by the constitution of the CIC (subsection (3)(b)), and the director is to have all those powers available to other directors of the company (subsection (6)). The other directors of the company will retain their existing powers. However, the clause also prevents a CIC from removing a director appointed under this power (subsection (7)). A director appointed under this power will have to comply with the requirements and duties of a director under the common law and the Companies Act 1985.

228.     Where a change of directors arises from the use of this power, the Regulator, rather than the company, is required to notify the change to the registrar of companies (subsection (8)). Where the Regulator has appointed a director under this power, and that person subsequently ceases to be a director, the CIC is required to notify the Regulator, rather than the registrar of companies, of this change in its directors (subsection (10)). The requirement is on the company to notify the Regulator of this change because it is the company that will ordinarily first become aware of such an event. Failure to comply with this requirement is an offence (subsection (11)) punishable on summary conviction by a fine not exceeding level 5 on the standard scale (currently £5,000) (subsection (12)).

Clause 44 - Removal of director

229.     This clause gives the Regulator power to remove a director from a CIC (subsection (1)) or suspend a director for up to one year (subsections (3) and (4)), and prevents a CIC from reinstating a director removed by the Regulator (subsection (2)). The exercise of these powers is subject to the company default condition being satisfied (clause 39(2)).

230.     The clause sets out procedures which the Regulator must follow when exercising these powers (subsections (8), (9) and (11)). Where the Regulator makes an order to remove a director and then discharges the order, the discharge does not in itself reinstate the person concerned as a director (subsection (7)). Any director suspended or removed by the Regulator will have a right of appeal to the courts in respect of the use of this power (subsection (10)). The Civil Procedure Rules (Part 52) or, in Scotland, the Rules of the Court of Session (Part III of Chapter 41) set out the procedural rules applying to such an appeal.

Clause 45 - Appointment of manager

231.     This clause gives the Regulator a power to appoint a manager to carry out functions in relation to a CIC. This power is subject to the company default condition being satisfied (clause 39(2)). The Regulator may wish to appoint a manager to take control and run the day to day operations of a CIC for a certain period of time, rather than to influence the general direction of the CIC through the appointment of a director. Therefore the Regulator is able to specify the manager's functions and powers (subsection (3)), and to prevent the directors of a CIC from carrying out such functions (subsection (4)(b)). In order to ensure that this power does not affect the rights of third parties or the insolvency process, subsection (6) provides that the appointment of a manager under this clause does not affect the rights of any third party to appoint a receiver or manager, or the rights of any receiver or manager appointed by a third party. For similar reasons, subsection (8) provides that if certain office holders under insolvency legislation are appointed in respect of the CIC, the Regulator must discharge any order appointing a manager to that CIC. The clause allows the Regulator to seek directions from a court in connection with the manager's functions (subsections (9) - (10)). This might be done in order to counter obstruction of the manager by a CIC or its officers, since disobeying the court's directions would amount to contempt.

Clause 46 - Property

232.     This clause gives the Regulator various powers to protect the assets of a CIC. The Regulator can vest the CIC's property in or transfer it to the Official Property Holder (subsection (1)), or freeze or otherwise restrict the assets of a CIC and the commitments it may make (subsections (2) and (3)). The exercise of these powers is subject to the company default condition being satisfied (clause 39(2)). The clause contains provisions to ensure that the use of these powers will not trigger any rights against a CIC's property which would result in the loss of that property, or in a breach of a restriction on the transfer of the property (subsections (4) and (5)). The discharge of an order under this clause may not necessarily automatically result in the return of the property to the CIC, so subsection (7) enables the Regulator to make the necessary vesting orders. Subsection (10) creates an offence where a person contravenes an order of the Regulator in respect of the property of the CIC or the transactions that may be entered into by the CIC, and subsection (11) fixes the penalty for contravention as a fine not exceeding level 5 on the standard scale (currently £5,000). Subsection (12) ensures that the creation of a criminal offence by subsection (10) does not prevent civil proceedings. This means that a CIC will be able to seek damages if property is lost or reduced in value because it was not transferred to the Official Property Holder in breach of an order.

