Law and Regulation of Community Interest Companies 9781526522757, 9781526522788, 9781526522771

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Law and Regulation of Community Interest Companies

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Law and Regulation of Community Interest Companies Richard C. Bishop MA DipFA

BLOOMSBURY PROFESSIONAL Bloomsbury Publishing Plc 50 Bedford Square, London, WC1B 3DP, UK 1385 Broadway, New York, NY 10018, USA 29 Earlsfort Terrace, Dublin 2, Ireland BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc © Bloomsbury Professional 2022 All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/ open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2022. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN:  HB ePDF ePub

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Contents Downloadable Precedents  413 Table of Statutes  vii Table of Statutory Instruments  xiii Table of Cases  xvii Chapter 1: Introduction to Community Interest Companies  1 Overview  1 The role of CICs  7 Excluded companies  10 CIC names  13 CIC versus charity structure  14 Registered societies  15 Taxation of CICs  16 Legal structure  17 Constitution overview  18 Key points  24 Chapter 2: Legal Background of Community Interest Companies  25 The CIC Regulations  25 Three Amendment Regulations  29 Chapter 3: Regulation of Community Interest Companies  31 Legislative background  31 Companies (Audit, Investigations and Community Enterprise) Act 2004  31 The Regulator’s approach  34 Supervision by the Regulator  37 Investigations  38 Appeals  47 Corporate governance  51 Regulations  54 Chapter 4: Overview of Community Interest Companies  55 Legal company structures  55 Unincorporated forms, sole traders and partnerships  55 Process of incorporation  57 Forming a CIC  61 Company becoming a CIC  64 Conversion to a CIC  67 CIC becoming a charity  68 Financing  73 Loan capital and debentures  74 Chapter 5: Reporting  77 Introduction  77 Directors’ remuneration  79

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Contents Winding up  83 Insolvency Act 1986  84 Transfer of assets  87 Chapter 6A: Articles of Association  91 Introduction  91 Asset-lock provisions  96 Alteration of objects  97 The Regulator’s decision  97 Chapter 6B: Model Articles for Private Companies Limited by Shares  101 Introduction  101 Model Articles for Private Companies Limited by Shares  101 Chapter 6C: Articles of Association for Not for Profit Companies  173 General comments  173 Key changes  173 Drafting assumptions  173 Boiler plate clauses  174 Model Articles for Private Companies Limited by Guarantee  177 Chapter 7: Asset Lock  197 Introduction  197 Declaration of dividends  200 PRECEDENTS Chapter 8.0: Community Interest Company Limited by Guarantee (CIC Limited by Guarantee, Schedule 1, Small Membership)  211 Chapter 8.1: Community Interest Company Limited by Guarantee (CIC Limited by Guarantee, Schedule 1, Large Membership)  235 Chapter 8.2: Community Interest Company Limited by Shares (CIC Limited by Shares, Schedule 2, Small Membership)  265 Chapter 8.3: Community Interest Company Limited by Shares (CIC Limited by Shares, Schedule 2, Large Membership)  295 Chapter 8.4: Community Interest Company Limited by Shares (CIC Limited by Shares, Schedule 3, Small Membership)  333 Chapter 8.5: Community Interest Company Limited by Shares (CIC Limited by Shares, Schedule 3, Large Membership)  365

