Social enterprises in the EU (IVOR nr. 111) 2018/2.4.3:2.4.3 The Community Interest Company (CIC) in the UK

Social enterprises in the EU (IVOR nr. 111) 2018/2.4.3

2.4.3 The Community Interest Company (CIC) in the UK

Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.

The Companies Act 2004 (hereafter the ‘2004 Act’) introduced the Community Interest Company (CIC), which is a tailor-made legal form for social enterprises in the UK.1 The CIC is not a new legal form in its entirety. It constitutes a legal form that is tailored to the limited liability company: the standard incarnation of the corporate body designed for commercial purposes that is regulated by the company law provisions contained in the Companies Act of 2006 (hereafter ‘2006 Act’). The CIC and its special characteristics are superimposed upon the limited liability company form in terms of the 2004 Act and the CIC Regulations of 2005. These both constitute the basic legislation regulating CICs.2 As such, the CIC is a special kind of company with limited liability that can be incorporated afresh. Alternatively, a private company or a public limited company (hereafter ‘plc’) can be converted to a CIC. It must be registered with the Registrar of Companies at the Companies House in Cardiff or Edinburgh, either as a CIC limited by shares or by guarantee.3 A CIC limited by guarantee is a not-for-profit company without share capital that has members rather than shareholders. However, its members enjoy the limited liability prescribed in the CIC’s AoA to the extent of the amount that the members (guarantors) agree to contribute in the event that the CIC ends.4

All CICs must adhere to the rights and obligations provided by UK Company Law and the principles of common law that are applicable to limited liability companies in the UK.5 The 2004 Act introduces a very basic legal framework for CICs that is complemented by the 2006 Act, and the CIC Regulations of 2005.6 The social purpose of the CIC is not explicitly prescribed in the CIC legislation. Instead, a CIC is required to set out the community benefit objectives in its memorandum and/or AoA. The CIC constitutional documents are subject to a legislatively prescribed test known as the ‘community interest test’ (hereafter ‘the CIC test’).7 The CIC test is an obligation that the 2004 Act imposes upon every CIC. The CIC Regulator (hereafter ‘the Regulator’) is the competent authority to adjudicate whether a limited liability company has met the CIC test based on the submitted documents.8 First, it is essential that the Regulator examines the community interest objectives in the CIC’s constitutional documents.9 Secondly, the Regulator then has to establish whether the objectives of the CIC will serve the purpose of benefiting the community instead of serving the interests of other beneficiaries.10 The decisive standard for the Regulator is whether a reasonable person would consider the activities carried out by the CIC – undertaken – with the view of fulfilling the company’s objectives to be for the benefit of the community. Therefore, the CIC test demands that a CIC explains in its constitutional documents the scope of its objectives, the nature of its activities, the community that it aims to serve, and the way in which its objectives will be pursued. An example of how this may be achieved is provided by the Regulatory Guidance, whereby a CIC may explain that it provides ‘day care and transport facilities for the elderly and physically disadvantaged in North Essex’.11

Every aspect of the CIC’s operations and activities is subject to the CIC test. By applying this test, the Regulator has the power to inspect, supervise and control the eligibility of all social enterprises to be formed as a CIC or companies that are to be converted into a CIC.12

Specific regulatory provisions refer to the activities that a reasonable person would consider benefitting the community. However, a detailed or specific list of eligible CIC activities that a reasonable person would view as activities carried out for the benefit of the community is not supplied. Instead, the CIC Regulations of 2005 provide a list of activities that cannot be considered eligible community-based activities, namely political activities.13 In particular, according to the Regulatory Guidance, political activities are excluded from the scope of activities that a CIC could undertake. The political activities may put the Regulator in the unenviable position of having to consider and select whether a particular political activity is beneficial for the community.14 However, the CIC Regulations of 2005 do provide for an exception in the case of political activities, which are ‘incidental’ to activities that a reasonable person would consider to be carried on for the benefit of the community. However, this must not ‘compromise the non-political character’ of the CIC.15

It is critical for the CIC test, and thus for the decision of the Regulator that a definition within the CIC Regulations of 2005 is provided for the term ‘community’. The term ‘community’ has been defined in both the Regulation 5(a) and (b) of the CIC Regulations of 2005 and in Sub-section 35(5) of the 2004 Act. According to Regulation 5 of the CIC Regulations of 2005, ‘community’ could be understood as the entirety of the population or as a part of the community, i.e. a group of individuals who share common identifiable characteristics.16 The term ‘community’ could also imply a section of a larger or smaller geographic community, for example a city, country, municipality, or province.17 The Regulatory Guidance provided by the Regulator explains that the notion of community may also include a group who is, or will be, the beneficiary of any surplus or profits generated by the trading activities of the CIC. This will be the case even where those trading activities do not benefit such a group directly.18

Deze functie is alleen te gebruiken als je bent ingelogd.