Clause 47 - Transfer of shares etc

233.     This clause gives the Regulator a power to order the transfer of shares (subsection (1)) or, in the case of a CIC limited by guarantee, to extinguish the membership interests of specified members of the CIC (subsection (2)). The only interests that may be extinguished by an order under subsection (2) are the interests that a person has by virtue of being a guarantor of the CIC. If the CIC is a company limited by guarantee with share capital, the interests that any member has by virtue of being a shareholder in that CIC are unaffected by an order under subsection (2), but may be the subject of a separate order under subsection (1).

234.     The power can only be exercised if it appears to the Regulator that the CIC in question is an excluded company (clause 39(4)). It allows the Regulator to arrange for the control of a CIC to change hands, with a view to the CIC ceasing to be an excluded company. Without such a power the Regulator would only be able to stop the CIC being an excluded company by using the power under clause 48 to seek the winding-up of the CIC.

235.     The power does not apply to any share which may pay a dividend or entitle its holder to a distribution of the assets of a CIC in the event of a winding-up (subsection (3)). It is intended that under regulations made under the power conferred by clause 30(3) and (4), such shares will not enable their holder(s) to control the CIC in question.

Clause 48 - Petition for winding up

236.     This clause gives the Regulator the right to petition the courts for a CIC to be wound up. This will be without prejudice to the power of the Secretary of State to wind up CICs and other companies on public interest grounds (section 124A of the Insolvency Act 1986).

Clause 49 - Dissolution and striking off

237.     If a CIC is dissolved or struck off the register of companies, any assets remaining in the company pass to the Crown, the Duchy of Lancaster or the Duchy of Cornwall as bona vacantia (the legal name for ownerless property which by law passes to the Crown). This clause allows the Regulator to go to court for an order to make void the dissolution of the CIC (subsection (1)) or to get the CIC's name put back on the register of companies (subsection (2)). These powers will enable the Regulator to safeguard the assets of a CIC for the community interest where the CIC has been struck off the register without having been wound up, or where an asset has been overlooked in a winding up.

238.     Section 652A of the Companies Act 1985 allows the directors of a private company to make an application to the registrar of companies for the company to be struck off the register of companies. If any such application is made by the directors of a CIC, subsection (3) requires the directors to send a copy of the application to the Regulator. If no such copy of the application is sent to the Regulator and the CIC is subsequently struck off the register of companies, the Regulator may apply to the court under section 653(2B) of the Companies Act 1985 for the company to be restored to the register.

Change of status

Clause 50 - Re-registration

239.     This clause brings together provisions on the re-registration of CICs. Subsection (1) provides that once a company is registered as a CIC, it will not be able to re-register as an unlimited company. Such companies are able to take advantage of reduced regulatory and reporting requirements under the Companies Act 1985, and this would be inconsistent with the reporting requirements placed on CICs by clause 32, which are intended to complement the requirements on ordinary limited companies. Subsection (2) ensures that any certificate of incorporation issued in respect of a private limited CIC upon re-registration as a public limited CIC or vice versa will contain a statement that the company is a CIC.

Clause 51 - Ceasing to be a community interest company

240.     This clause provides that a CIC cannot lose its status as a CIC except by the methods described in the following clauses. This provision is effectively part of the 'asset lock', since it ensures that the members of a CIC cannot get round the restrictions to which CICs are subject by ceasing to be a CIC and then distributing the company's assets. If a CIC is dissolved, it is intended that the residual assets will be preserved for the community benefit, under regulations to be made under clause 29. Conversion to a charitable company under the provisions of clauses 52 and 53, or to an industrial and provident society under the provisions of clause 54, would impose other restrictions on the distribution of assets.

Clause 52 - Becoming a charity or a Scottish charity: requirements

241.     This clause sets out the steps that a CIC must take if it wishes to give up CIC status and become a charitable company. Subsection (1) requires the CIC to change its name and make any other appropriate changes to its constitution by special resolution, and subsection (2) requires such changes to be notified to the registrar. 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 are made, the company must not submit its application to give up CIC status until either the changes have been confirmed by the court, or the deadline for objections has passed.

242.     For CICs with their registered offices in England and Wales, or in Wales, conversion to a charitable company will not be permitted without a written statement from the Charity Commission that in their opinion, the CIC will have charitable status (and will not be an exempt charity) once the special resolutions have taken effect (subsection (7)). For CICs with their registered offices in Scotland that wish to become a Scottish charity, a written statement from the Inland Revenue will be required, confirming that the CIC has applied for recognition as a Scottish charity, and would be granted such recognition if it ceases to be a CIC (subsection (8)). The relevant written statement must also be sent to the registrar (subsection (6)(b)).

