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Comments from ACCA
June 2003

ACCA is pleased to comment on the DTI�s proposals for the Community Interest Company. Our responses on the specific consultation issues posed in the consultation paper are set out below.

There should be a new type of company � the Community Interest Company (CIC)

We accept that there is a need for there to be available a means of doing business in accordance with non-commercial objectives and in a form which provides a reasonable level protection from personal liability to the entity�s controllers. We do not, however, consider that the consultation paper, and in particular the case studies contained within it, sets out a convincing case that there is likely to be a distinct �market� for the CIC. We say this for three main reasons:

1. Overlap with the charity
   At present, an organisation which wishes to pursue �public interest�-orientated goals through a corporate body has the option of forming a company limited by guarantee and, if it wishes and if it is appropriate, of supplementing that status through the acquisition of charitable status. We understand that the guarantee company format remains extremely popular with persons who wish to form non-profit-making companies. The drawback of the current two-step procedure, which requires charitable companies to subject themselves to two separate compliance regimes, is being addressed by the Government in the development of the Charitable Incorporated Organisation (CIO), which, we understand, is to be a wholly new type of corporate body but which will combine the essence of the two current regimes. In order to incorporate as a CIC, it is now proposed that the prospective CIC will be required to satisfy a new regulator that the purposes of its existence will be to benefit the community or the wider public interest. This test appears to be similar to the test which a body needs to meet now and in the future in order to secure charitable status.
   
   
2. Lack of fiscal incentive
   Even though a CIC would need to have much the same sort of character as a charity, it would not be entitled to the tax benefits which are available to charities. This makes the CIC less attractive vis-à-vis the charity, particular if the charitable company is, in future, rationalised via the CIO.
   
   
3. Flexibility of company law
   Individuals or businesses which wish to set up a corporate body for specific purposes and to lay down rules concerning the use of its surpluses and the rights of its shareholders may already do this via the framing of constitutional documents and shareholders� agreements. We accept that statutory provisions would bring greater certainty to such arrangements and allow them to apply to �new� investors as well as to present ones, but we doubt whether the difference would be significant in practice.

Apart from the issue of whether the CIC will be sufficiently distinctive to create any market demand for it, we query whether it would be appropriate to constitute the CIC as a �limited company�. An alternative would be to create a wholly new type of corporate body, as we understand is envisaged for the CIO,

with appropriate provisions of companies legislation being applied to the CIC in the same way as has been done with respect to the LLP. Under current company law requirements, it is the overriding responsibility of the directors of any limited company to run their company in what they see as being the best interests of its members. This basic principle of company law is likely to be expanded and given new emphasis in the forthcoming Companies Bill.

Given that the CIC is intended to be a business with primarily �social� objectives, in the sense that they may not necessarily reflect the aggregate self-interest of the members of the company, we suggest that it would be more appropriate for companies with such altruistic objects to be clearly differentiated from companies which are characterised by what might be described as collective self-interest. This would allow the CIC to operate in accordance with a set of principles which were appropriate for the body, its controllers and investors. Clearly distinguishing the CIC from guarantee and share-based companies could also allow the CIC to carry a unique, self-identifying description such as �CIC� (although, in this connection, we would point out that the description CIC is widely understood in tax circles to refer to a close investment holding company).

The consultation paper also suggests that the CIC would be subject to the requirements of company law in the same way as any other limited company, although with additional responsibilities linked to its community-orientated purposes. Given the intended nature of the CIC, we suggest that the application of company law to CICs would need to be modified significantly to reflect the enhanced element of stakeholder interest in the CIC. For example, under planned changes to company law, limited companies will be freed from the ultra vires rule, thus allowing them to pursue whatever activities they wished. This would clearly not be appropriate for the CIC. Also, the CIC should not be exempt from the statutory independent audit and the CIC should not be entitled to dispense with the AGM. This sort of exemption from hitherto standard elements of company law has been devised in recent years in the interests of closely-held private companies in which the owners and managers of the business are essentially the same and where no information purpose is considered would be gained from imposing these requirements on small companies. It would not be appropriate to extend such features to what is designed essentially to be a �stakeholder� type company. Neither would it be appropriate to extend to the CIC the same size-based exemption criteria which have been devised with specific reference to commercial, trading companies.

