Companies (Audit, Investigations and Community Enterprise) Act 2004 Explanatory Notes

Becoming a community interest company

Section 36 - New companies

229.This section sets out the process for an organisation not already incorporated as a company to incorporate as a CIC.  Since CICs are companies under the Companies Act 1985, the standard company registration provisions apply along with the additional provisions set out in this section.  Applicants will be required to deliver to the registrar of companies both the normal documents required for formation as a company, and some additional documents called the ‘prescribed formation documents’ (subsection (1)). Regulations will set out what these additional documents should be (subsection (2)).  It is intended that the documents will consist of:

  • a ‘community interest statement’ confirming the applicant’s intention to serve the community rather than private benefit, and to pursue activities in the community interest; and

  • a declaration that the applicant, when formed, will not be a political party or controlled by a political party (it is intended that regulations under section 35(6) will prescribe political parties and companies owned by them as excluded companies).

230.The registrar will pass a copy of all the documents to the Regulator without registering them (subsection (3)).  If the Regulator is satisfied that the company is eligible to be formed as a CIC under the terms of subsections (4) and (5), he notifies the registrar who completes the company registration process.

Section 37 - Existing companies: requirements

231.This section sets out the steps that an organisation already incorporated as a company must take if it wishes to become a CIC.  Subsection (1) requires the company to pass special resolutions to make the company’s memorandum and articles consistent with the requirements laid down under section 32, and to make the company’s name consistent with section 33.  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 have been made, the company must not submit its application to become a CIC until either the changes to its memorandum have been confirmed by the court, or the deadline for objecting has passed.

232.Under subsections (2) and (6), the special resolutions are to be forwarded to the registrar of companies, along with the memorandum and articles in the form that they would take once altered by those special resolutions.  The company must also submit some additional documents, called the prescribed conversion documents.  Regulations will set out what these additional documents should be.  It is intended that the documents will consist of:

  • a ‘community interest statement’ confirming the company’s intention to serve the community rather than private benefit, and to pursue activities in the community interest;

  • a declaration that the company is not a political party or controlled by a political party (it is intended that regulations under section 35(6) will prescribe political parties and companies owned by them as excluded companies); and

  • either a declaration that the company is not a charity or a Scottish charity, or in the case of a company that is a charity, the written consent of the Charity Commissioners as required under the terms of section 39.

233.All these documents and special resolutions must be submitted to the registrar of companies at the same time.

Section 38 - Existing companies: decisions etc

234.This section sets out the process through which the Regulator will determine whether an existing company seeking to become a CIC is eligible to do so.  Once the Regulator has made his decision, he must give notice to the registrar of companies.  Any alterations to the company’s memorandum and articles, as made by the special resolutions submitted with the application to become a CIC, will only be recorded and take effect once the Regulator has decided that the company is eligible to become a CIC and the registrar of companies has recorded its new name.

Section 39 - Existing companies: charities

235.This section contains additional provisions applying to an existing company that wishes to become a CIC and that has charitable status. These provisions do not apply to companies that are "Scottish charitable companies" as defined in section 40(8),  to which section 40 will apply instead (subsection (4)). The key procedural provision is that the Charity Commissioners must consent to the change of name required under section 37(1)(c), and thus to conversion to CIC status (subsection (1)).  The Charity Commissioners have a right to apply to the High Court for an order quashing the conversion of any charity that was made without their consent (subsection (2)). The Charity Commissioners’ right to apply for such an order is, of course, without prejudice to the power of the Attorney General to apply to court to quash a registration which has been improperly or erroneously allowed. The section also provides that the assets held by the charitable company at the moment of its conversion to a CIC must remain applicable to the company’s original charitable purposes (subsection (3)).

Section 40 - Existing companies: Scottish charities

236.Subsection (1) prevents a Scottish charity, or a company which is not a Scottish charity as defined insection 63 but that is registered in Scotland and established for wholly charitable purposes, from becoming a community interest company.  If, despite this prohibition, such a company attempts to become a CIC and changes its name to comply with section  33, the altered certificate of incorporation issued on the change of name may be quashed by order of the Court of Session (subsection (2)).  The right of the Commissioners of Inland Revenue to apply for such an order is, of course, without prejudice to the power of the Attorney General to apply to court to quash a registration (by a company registered in England and Wales, or in Wales) which has been improperly or erroneously allowed.

237.Charity law is a devolved matter in Scotland. Scottish charities are prohibited from altering their purposes, as set out in their constitution, in any way which would result in the loss of their charitable status.  Since CICs are excluded from charitable status (section 26(3)), Scottish charities should not be able to lose their charitable status by converting to a CIC.  A consultation draft of a Charities and Trustee Investment (Scotland) Bill was published on 2 June 2004.  Clause 15 of that draft Bill contains provisions making it possible for Scottish charities to lose their Scottish charitable status.  Those provisions, if enacted, will make it appropriate to use the mechanism in subsection (3) whereby the prohibition on Scottish charities converting to CICs may be lifted, via regulations.  The conversion process that would then apply contains similar safeguards to the conversion mechanism in section 39.

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