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Companies (Audit, Investigations and Community Enterprise) Act 2004

Supervision by Regulator

Section 41 - Conditions for exercise of supervisory powers

238.This section restricts the circumstances in which the Regulator is able to exercise the supervisory powers conferred by sections 42 to 51.  It constrains the Regulator in three respects.  First, subsection (1) imposes a general requirement on the Regulator to make use of these powers in such a way that his supervisory activity is not greater than is needed to maintain confidence in CICs.

239.Second, subsection (2) prevents the Regulator from exercising the powers listed in that subsection unless the "company default condition" is satisfied.  The purpose of this provision is to ensure that the Regulator can only use these relatively intrusive powers where it is necessary to do so and there are particular grounds for doing so.  The grounds are set out in subsection (3).

240.One of the four triggers of the company default condition relates to community interest objects (subsection (3)(d)).  These are defined in section 35(3).  If they wish, CICs will be able to state wide objects in their memorandum, such as commercial trading objects.  Alternatively, they may choose to limit themselves to ‘community interest objects’ that only include specific activities for the benefit of the community.  A CIC may wish to do this, for instance, to demonstrate to potential investors, grant-givers or other stakeholders that it is restricted to particular activities.  If a CIC chooses to limit its objects in this way, then a failure to carry on activities in pursuit of those objects will be sufficient grounds to trigger the company default condition.

241.The third constraint is applied by subsection (4).  This prevents the Regulator from exercising the power to order a transfer of shares or other membership interests in a CIC under section 49 unless the CIC in question is an excluded company within the meaning of section 35(6).  It is intended that regulations will provide that companies subject to the control of a political party will be excluded companies (see also the note on section 35(6) above).

Section 42 - Investigation; and Schedule 7 - Community interest companies: investigations

242.This section gives the Regulator powers to investigate the affairs of CICs, and to appoint people other than members of the Regulator’s staff to carry out such investigations.  This means that where necessary the Regulator can use third parties with appropriate expertise in particular areas, such as accountancy. The Regulator may also authorise members of his own staff to carry out investigations (paragraph 5 of Schedule 3). Subsection (3) gives effect to Schedule 7, which details the investigation powers conferred on the Regulator by clause 40.  These are powers to require a CIC or any other person to provide documents and information (paragraph 1).  The powers, and the further provisions contained in the Schedule (paragraphs 2 - 5), are based on the powers conferred on the Secretary of State under new section 447 of the Companies Act 1985..  It is intended that if, after using these powers, the Regulator concludes that a full investigation of a CIC may be required, he will refer the matter to the Companies Investigation Branch of the DTI, which will consider whether to carry out an investigation under Part 14 of the Companies Act 1985.

Section 43 - Audit

243.This section gives the Regulator a power to require an audit of a CIC's annual accounts.  Any auditor appointed under this clause will have all the rights of an auditor as set out in section 389A of the Companies Act 1985 (as amended bysection 8 of the Act) (subsection (3)). The offences for non-compliance with that section of the Companies Act 1985 will also apply.

Section 44 - Civil proceedings

244.This section gives the Regulator the right to bring a derivative action on behalf of a CIC.  It is intended that the Regulator would use this power to bring court proceedings in the name of a CIC where the directors of a CIC fail to bring such proceedings, in a situation where it would be in the interests of the CIC or the community to bring those proceedings.  For instance, the power will allow the Regulator to bring a claim in respect of a breach of duty by the directors themselves.  The Regulator will have to reimburse the CIC for any costs it suffers as a result of the action (subsection (6)) and in return any costs awarded must be paid to the Regulator (subsection (7)).

Section 45 - Appointment of director

245.This section gives the Regulator a power to appoint a person to be a director of a CIC.  This power may only be used if the company default condition is satisfied (section 41(2)).  It enables the Regulator to take action to remedy the circumstances that have caused the company default to arise, such as mismanagement or failure to satisfy the community interest test.  For instance, the Regulator may wish to appoint a director with financial expertise to remedy mismanagement of a CIC's assets.

246.The section contains provisions to ensure that a director appointed under this power will be capable of influencing the direction of the CIC.  For instance, the appointment cannot be blocked by the constitution of the CIC (subsection (3)(b)), and the director is to have all those powers available to other directors of the company (subsection (6)).  The other directors of the company will retain their existing powers.  However, the section also prevents a CIC from removing a director appointed under this power (subsection (7)).  A director appointed under this power will have to comply with the common law and statutory obligations and duties applicable to directors generally.

247.Where a change of directors arises from the use of this power, the Regulator, rather than the company, is required to notify the change to the registrar of companies (subsection (8)).  Where the Regulator has appointed a director under this power, and that person subsequently ceases to be a director, the CIC is required to notify the Regulator, rather than the registrar of companies, of this change in its directors (subsection (10)).  The requirement is on the company to notify the Regulator of this change because it is the company that will ordinarily first become aware of such an event.  Failure to comply with this requirement is an offence (subsection (11)) punishable on summary conviction by a fine not exceeding level 5 on the standard scale  (currently £5,000) (subsection (12)).

Section 46 - Removal of director

248.This section gives the Regulator power to remove a director from a CIC (subsection (1)) or suspend a director for up to one year (subsections (3) and (4)), and prevents a CIC from reinstating a director removed by the Regulator (subsection (2)).  The exercise of these powers is subject to the company default condition being satisfied (section41(2)).

