Commentary on Sections
Part 2: Community Interest Companies
Summary and background
Requirements
Section 30 - Cap on distributions and interest
207.This section provides for limits to be placed on the ability of CICs to make distributions to members and interest payments on debentures and debts. It also provides for the role of the Regulator in setting these limits. It therefore forms an important part of the ‘asset lock’, which is one of the distinguishing features of the CIC (see ‘Summary and Background’ to Part 2, above).
208.Subsection (1) prohibits CICs from distributing assets to their members, unless regulations allow such a distribution. The prohibition covers every description of distribution of the company’s assets to its members, made in their capacity as members, such as dividends, issues of bonus shares, and payments on the purchase or redemption of shares or on the reduction of share capital. Subsection (2) allows such regulations to place limits on any distributions that regulations do permit. Subsection (4) allows the regulations to provide for the limits to be set by the Regulator.
209.It is intended that regulations will allow a CIC limited by shares that issues dividend-bearing shares to make limited distributions by way of dividends to the members of the company holding those shares. It is also intended that regulations will allow unlimited distributions to be made to members which are themselves CICs or charities, since such members will themselves be subject to an asset lock.
210.Subsection (3) provides for limits on the payment of interest on debts or debentures. It is not intended that regulations under this subsection will be used to set limits on conventional interest payments – that is, payments at a level fixed for the term of the debt. Regulations will be targeted at payments that are related in some way to the performance of the CIC – for instance, payments that rise or fall according to the turnover or profit of the CIC. The intention of this provision is to prevent such instruments – sometimes known as ‘debt with equity characteristics’ – being used to avoid the restrictions that are to be imposed on dividend-bearing shares under subsection (2).
211.The provisions in subsections (4) to (8) set out the role that the Regulator will have in setting the limits to be imposed under subsections (2) and (3). Subsection (5) sets out various ways in which the Regulator may set those limits. Subsection (5)(a), in providing for a limit to be set by reference to a rate determined by someone else, will allow the Regulator to set a limit which is linked to, and may rise and fall with, an index such as the Bank of England base lending rate. Subsection (5)(b) gives the Regulator scope to set a number of different limits applying to different categories of CICs. For instance, it may be considered desirable to set a less restrictive limit on dividends payable to shareholders investing in CICs carrying on certain types of activity, or those operating in certain geographical areas so as to encourage investment in such activities or such areas.
212.In considering how to set the limits, the Regulator is bound by subsection (6), which refers back to the statutory objectives set out in section 27, and requires the Regulator to apply these in a particular way when exercising this function. The requirement in subsection (6)(b) to “have regard to [a limit’s] likely impact on community interest companies” is intended to point the Regulator toward considering both the beneficial effect which a less restrictive limit may have on the availability of investment in CICs, and the need to maintain public confidence in CICs as primarily non-profit-distributing organisations.
213.There is provision in subsection (7) for regulations to give a power to the Secretary of State to require the Regulator to review limits. It is intended that the Secretary of State might use this power to ask the Regulator to consider using the flexibility in setting limits provided by subsection (5) in particular ways. The power is limited to the ability to request a review, so as not to prejudice the independence of the Regulator.
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