Proposals for a Community Interest Company

Introduction

The Government has recently published a consultation paper for a new type of company - the Community Interest Company ("CIC"), whose profits and assets will be used for the public good.

The concept of the CIC was outlined in the report “Private Action, Public Benefit” published by the Strategy Unit in September 2002, which made proposals for the reform of charities (the report, which can be found by following the link at
http://www.dti.gov.uk/cics/background.htm was covered in a previous Law-Now article at
Future of charities and the not-for-profit sector - Cabinet Office report). The report identified limitations in the options available to social enterprises that wished to incorporate as companies.

The CIC will take one of the existing forms of a limited liability company incorporated under the Companies Act 1985, namely a company limited by shares or a company limited by guarantee, whether by newly incorporating a company or amending the constitution of an existing company. It will be subject not only to a restriction on the ability to distribute assets and dividends but also to regulation by a "regulator". In order to become a CIC, an organisation will have to satisfy the regulator that its purposes could be regarded by a reasonable person as being beneficial to the community or the public interest. Once the company is registered as a CIC, the regulator would also need to approve any proposals for changes in its purposes.

The consultation paper is light in detail about the proposed "regulation". The Government intends that the core functions of the regulator should be closely aligned with those of Companies House.

The CIC will able to raise debt (for example by way of loans and bonds). It will also be able to issue preference shares and to pay dividends to the holders of the shares up to a fixed limit. There will be a distinction between the "investors" who hold the preference shares and other members. While investors can have an influence over the CIC, they will not be able to control the CIC.

Although the CIC is described as a "custom-made legal vehicle for community and social enterprises", some philanthropic enterpreneurs may not be able to face being subject to yet another regulator. For them, another option may be to establish a company limited by shares with a prohibition in the memorandum of association on distributing dividends or assets to the members.

It remains to be seen whether the CIC's future will be inextricably linked to that of the Charities Bill contemplated by "Public Action, Private Benefit". The jury remains out on whether Parliamentary time can be made available for that legislation in the foreseeable future.

Comments on the proposals are requested by 18th June 2003.

A copy of the paper can be found in
http://www.dti.gov.uk/cics/pdfs/condoc.pdf

Corporate form

The CICs will be established as companies under the Companies Act 1985. They will follow the same incorporation reporting procedures as other companies and their directors and members will have the same rights and duties. A CIC could be a private or a public company (but if it is a company limited by guarantee it will only be capable of being as public company if it was incorporated before December 1980). A special status will arise from some additional statutory requirements.

The "regulator"

In order to become a CIC, an organisation will have to satisfy the "regulator" that its purposes could be regarded by reasonable persons being beneficial to the community (see below) or wider public interest. The organisation will also be asked to confirm that access to the benefits it provides will be widely available, and not confined to an unduly restrictive group. The proposal contemplates that this regulation is an "essential element"; the regulator will be the guarantor that the community benefit is being pursued and that profits and assets are working to that end. A detailed paper on the "community interest test" will be published on the DTI's website as part of this consultation.

It is proposed that political parties should not be able to become CICs or to set up CIC subsidiaries. This is to ensure that the regulator does not become involved in a debate about whether particular political purposes are beneficial. This means that the CIC may be unsuitable for groups wishing to campaign on issues involving changes to the law or groups formed to campaign for changes in Government policy (for example, on the environment).

Purposes beneficial to the community

Among the various heads of charity is "Other purposes beneficial to the community". For example, the following are recognised as charitable:

Promotion of human rights

Conservation of the natural environment

Promotion of urban and rural regeneration

Unemployment

Promotion of community capacity building

Promotion of community participation in health recreation via providing facilities for paying particular sports

Promotion of health

Disposal of assets

While a CIC cannot distribute its profits or assets, it may use them as collateral to raise finance for its activities. The Government proposes that CICs should be able to transfer a surplus to another organisation with public or community benefit purposes, whether it is a CIC or a charity, provided that:

• the beneficiary organisation is "listed" in the donor's constitution; or
• the CIC notifies its stakeholders of the proposed transfer, and the regulator agrees to it.

Where a CIC enters into an insolvency procedure, insolvency practitioners will be able to dispose of the CIC's assets in the usual way. There will be no restrictions on how they dispose of those assets in an insolvency.

Raising finance

At the request of the DTI, the Bank of England is reviewing the provision the provision of debt and equity finance decision enterprises. The Bank will report on this review later in the spring. It is intended that this work will complement the development of the CIC model. The proposals acknowledge that CICs will need to be able to raise debt (for example, loans and bonds) in the commercial markets on the same terms as other companies. The regulator will be expected to review CICs to check that they do not use artificially inflated debt repayments as a way of distributing assets.

It is not clear whether a private company CIC will be subject to the normal prohibition under the Companies Act 1985 on offering shares or debentures to the public. If so, depending on the circumstances, it may be necessary to form or re-register the CIC as a public company, which will entail its having an authorised share capital of at least £50,000 paid up as to at least a quarter of the nominal value. In offering securities the CIC may need to produce a prospectus in accordance with the Public Offers of Securities Regulations 1995, although various exemptions may be available (for example, if the offer is open to 50 or fewer persons in the UK).

Some banks have been reluctant to lend to charities, because of concerns about the risk of adverse publicity when faced with the prospect of enforcing security. Will the fact that a CIC is not a charity encourage banks to lend to such organisations?

In addition, it is contemplated that CIC should be able to issue tradable fixed or capped rate ("Preference" or "Investor") shares and to pay dividends to the holders those shares up to a fixed percentage above base rate, LIBOR or another appropriate benchmark. The CIC will not be able to issue such shares if it is a company limited by guarantee.

The holders of the preference or investor shares will not be able to control the CIC. The Government will seek reviews on the appropriate restrictions on control as part of the consultation.

It is hoped that the introduction of the Community Investment Tax Relief will enhance the flow of capital to enterprises in disadvantaged communities, through Community Development Finance Institutions ("CDFI's"). For more information about CDFI's please see
Community Investment Tax Credit

Governance

CICs will be free to set up subsidiaries. The subsidiaries may themselves be CICs with public or community benefit objectives similar or different to their parents'. Alternatively, a CIC may wish to set up a non-CIC subsidiary, for example, to raise equity finance for a new venture (which is not subject to the restrictions referred to above). This is similar to the relationship between a charity and a wholly-owned trading company.

The Government expects CICs to focus on the needs of "stakeholders". The regulator will produce guidance setting out best practice in involving stakeholders and in balancing the interests of different stakeholder groups. It is considering, as an option, a statutory requirement to seek the views of stakeholders. This goes further than the provisions of an annual report.

As it is contemplated that "stakeholders" can be not only members but also on the board, there is the potential for conflicts of interest for the stakeholders who are also directors. It will be interesting to see whether the usual obligations of a director to act in the best interests of the company are modified in the case of a director on the board of a CIC.

For further information please contact either Andrew Crawford at [email protected] or on +44 (0)20 7367 2867 or Simon Howley at [email protected] or on +44 (0)20 7367 3566.