249.The section sets out procedures which the Regulator must follow when exercising these powers (subsections (8), (9) and (11)).  Where the Regulator makes an order to remove a director and then discharges the order, the discharge does not in itself reinstate the person concerned as a director (subsection (7)).  Any director suspended or removed by the Regulator will have a right of appeal to the courts in respect of the use of this power (subsection (10)). The Civil Procedure Rules (Part 52) or, in Scotland, the Rules of the Court of Session (Part III of Chapter 41) set out the procedural rules applying to such an appeal.

Section 47 - Appointment of manager

250.This section gives the Regulator a power to appoint a manager to carry out functions in relation to a CIC.  This power is subject to the company default condition being satisfied (section 41(2)).  The Regulator may wish to appoint a manager to take control and run the day to day operations of a CIC for a certain period of time, rather than to influence the general direction of the CIC through the appointment of a director.  Therefore the Regulator is able to specify the manager’s functions and powers (subsection (3)), and to prevent the directors of a CIC from carrying out such functions (subsection (4)(b)).   In order to ensure that this power does not affect the rights of third parties or the insolvency process, subsection (6) provides that the appointment of a manager under this clause does not affect the rights of any third party to appoint a receiver or manager, or the rights of any receiver or manager appointed by a third party.  For similar reasons, subsection (8) provides that if certain office holders under insolvency legislation are appointed in respect of the CIC, the Regulator must discharge any order appointing a manager to that CIC.  The clause allows the Regulator to seek directions from a court in connection with the manager’s functions (subsections (9) – (10)).  This might be done in order to counter obstruction of the manager by a CIC or its officers, since disobeying the court’s directions would amount to contempt.

Section 48 - Property

251.This section gives the Regulator various powers to protect the assets of a CIC.  The Regulator can vest the CIC’s property in or transfer it to the Official Property Holder (subsection (1)), or freeze or otherwise restrict the assets of a CIC and the commitments it may make (subsections (2) and (3)).  The exercise of these powers is subject to the company default condition being satisfied (section 41(2)).  The section contains provisions to ensure that the use of these powers will not trigger any rights against a CIC's property which would result in the loss of that property, or in a breach of a restriction on the transfer of the property (subsections (4)and (5)). The discharge of an order under this clause may not necessarily automatically result in the return of the property to the CIC, so subsection (7) enables the Regulator to make the necessary vesting orders.  Subsection (10) creates an offence where a person contravenes an order of the Regulator in respect of the property of the CIC or the transactions that may be entered into by the CIC, and subsection (11) fixes the penalty for contravention as a fine not exceeding level 5 on the standard scale (currently £5,000).  Subsection (12) ensures that the creation of a criminal offence by subsection (10) does not prevent civil proceedings.  This means that a CIC will be able to seek damages if property is lost or reduced in value because it was not transferred to the Official Property Holder in breach of an order.

Section 49 - Transfer of shares etc

252.This section gives the Regulator a power to order the transfer of shares (subsection (1)) or, in the case of a CIC limited by guarantee, to extinguish the membership interests of specified members of the CIC (subsection (2)).  The only interests that may be extinguished by an order under subsection (2) are the interests that a person has by virtue of being a guarantor of the CIC.  If the CIC is a company limited by guarantee with share capital, the interests that any member has by virtue of being a shareholder in that CIC are unaffected by an order under subsection (2), but may be the subject of a separate order under subsection (1).

253.The power can only be exercised if it appears to the Regulator that the CIC in question is an excluded company (section 41(4)).  It allows the Regulator to arrange for the control of a CIC to change hands, with a view to the CIC ceasing to be an excluded company.  Without such a power the Regulator would only be able to stop the CIC being an excluded company by using the power under section 50 to seek the winding-up of the CIC.

254.The power does not apply to any share which may pay a dividend or entitle its holder to a distribution of the assets of a CIC in the event of a winding-up (subsection (3)).  It is intended that under regulations made under the power conferred by section 32(3) and (4), such shares will not enable their holder(s) to control the CIC in question.

Section 50 - Petition for winding up

255.This section gives the Regulator the right to petition the courts for a CIC to be wound up.  This will be without prejudice to the power of the Secretary of State to wind up CICs and other companies on public interest grounds (section 124A of the Insolvency Act 1986).

Section 51 - Dissolution and striking off

256.If a CIC is dissolved or struck off the register of companies, any assets remaining in the company pass to the Crown, the Duchy of Lancaster or the Duchy of Cornwall as bona vacantia (the legal name for ownerless property which by law passes to the Crown).  This section allows the Regulator to go to court for an order to make void the dissolution of the CIC (subsection (1)) or to get the CIC’s name put back on the register of companies (subsection (2)).  These powers will enable the Regulator to safeguard the assets of a CIC for the community interest where the CIC has been struck off the register without having been wound up, or where an asset has been overlooked in a winding up.

257.Section 652A of the Companies Act 1985 allows the directors of a private company to make an application to the registrar of companies for the company to be struck off the register of companies.  If any such application is made by the directors of a CIC, subsection (3) requires the directors to send a copy of the application to the Regulator.  If no such copy of the application is sent to the Regulator and the CIC is subsequently struck off the register of companies, the Regulator may apply to the court under section 653(2B) of the Companies Act 1985 for the company to be restored to the register.

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