Clause 53 - Becoming a charity or a Scottish charity: decisions etc.

243.     This clause sets out the process through which the Regulator will decide whether a CIC seeking to become a charity or Scottish charity is eligible to cease to be a CIC. The company will not be eligible if the Regulator has exercised certain supervisory powers in respect of that CIC, and the exercise of those supervisory powers is still ongoing (subsection (4)).

Clause 54 - Becoming an industrial and provident society

244.     This clause makes provisions about the conversion of a CIC to an IPS. Companies can convert to an IPS under the Industrial and Provident Societies Act 1965, but under subsection (1) CICs are to be prohibited from doing this until such time as regulations remove the prohibition. If the prohibition is removed, regulations may also amend section 53 of the Industrial and Provident Societies Act 1965 to ensure that conversion takes place in a particular manner (subsection (2)).

245.     The clause prohibits conversion because IPSs do not currently have an asset lock, so that the ability to convert to an IPS would allow CICs to circumvent the asset lock (see note on clause 51 above). The clause makes provision for regulations to remove the prohibition because the Co-operatives and Community Benefit Societies Act 2003 includes a power for the Treasury to introduce an asset lock for community benefit societies, which are a sub-set of the IPS corporate form (see section 1(1) and (2) of the Industrial and Provident Societies Act 1965). It is intended that regulations under subsection (1) will only be made in the event that the Treasury enacts secondary legislation to introduce an asset lock for community benefit societies. If such regulations are made, they will only allow CICs to convert to community benefit societies that have such a lock, and not to a community benefit society without an asset lock, or to any other type of IPS. It is anticipated that in this event, regulations would need to be made under subsection (2) to enable a seamless transition from CIC to IPS status, ensuring that the organisation's assets remain protected from distribution at all times.

Supplementary

Clause 55 - Fees

246.     This clause provides for regulations to set the fees that may be charged by the Regulator (subsection (1)). They may provide for the registrar of companies to collect fees on behalf of the Regulator, so that only a single payment would need to be made in respect of matters that involve both the Regulator and the registrar (subsection (2)). An example would be the formation of a company as a CIC, where the Regulator applies the community interest test and the registrar of companies registers the company. In addition, the clause enables the Regulator to charge fees (without the need for regulations) for providing services which he is not legally required to provide (subsection (3)). However, the Regulator cannot use the power under subsection (3) to charge fees for the provision of guidance of general interest.

Clause 56 - Extension of provisions about registrar etc.

247.     This clause will enable regulations to apply relevant provisions of Parts 24 and 25 of the Companies Act 1985 to any documents sent to the registrar under this Part of the Bill, and allows those provisions to be modified if required. This Part of the Bill imposes new functions and obligations on the registrar of companies. In particular, it provides for documents to be delivered to, and recorded by, the registrar. Part 24 of the Companies Act 1985 contains provisions in respect of the powers and functions of the registrar, including provisions relating to the delivery, recording and inspection of documents. Part 25 of the Companies Act 1985 makes provisions for confidentiality orders in respect of documents held by the Registrar.

Clause 57 - Information

248.     This clause sets out the terms on which the Regulator will be able to disclose and receive information in connection with the exercising of his functions or the functions of other bodies.

249.     As many of the Regulator's functions will require interaction with the registrar of companies, subsection (1) makes provision for regulations to require the registrar to provide information and documents to the Regulator.

250.     Subsection (2) places a specific duty on the Accountant in Bankruptcy in Scotland to forward copies of notices of the appointment of a liquidator of a CIC to the Regulator, since in Scotland such notices are received by the Accountant in Bankruptcy and not the registrar of companies.

251.     Subsection (3) amends section 31(2) of the Data Protection Act 1998. It creates exemptions from an individual's entitlement under that Act to obtain a copy of information held on him. The exemptions apply to public bodies acting to protect CICs against misconduct or mismanagement in their administration or acting to protect or recover the property of CICs (subsection (3)(a)). The exemptions will apply whether the misconduct or mismanagement is by a director or any other person (subsection (3)(b)).

