Law guide: Business start-up

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Legal restrictions and regulation

Legal restrictions and regulation

Legal restrictions

There are certain statutory requirements that must be included in a CIC's articles of association:

Asset lock

This is designed to ensure that the assets of the CIC (including any profits or other surpluses generated by its activities) are not given away for less than market value.

CICs limited by guarantee without a share capital may only transfer assets out of the CIC (as long as they comply with any restrictions in the articles) if the transfer is:

  • at market value;
  • to another CIC or other asset-locked body (either specified in the CIC's articles or with the consent of the Regulator); or
  • otherwise made for the benefit of the community.

CICs limited by shares or by guarantee but having a share capital may adopt articles that impose the same restrictions, or which provide for more exceptions to these restrictions. In this latter case, as well as making transfers to other asset-locked bodies or for the benefit of the community, the CIC can, subject to certain limits:

  • pay dividends on its shares;
  • distribute assets on a winding up;
  • make payments on the redemption or purchase of its own shares;
  • make payments on the reduction of capital; or
  • extinguish or reduce the liability of members in respect of unpaid share capital on a reduction of share capital.

A CIC may not distribute assets to its members via a redemption or buyback of shares, unless the amount it pays for any share isn't more than the share's paid-up value.

A CIC may not distribute assets via a reduction of capital unless:

  • it removes or reduces the liability of any of the members on any of the company's shares for the share capital that's not paid up; or
  • the amount it pays to the member isn't more than the paid-up value of their respective shares.

Dividend cap

To ensure dividends are not disproportionate to the amount invested by the investor or the profit generated by the CIC, they are subject to a maximum aggregate dividend cap of 35% of distributable profits.

Interest cap

Where interest payable on debts or debentures is linked to the performance of the CIC, that debt is regarded as similar to equity shares. The payment of such performance-related interest is subject to a cap.

The cap is expressed in terms of a percentage rate on the average amount outstanding on any given loan. It will be the rate in force at the date the agreement for payment of the interest was made, or, for existing debt, the date the company became a CIC. The rate for a particular debt is fixed for the life of that debt and will not change if the rate is changed. The rate is 20% currently.

Regulation

CICs are regulated by the Regulator of Community Interest Companies. Their role is to:

  • regulate using a 'light touch';
  • create an awareness of CICs generally; and
  • provide guidance and help on matters relating to CICs.

Powers and duties

Much of the Regulator's time is taken up with considering applications for new CICs. They decide if the proposed CIC complies with the regulations and satisfies the community interest test.

The Regulator has powers to investigate a CIC (or appoint someone to investigate on their behalf). They may require the CIC to show them documents and information (except for legally privileged information and confidential banking information). This may be used in civil proceedings brought by the Regulator or others.

The Regulator may appoint (at their own expense) auditors to audit the accounts of a CIC.

The Regulator may bring civil proceedings in the name and on behalf of the CIC (usually in circumstances where the members or directors have failed to do so). Before proceedings start, the Regulator must notify the CIC in writing, stating the cause of action, the remedy sought and a summary of the facts on which the proceedings are to be based. Any director of the CIC may apply to court for an order to prevent the proceedings or to end any that have already been begun. The Regulator must indemnify the CIC against any costs or expenses incurred in connection with the proceedings.

In certain situations, the Regulator can appoint and remove directors, appoint a manager and vest (in trust) the property of the CIC in the Official Property Holder (a member of the Regulator's staff appointed by the Regulator to perform certain statutory functions). These situations are:

  • There's been misconduct or mismanagement in the administration of the CIC.
  • There's a need to protect the CIC's property or to secure the proper application of that property.
  • The CIC is not satisfying the community interest test.
  • Where the CIC has community interest objects, the CIC is not carrying on any activities in pursuit of those objects.

If the CIC is an excluded company (i.e. a political party or political campaigning organisation), the Regulator may re-arrange the control of the CIC with a view to it ceasing to be an excluded company. They can do this by ordering that shares in the CIC are transferred to certain people (where the CIC has a share capital). Similarly, where the excluded CIC is a company limited by guarantee, the Regulator can extinguish the interests of specified members of the CIC.

The Regulator can also petition for the CIC's winding up if the court is of the opinion that it is just and equitable to do so.

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