Community Interest Company Regulations 2005

rose to move, That the draft regulations laid before the House on 1 March be approved [13th Report from the Joint Committee, Session 2004–05]. The noble Lord said: My Lords, the Community Interest Company Regulations are to be made under Part 2 of the Companies (Audit, Investigations and Community Enterprise) Act 2004. This House debated that Act thoroughly last year. Noble Lords on the Benches opposite agreed at Third Reading that the Bill had been significantly improved during its passage. I do not, therefore, propose to restate the case for community interest companies, but rather to concentrate on the regulations themselves. Like the original proposals for community interest companies, these regulations have been subject to much consultation. Two drafts of the regulations were published while the Bill was under consideration and a formal consultation began in October 2004 for three months. The regulations now before us take account of the valuable comments made on the earlier drafts. Part 1 of the regulations contains the usual provisions on citation, commencement and definitions. Part 2 deals   with the community interest test and excluded companies. The regulator of community interest companies should not have to decide whether the activities of any political party benefit the community, so Regulations 3 and 6 exclude political parties from being or owning community interest companies. Nevertheless, community interest companies may campaign or lobby, just as some charities do, and that will be allowed provided that the campaigning or lobbying is ancillary to their activities to benefit the community. Regulation 4 allows an employee-owned company to be a community interest company provided that its activities are intended to benefit the community. For example, it may have a policy of employing people who are long-term unemployed; or it may provide socially valuable goods or services at affordable prices to people who would otherwise not have access to them. Similarly, a company set up to benefit the employees of one employer, for example by providing childcare, could be a community interest company if it also provides childcare for the wider community. Regulation 5 defines the term ““section of the community”” for the purposes of the community interest test. The definition is deliberately wide because we do not wish to constrain the potential activities of community interest companies. Community interest companies must have certain provisions, mainly concerned with the asset lock, membership, governance and dividends, in their memoranda and articles. Those provisions are set out in Regulations 7 to 10 and Schedules 1 to 3. Regulations 11 and 12 in Part 4 specify the additional documents to be supplied on the formation of, or conversion to, a community interest company. Regulations 13 to 16 make it a requirement for the regulator to approve changes to a community interest company’s objects, and for companies to publicise proposed changes before they are made. Regulations 17 to 25 deal with the cap on dividend payments, the distribution of any residual assets on winding up, and with share redemptions, buy-backs and capital reduction. Following consultation we have decided on a double cap on dividends. The first cap is a limit expressed as a maximum percentage of the paid up value of a share which can be paid out each year. The regulations set this at bank base rate plus 5 per cent. Since a community interest company should not pay out too much of its profits in dividends, the regulations add a second cap, so that no more than 35 per cent of profits can be paid as dividends in a given year. The guidance notes on the regulations contain four worked examples showing how those caps will work in practice. The arrangement strikes a fair balance: it allows community interest companies which wish to raise capital by issuing shares to pay a reasonable rate of return but ensures that a substantial proportion of profits is retained in the   business or used for the community benefit. The regulator will be able to change the dividend caps in the   light of experience, after consulting and with the consent of the Secretary of State. Regulations 26 to 29 deal with the community interest report which community interest companies will have to provide each year, to show how they have benefited the community, how much they have   paid their directors, and whether they have transferred assets for the benefit of the community. The Regulator’s office will check reports but their main value will be for those with an interest in a company: the employees or the community it is intended to benefit. They will be able to read the company’s account of its activities and raise any concerns with the regulator who, under the 2004 Act, has powers to investigate where necessary. One way in which the regulator can intervene if he has serious concerns about the running of a community interest company is to appoint a manager under Section 47 of the 2004 Act. Regulations 30 to 33 make some provisions for such managers. Regulations 34 and 35 make minor consequential amendments to the functions of the registrar of companies. Regulation 36 and Schedule 5 set out the fees for the regulator’s main activities of approving the   formation of, or conversion to, a community interest company and receipt of the annual community interest report. We have set each fee at £15. Finally, Regulations 37 to 42 set out some basic rules governing the hearing of cases by the appeal officer. The Regulator of Community Companies, John   Hanlon, was appointed, in accordance with the procedures of the Office of the Commissioner for Public Appointments, with effect from 1 April and he is producing extensive guidance for different types of   community interest companies. These regulations represent the final step to implement community interest companies. There is already a queue of organisations wishing to form, or convert to, community interest company status and over 340   organisations have expressed interest in this type of company. It is clear, therefore, that the community interest company will meet a real demand. I beg to move. Moved, That the draft regulations laid before the House on 1 March be approved [13th Report from the Joint Committee, Session 2004–05].—(Lord McKenzie of Luton.)