3.4.1.1 Social enterprises in the UK and the CIC legal form

The term ‘social enterprise’ in the UK is used predominantly to describe organisations operating in the framework of the social economy, also called the ‘third sector’. The term has a general meaning, which describes ‘a trading enterprise having a social purpose’ comprising various types of organisations and legal forms.1 However, as noted by Spear, with regards to UK company law and other laws applicable to social economy organisations, ‘UK law was never tailored to the idea of the social enterprise’.2 Social enterprises in the UK were traditionally incorporated using the legal forms of the ‘company limited by guarantee’ or the ‘industrial and provident society’.3

In 2002, the UK Government initiated a dialogue regarding the development of a favourable legislative environment for social enterprises.4 The Strategy Unit of the Cabinet Office emphasised the necessity of reforming the legislation for charities and non-profits in the UK and introduced an elaborate legislative proposal for a special type of social enterprise, i.e. the Community Interest Company.5

In 2005, the Companies (Audit, Investigations and Community Enterprise) Act of 2004 (Companies Act of 2004) came into force.6 The Companies Act of 2004 introduced the CIC, i.e. a tailor-made legal form for social enterprises in the UK (in part 2, ss. 26 et seq). The Companies Act of 2006 (Companies Act of 2006) is also applicable to the CIC, as well as secondary legislation which regulates the features of the new corporate entity in detail. Secondary legislation was later included in the CIC Regulations of 2005 and in the subsequent amending regulations.

CICs are introduced as companies with limited liability, either in the form of the company limited by guarantee often without share capital, or as a company limited by shares (private or public). The CIC legal framework contains provisions regarding: (i) the community purpose; (ii) participatory governance; (iii) accountability; and (iv) the financial structure. The CIC legal provisions are underpinned by an overarching community interest, which is also reflected in the new legal form’s name.7 The service to the community and the engagement of the CIC with the community’s constituents are core principles that underlie the CIC legal regime in its entirety. Accordingly, the CIC’s core characteristics were designed by the national legislator to safeguard, namely: (i) the community objectives of the company; (ii) the profit and asset distribution constraint through an asset-lock scheme; and (iii) accountability and the participatory governance of the CIC.8 In the following Sub-sections, the manner in which these characteristics were given a place in the law applicable to CICs will first be briefly discussed. Thereafter, the discussion will focus on the characteristics of participatory governance.