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Lord Glentoran: I thank the Minister for what he has said. Some of it is encouraging. I am particularly interested in what he said about the relationship between the assets of a CIC, the official property holder and the potential liquidator at the time of liquidation. I shall read that carefully. I am sure that the Government have tidied that up. There are still some details that I should like to take another look at when I have read Hansard. I am encouraged to hear the Minister talking about further clarification of a number of points in this area. That is very necessary. I look forward to seeing amendments coming forward and to giving further consideration to certain issues.

Clause 26 agreed to.

Schedule 5 [Official Property Holder for Community Interest Companies]:

[Amendment No. 111 not moved.]

Schedule 5 agreed to.

Clause 27 [Cap on distributions and interest]:

Lord Glentoran moved Amendment No. 112:

Page 28, line 3, leave out "may" and insert "must"

The noble Lord said: In moving Amendment No. 112, I shall speak also to Amendments Nos. 117 and 119 and Clause 27. The Government's proposals for a community interest company, published as a consultation document in March 2003, identified certain key features of the proposed community interest company. One feature was that there should be an asset lock. On page 18 of the document at paragraph 3, it was suggested that:

"It would be critical to acceptance by charitable and ethical investors that those who set up CICs should commit to lock profits and assets into the company irrevocably, and that they should be seen to do so".

Related to this feature were certain other elements, such as the proposal for there to be a cap on dividends, mentioned in paragraph 28 of the consultation document; a restriction on the return to be made to investor shareholders on a liquidation, mentioned in paragraph 29; a requirement for approval from the regulator for changes to the CIC's purposes, mentioned in paragraph 21; and a permission for surplus assets to be gifted to other suitable organisations, such as CICs or charities, mentioned in paragraph 40. As CICs are designed for community interest and public benefit, a cap on the distribution of assets is fundamental to their purposes.

Clause 27 gives us only the outline of the legislation. The technical details appear, once again, in regulations. The relevant regulations relating to Clause 27 are numbers 17 to 20 and 22 to 23. These are complex and require detailed scrutiny. Regulations 17 to 20 provide for a cap to be placed on dividend payments and on certain interest payments related to the performance of the CIC. Regulations 22 and 23

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place limits on payments made by a CIC on the redemption or purchase of its own shares and on payments made by way of a reduction of share capital.

We have no problem with the concept of having an asset lock, but we need to ensure that the detail of the regulations is tightly drafted enough. At the moment, the drafting of Clause 27 is loose. I am not sure whether this is merely a semantic point or whether it is significant, but the clause uses the formula that "regulations may" do x, y and z. We have seen the regulations but they are only in draft format.

We do not want to hear what might or might not be contained in regulation; we want certainty that the regulations will prohibit or impose limits on the distribution of assets, and so on. To this end, we have tabled amendments to remove "may" and insert "must"—an old chestnut for the Opposition. I am sure the Minister will assure me that "may" has the necessary degree of certainty but, to be honest, it is no guarantee. It is almost as if, when the Bill was being drafted, the actual details of how regulations would work to lock assets was unclear, so the use of "may" gave some flexibility. We now have draft regulations, and it might be good to tighten up the drafting to reflect the content of these regulations more closely.

I know that officials love the use of "may"; Opposition politicians love the use of "must" and hate the use of "may". I beg to move.

Lord Phillips of Sudbury: I simply wish to support the old chestnut—by which I do not mean the noble Lord, Lord Glentoran. In this instance, he has a good point.

Lord Evans of Temple Guiting: These amendments, as we have been told by the noble Lord, Lord Glentoran, are concerned with the asset lock for community interest companies, which is one of the most important features of this part of the Bill. Clause 27 provides powers to use regulations to set various caps on distributions and interest, and the draft regulations published on 12 February, mentioned by the noble Lord—in particular, draft regulations 17 to 20, 22 and 23—show how the Government intend to use those powers. I shall therefore describe why the Government are resisting the amendments in the context of the draft regulations.

All these amendments turn the word "may" to "must" in different parts of the clause. This change would require—rather than allow—various limits to be set. First, let me assure the Committee that it is our intention that there should be limits on the distribution of assets by community interest companies. We fully intend to use this power, as the draft regulations demonstrate. However, it is necessary to frame the powers in this clause in discretionary rather than mandatory terms. This is because we do not intend to impose limits on everything.

For instance, we do not intend that there should be limits on the interest payable on the debts of community interest companies, except in special circumstances where the rate of return on the debt is

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linked to the performance of the company. That is why draft regulation 18 provides for a cap on such payments, but not on debt payments generally.

Other types of interest payments might be limited in the future if it was found that they were being used to evade the restrictions on distributions to members. That is why the detail of what is limited is left to regulations. It retains that flexibility so that the caps can be targeted at just those transactions that damage the asset lock. The amendments would harm the current ability to leave it for regulations to determine what should be limited, what should be prohibited, and how. This flexibility, we believe, is important if community interest companies are to remain an up-to-date and adaptable form.

[The Sitting was suspended for a Division in the House from 6.30 to 6.40 p.m.]

Lord Evans of Temple Guiting: I thought that I had dealt with Amendment No. 112 and was moving on to Amendment No. 117, which has the particular effect of requiring the regulator, rather than anyone else, to set the limits. Again, this is a limitation of flexibility. The draft regulations show that it is our intention that the level of all limits imposed by regulations under this clause should be set by the regulator. However, in time it may be more appropriate for certain limits for certain community interest companies to be set by someone other than the regulator. For example, it might be better for those community interest companies in England and Wales that are housing associations to have their limits set by the Housing Corporation. Any such change in regulations would be subject to the affirmative procedure in both Houses.

Amendment No. 119 will remove the ability to develop the limits regime in a way that responds to the needs of the social enterprise sector. Clause 27(3)(a) allows limits to be set by reference to a rate set by a third party, such as the Bank of England base rate. Our consultation confirmed that the ability to link the limits on CIC dividend payments to such a rate would be a useful additional flexibility. However, Amendment No. 119 would require the regulator to set all limits by reference to such an ambulatory rate. This may be inappropriate in some circumstances. For example, community interest companies in certain sectors may prefer the simplicity and certainty of a limit that remains fixed, rather than one that is regularly changed. We therefore think that this clause currently strikes the right balance by allowing the regulator to set limits by reference to rates determined by others, but not requiring him to do so. With that explanation, I hope that the noble Lords will feel able to withdraw their amendments.

Lord Glentoran: With all respect to the Minister, I do not accept the explanation. My concern in Clause 27 is where "may" is used in lines 3, 8 and 10. As I understand it, if "may" was taken away there would be no regulations at all. If "they may prohibit" was not there, there would be nothing. What I want is that "regulations must prohibit". The regulator "may set a limit". He may not. I want to be sure that he will set a limit. The regulations,

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"may include power for the Secretary of State".

That may be debatable but I would still like to feel that they must. It is terribly woolly. Nothing might happen at all. There might not be a cap set; there might not be a limit set; there might not be any power given for the regulator to review limits. It is there. "May" means "may", which, I suggest, means "may not" as well. However, as we are unable to divide in Committee, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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