252.     The clause also enables public authorities to pass information to the Regulator (subsection (4)). Similarly, the Regulator can pass information obtained in exercising his functions to other public authorities (subsection (5)). These disclosures of information are subject to the constraints set out in subsections (6) to (8). The constraints include (subsection (6)) the restrictions contained in section 243(6) of the Enterprise Act 2002, namely that the Regulator, before disclosing information to an authority outside the United Kingdom, must consider:

?     whether the reason for the request is sufficiently serious to justify disclosure;

?     the existence of appropriate protection against self-incrimination in criminal proceedings in the requesting country;

?     the existence of appropriate protection for the storage and disclosure of personal data in the requesting country; and

?     the existence of any mutual assistance agreements covering the information concerned with the requesting country.

253.     Subsection (8) allows a restriction to be placed on further disclosure and subsection (9) makes it an offence to disclose information in contravention of any such restriction, the penalty under subsection (10) being a fine up to level 3 on the standard scale (currently £1,000).

Clause 58 - Offences

254.     This clause provides that where a corporate body (e.g. a company) commits an offence those directors or other officers of the corporate body who are to blame for the offence can be penalised, as well as the corporate body itself.

Clause 59 - Orders made by Regulator

255.     This clause sets out procedural requirements for the making of orders by the Regulator. For instance, it specifies those to whom the various types of order are to be given (subsection (1)). Subsection (3) allows the Regulator to make savings and transitional provisions when discharging an order, so as to provide a measure of control over the extent of the discharge where necessary. For example, an order under clause 46(1), vesting the stock and equipment of a CIC in the Official Property Holder, might be discharged in part, so that all the stock is vested back in the CIC, but with a proviso that the CIC may not sell the stock for less than 50% of its book value, and with transitional provisions to make arrangements for the physical transfer of the stock. Subsection (5) requires the Regulator to give reasons for those of his orders and decisions for which the Bill confers a right of appeal to the Appeal Officer or to the courts. The Regulator must give his reasons to those persons who have the right to appeal the order or decision. This is to ensure that they will have the information they need to make a decision about whether they have grounds to appeal.

Clause 60 - Regulations

256.     This clause contains provisions about the making of regulations under this Part of the Bill. Subsection (5) specifies which of those regulations are to be made by affirmative procedure. The other regulations made under this Part of the Bill will be subject to negative procedure in both Houses (subsection (6)).

PUBLIC SECTOR FINANCIAL COST AND PUBLIC SECTOR MANPOWER EFFECTS

257.     The Bill will involve some new expenditure from public funds. One element of expenditure will be the costs of establishing and running the Regulator of Community Interest Companies. This is intended to be a small organisation, probably co-located with Companies House in Cardiff. We estimate the Regulator's annual running costs at approximately £400,000, plus exposure to legal liability estimated at £50,000 per year. Estimated non-recurring set-up costs include:

i)     recruitment costs and salaries for a 'shadow' regulator and skeleton staff in the period before the Regulator begins operations (estimate £125,000);

ii)     accommodation fit-out, new IT systems, IT and other office equipment, website development, publication design and production costs, and provision for contracting out production of some initial guidance to experts from the social enterprise sector (estimate £225,000);

iii)     establishing information systems and changing existing (including Companies House) systems (estimate circa £150,000).

258.     This gives a total estimate of set-up costs in the region of £500,000.

259.      The FRC's costs are expected to increase, primarily as a result of expansion and greater proactive enforcement of accounting requirements; although neither of these results from provisions in the Bill. We estimate that the costs will increase, from around £2.8 million at present (or, including the existing costs of the Accountancy Foundation whose functions the FRC is taking over, some £5.5 million) to around £12 million per year by 2006-07. Costs are currently shared equally between Government, business and the accounting profession, so the Government's share (paid as grant-in-aid, see paragraphs relating to clause 16 above) might increase to £4 million a year by 2006-07. It should be noted, however, that the expansion of the FRC and the FRRP's move to a proactive role in themselves are not required or initiated by the Bill, although they are supported and complemented by certain of the Bill's measures.

260.     There will be the ability to apply to court for non-compliance in the following cases:

• company investigation powers to require any person to provide any relevant documents or information;

• inspectors' and investigators' powers to enter and remain on premises;

• the Secretary of State's powers to require documents and information from companies;

• the powers of the FRRP to require information;

• the powers of the Regulator of Community Interest Companies to require documents and information, and to require the transfer of property to the Official Property Holder.

261.     The Government considers this will have only minimal impact on the court.