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Lord Glentoran moved Amendment No. 113:
- Page 28, line 4, after "assets" insert "or other transactions"
The noble Lord said: Amendments Nos. 113 and 114 were suggested to us by a senior company law barrister who saw a potential loophole in the drafting of Clause 27. The problem is that the consultation paper did not specifically address the question of the extent to which the asset lock should be structured so as to preclude the removal of profits or surplus assets from CICs by transfer-pricing or other devices short of the making of distributions to members. It is suggested that the rule-making power to be given by Clause 27 of the Bill—a power that will authorise the regulations to be made that will provide the asset lock—limits the scope of the regulations in a way that may prevent the regulations from being able to impose an effective asset lock. Not only should there be regulation of the distribution of assets to members, but there should be regulation of the class of persons who may receive benefit from CICs and of the type of benefits which may be received. I beg to move.
6.45 p.m.
Lord Evans of Temple Guiting: Amendments Nos. 113 and 114 seek to widen the scope of this clause so that the regulations to be made under it can prohibit or impose limits on transactions other than simple distributions of assets to members of the company. The wider protection that the amendments aim to provide is already provided by the powers contained in Clause 29, which allow for restrictions on transactions and distributions to be placed in the memorandum and articles of each community interest company.
The restrictions that the Government intend to impose under Clause 29 are indicated by draft Regulations 7 to 10 in the set of draft regulations, published in February, and their associated schedules. The restrictions include a bar on community interest companies making a distribution or transfer except for full consideration, other than in the narrow circumstances set out in the draft regulations. Therefore, regulations under Clause 29 will implement most of the key provisions of the asset lock by placing restrictions on transactions and distributions into the memorandum and articles of each community interest company. We believe that that is the most effective way of creating the asset lock.
The fact that the restrictions will be set out in the constitution of each CIC and not just in the small print of legislation will make it easier for CICs, and for those who deal with them, to be aware of and to understand
what the asset lock means. It is particularly important that the asset lock should be transparent and easily understood.Clause 27 is also an important part of the asset lock but is intended to cover only those matters where a complete prohibition is intended or where limits are to be set by the regulator or some other person. Subsection (1) already sets out a complete list of the matters that we wish to prohibit or limit in that way.
I was asked whether there were potential loopholes, such as transfer pricing. When there is any concern that a CIC is breaching prohibitions on distributions that are set out in regulations, the regulator will be able to investigate. If he concludes that the company default condition set out in Clause 38 is satisfied, he can take supervisory action. I hope that, with those reassurances, the noble Lord will withdraw his amendment.
Lord Glentoran: I thank the Minister for that response. The purpose of the amendment was to point out a legal loophole. I do not pretend to be an "eagle beagle" legal man, and I leave it with the Government to decide whether or not my legal adviser had occasion to give his advice. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 114 not moved.]
Lord Phillips of Sudbury moved Amendment No. 115:
- Page 28, line 7, at end insert—
The noble Lord said: The amendment would entitle regulations to be made with regard to the imposition of limits on the payment of remuneration or other benefits to members and directors of CICs. The second amendment in the group in my name—Amendment No. 117—would add a subsection to the end of Clause 29(4), which in turn sets out provisions that can be promulgated under Clause 29 and included in the memorandum and articles of a CIC.
Both amendments are designed to control what seems to me a gaping gap—I suppose that gaps are, of necessity, gaping—or a hole through which a coach and horses might go. As the Government have said, rightly and at length on many occasions, the central purpose of the CIC is to constrain the prospect that accumulated assets and profits should be got out for private benefit, so to speak. Hence the provisions of Clause 27 vis-a-vis caps. However, they do not extend to remuneration. I raised this on Second Reading. The fact that at no time, then or since, have the Government pretended that the prohibition on distributions of assets is intended to include remuneration levels makes me confident that Amendments Nos. 115 and 117 are necessary.