Also with regard to the question of the market need for a brand new type of company, paragraph 8 of the paper states that the legal process of creating a not-for-profit company can be lengthy and expensive, and the transaction costs of setting up are high. We dispute these claims: setting up any company, whether public or private, by shares or by guarantee, is cheap and easy, as is evidenced by the number of companies on the register and by the number of new registrations each year. The cost of incorporation is not a bar to setting up a company in the UK.

A regulator should apply a �reasonable person� test of community interest and issue guidance on this test

If the CIC is to have any sort of unique ethos, then it will be essential that a test of eligibility is imposed on would-be incorporators of the new body and that clear guidance is made available as to what the test means. This guidance will need to be far more specific than the statement in the consultation paper that an individual CIC�s benefits must �not be confined to an unduly restricted group�. With respect to the passage in paragraph 43 of the paper, it will also be essential that the regulator is able to monitor compliance with CICs� continued compliance with the eligibility test and is in a position to take appropriate remedial action where an individual CIC is not living up to its obligations.

Political parties should not be allowed to become CICs or to set up CIC subsidiaries

Although the CIC is not to benefit from any tax privileges, and will always be subject to restrictions as regards the use it makes of its surplus funds, we consider it to be right to insist that political parties should not be entitled to use the CIC vehicle for what would inevitably be their partisan assessment of what constitutes the �community interest�. There should also be restrictions on political control of individual CICs.

Once a CIC is registered, the regulator would need to approve any change to its purposes

We agree.

CICs should be able to issue tradable fixed or capped rate shares and to pay dividends on these shares up to a fixed percentage

We accept that the CIC might wish to raise funds in order to pursue its projects.

As regards the raising of equity finance, however, unless a company is a �public� company, it is not allowed to sell its shares to the public. This would appear to mean that a CIC, unless it were a plc or unless it was constituted as a wholly different type of corporate body, would not be entitled to raise funds via this method. The proposal to allow CICs to pay dividends to their shareholders also appears to conflict with the proposal to impose a lock on the CIC�s profits and assets and may, as a result, undermine support for the CIC concept on the part of other, �philanthropic� investors. If, however, �preference� shares were to be permitted, it would be desirable to restrict the ability of such investors to act as directors of a CIC.

CICs should not be able to issue shares that pay an uncapped dividend

This would be essential.

CICs should be encouraged to involve stakeholders in their enterprises

The contribution of stakeholders to the CIC�s policy-making process should be encouraged. The company�s members should certainly have legal rights to information and rights to communicate opinions. There should also be a requirement for each CIC to hold an AGM and provision for members to requisition an EGM. But, assuming that the CIC would be governed by a board of directors on the same lines as other limited companies, we do not consider that it would be helpful for the law to require those directors to liaise with �stakeholders� on any regular, prescribed basis. To a great extent, the onus should be on the members of the CIC to ensure that the persons that they appoint as directors are individuals who are sympathetic to the broad aims of the CIC and conscious of the need to take stakeholder views into account in all their dealings on behalf of the CIC. If the CIC is to be a limited company, then its directors will have broad power to manage its affairs under the law and in the light of its constitution, and any statutory requirement to liaise with stakeholders would act as an unreasonable constraint on this power.

The regulator�s functions

We agree with the proposed functions.

In conclusion, our view is that if the DTI wishes to create a new body with a character which is different from that which can be accommodated by both present and planned company and charity law, then it should constitute the CIC as a wholly separate type of corporate body. In particular, if the intention is to give the CIC a uniquely �stakeholder�-focused character, then the DTI should not think simply in terms of applying to the CIC the provisions of companies legislation, which are intended essentially to govern the activities of commercial enterprises.

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