2.7.3.1 Profit distribution constraint: the asset-lock scheme

The CIC’s policy on the distribution of dividends should be laid down in its AoA. The economic right to dividends constitutes the shareholder’s entitlement to benefits from the company’s profits in the form of dividends. However, in the case of the CIC, a restrictive scheme has been put in place regarding the distribution of profits, assets and dividends to shareholders, namely: the so-called ‘asset-lock’ scheme. The asset-lock scheme is a set of restrictions in the provisions of the 2004 Act1 and the CIC Regulations of 2005, which prohibit the distribution of assets to the CIC’s members/shareholders and other investors.2 The distribution is prohibited either during the active and operational period of the CIC or at the winding-up of the company.3 The asset-lock is a mandatory provision that must be included in the CIC’s constitutional documents.4 The asset-lock provisions in the AoA should explain how the distribution of the CIC’s assets is performed in the company inclusive of the period of winding up. Additionally, there are restrictions, which prohibit the CIC from transferring the company’s assets to other organisations. The AoA should contain minimum statutory restrictions stipulated in the CIC Regulations of 2005 with respect to the transfer of assets which require that the asset transfer can only take place: (i) for full consideration; (ii) to other asset-locked bodies which are specified in the CIC’s AoA; (iii) to other asset-locked bodies with the consent of the Regulator; or (iv) for the benefit of the community, i.e. following the CIC objectives.5

The implementation of the asset-lock provisions is subject to the Regulator’s supervisory power. Section 30 of the 2004 Act regulates the asset-lock scheme,6 laying down the general rule that prohibits CICs from distributing their assets to their members.7 Section 30(5)(a)-(b) of the 2004 Act also confers a right on the Regulator to impose certain limits on the distribution of assets thus imposing limits on the maximum amount of financial returns that the investors of the CIC can receive, i.e. dividend caps.8 Firstly, the Regulator may (a) set a ‘limit’ by reference to a rate determined by any other person. The explanatory notes further explain that the limit can be set by reference to an index, such as the Bank of England base lending rate to comply with national economic and governmental policy.9 Secondly, it is at the discretion of the Regulator to (b) impose a broad scope of different limits ‘for different descriptions of community interest companies’ applying to different categories of CICs according to their activity, size, sector or geographical area.10 In this respect, Section 30(6) addresses specific factors that the Regulator ‘must’ and ‘may’ take into consideration prior to determining the ‘limits’. The Regulator must: (i) undertake appropriate consultation before setting the limit; and (ii) in setting a limit, have regard to the likely impact on community interest companies.11

All types of dividend caps are regulated by Regulation 22(1)(a)-(c) of the CIC Regulations of 2005, which provide for the amount of profits that can be paid to shareholders. According to Regulation 22, the dividend-related cap imposed is referred to as the aggregate dividend cap.12 The Regulator is the person authorised to issue and/or revises the cap under the approval and the supervision of the Secretary of State.13 The aggregate dividend cap is determined as a percentage of the CIC’s distributable profits and is currently fixed at 35% of the CIC’s distributable profits.14 It is noteworthy that the CIC Regulations of 2005 allow unlimited distributions to be made to members, which are themselves CICs or charities under the concept of ‘exempt dividends’.15 Also regulated in Regulations 21 and 22(c) is the interest cap that on the basis of the asset-lock applies to debenture16 or any debt issued by any CIC. Such debenture includes for example mortgage debenture or CIC issued bonds. As of 1 October 2014 this is a fixed rate of 20%, which is expressed in Regulation 22(4)(7) as a percentage of the average amount of debt, or the sum outstanding under a debenture, during the 12 month period immediately preceding the date on which the interest on that debt or debenture becomes due.17