When Roger Warren Evans and Stephen Lloyd, the two architects of the CIC, produced their first working paper, they proposed,
Given the extent to which private companies these days utilise remuneration levels as the most common means of withdrawing profit from their companies, I hope that the Government will listen to this and, if they find these amendments unacceptable, they will put forward others in their place. They are not covered, either, by the provisions of Clause 29(4)(a), which refers to the transfer and distribution of the company's assets. Nor, indeed, is the situation remotely satisfactorily dealt with by the publicity requirements vis-à-vis salaries. There will be CICs, just as there are charities, with a sort of closed membership, where members of the CIC and members of the board of directors will be coterminous. It is written into the memorandum and articles that you cannot be a director unless you are a member and you cannot be a member unless you are a director. In those circumstances, it is extremely dangerous not to have any ability on the part of the regulator to take direct action.
Amendment No. 115 is quite adept, in that it does not say what the limits shall be. It can then be built on, or utilised, in the context of Clause 27(2), which makes provision for limits to be set by the regulator and, in subsection (3), allows the regulator to set a limit. That would then include my limit on remuneration for different types of cases. Although I was unhappy with the notion that the regulator could impose different limits for different cases, and still am, none the less, I suspect that will find its way into the Act.
We have here a mechanism that does not force the regulator to do anything, but at least gives him or her the power, where there is serious public discontent at an abuse, to do something about it. Without such an amendment, I do not believe he or she has that power, and it could undermine the very purpose and integrity of CICs. I beg to move.
The Deputy Chairman of Committees (Lord Geddes): It might be helpful for the Committee and, more particularly, for the official record, if I say that I think the noble Lord, Lord Phillips, meant to refer to Amendment No. 127 rather than Amendment No. 117.
Lord Phillips of Sudbury: He did, and how grateful I am.
Lord Glentoran: I would like to speak to Amendment No. 124, which is included in this group. I support the noble Lord, Lord Phillips, in his amendments. I, like the noble Lord, have grave concerns that the failure to mention directors'
In such a situation directors could receive inflated salaries to get round the interest cap in Clause 27 and the lock on assets except for community interest. We felt that directors' remuneration should be included as an obligatory requirement in the memorandum and articles of a CIC. CICs are designed for public benefit. Profits which should be ploughed into public benefit and community interest projects could get siphoned off to line the pockets of directors. In the interests of transparency we believe that the memorandum and articles of every CIC should give details about all directors' remuneration. Our amendment would guarantee such a provision.
However, having looked at the regulations, I notice that there is a requirement for details of directors' remuneration to be disclosed. That is to be contained in the CIC annual report in regulations under Clause 31(3). Details of those regulations are contained in draft regulation 24 at paragraph 1(e).
The Explanatory Notes make clear that the inclusion of information on directors' remuneration was newly inserted under regulations for the CIC report as a direct result of responses to the consultation process. That is an encouraging sign. It shows that those who responded to the consultation were on the same wavelength as us; that is, they appreciated that there might be a conflict between the lack of constraint on directors' pay and the public benefit asset lock.
The regulations make clear that the information required under the draft regulation is the same as that which the Companies Act 1985 already requires medium and large unlisted companies to include in the accounts they deliver to the registrar of companies, but will apply to all CICs whatever their size. That means that all CICs will be required to make public information including the total aggregate pay of their directors; the details of the highest paid director if the total aggregate pay of their directors exceeds £200,000; and the number of directors who have received share benefits.
I am happy that that information is to be disclosed. However, I wonder whether the Minister has any thoughts about where that should be included. The noble Lord, Lord Phillips, would prefer it to come in under Clause 27, while our proposal includes a
"( ) impose limits on the payment of remuneration or other benefits to members and directors of community interest companies"
"that statutory provision should be made for barring another manifestation of the improper disbursement of public assets, namely the payment of excessive Board or management remuneration. Without a statutory mechanism for the containment of this loophole, widely seen as a defect of prevailing company law, the credibility of the PIC sector could be rapidly eroded".
They also said:
"Competitive salaries and fees will have to be paid".
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