Index  405

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Table of Statutes All references are to paragraph number C Charities Act 2011�����������������������  1.11, 3.3 Ch 1��������������������������������������������   1.26 Pt 10��������������������������������������������   1.11 Pt 11��������������������������������������������   1.11 s 22����������������������������������������������   4.39 s 198��������������������������������������������   1.46 Sch 3�������������������������������������������   4.39 Companies Act 1856 Sch 1 Table A reg 7��������������������������������������   6B.27 reg 8�����������������������������   6B.25, 6B.26 reg 9����������������������������������������  6B.26 reg 9a���������������������������������������  6B.27 reg 10��������������������������������������  6B.28 reg 11��������������������������������������  6B.29 reg 12��������������������������������������  6B.29 reg 13��������������������������������������  6B.29 reg 14���������������������������   6B.27, 6B.29 reg 27��������������������������������������  6B.27 reg 31��������������������������������������  6B.39 reg 32��������������������������������������  6B.42 reg 33��������������������������������������  6B.40 reg 34��������������������������������������  6B.40 reg 35��������������������������������������  6B.42 reg 36���������������������������   6B.43, 6B.45 reg 37��������������������������������������  6B.45 reg 42��������������������������������������  6B.46 reg 43���������������������������   6B.46, 6B.47 reg 46�������������������������������   6B.4, 6B.5 reg 47��������������������������������������  6B.19 reg 53��������������������������������������  6B.18 reg 54��������������������������������������  6B.18 reg 55������������������   6B.8, 6B.10, 6B.12, 6B.14, 6B.37 reg 56��������������������������������������  6B.13 reg 57�������������������������������   6B.6, 6B.7 reg 58�������������������������������   6B.6, 6B.7 reg 59�������������������������������   6B.6, 6B.7 reg 63��������������������������������������  6B.31 reg 65��������������������������������������  6B.31 reg 67���������������������������   6B.32, 6B.34 reg 68��������������������������������������  6B.33 Companies Act 1862��������������������������  1.42 Sch 1 Table A reg 2�����������������������������   6B.25, 6B.26 reg 3����������������������������������������  6B.26 reg 8����������������������������������������  6B.27 reg 9����������������������������������������  6B.27 reg 10��������������������������������������  6B.27

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Companies Act 1862 – contd Sch 1 Table A – contd reg 11��������������������������������������  6B.27 reg 12��������������������������������������  6B.28 reg 13��������������������������������������  6B.29 reg 14��������������������������������������  6B.29 reg 37��������������������������������������  6B.39 reg 38��������������������������������������  6B.42 reg 39��������������������������������������  6B.40 reg 40��������������������������������������  6B.40 reg 41��������������������������������������  6B.42 reg 42���������������������������   6B.43, 6B.45 reg 43��������������������������������������  6B.45 reg 49��������������������������������������  6B.46 reg 50���������������������������   6B.46, 6B.47 reg 51��������������������������������������  6B.46 reg 54��������������������������������������  6B.20 reg 55�������������������������������   6B.4, 6B.5 reg 57��������������������������������������  6B.19 reg 61��������������������������������������  6B.16 reg 63��������������������������������������  6B.18 reg 64��������������������������������������  6B.18 reg 66������������������   6B.8, 6B.10, 6B.12, 6B.14, 6B.32, 6B.37 reg 67��������������������������������������  6B.13 reg 68�������������������������������   6B.6, 6B.7 reg 69�������������������������������   6B.6, 6B.7 reg 70�������������������������������   6B.6, 6B.7 reg 72��������������������������������������  6B.31 reg 76��������������������������������������  6B.34 reg 77��������������������������������������  6B.33 Companies Act 1906 Sch 1 Table A reg 6����������������������������������������  6B.25 reg 7����������������������������������������  6B.26 reg 18��������������������������������������  6B.27 reg 19��������������������������������������  6B.27 reg 20��������������������������������������  6B.27 reg 21��������������������������������������  6B.28 reg 22��������������������������������������  6B.29 reg 51��������������������������������������  6B.39 reg 52��������������������������������������  6B.42 reg 53��������������������������������������  6B.40 reg 54��������������������������������������  6B.40 reg 55��������������������������������������  6B.42 reg 56���������������������������   6B.43, 6B.45 reg 57��������������������������������������  6B.45 reg 65��������������������������������������  6B.46 reg 66���������������������������   6B.46, 6B.47 reg 67��������������������������������������  6B.46

Table of Statutes Companies Act 1906 – contd Sch 1 Table A – contd reg 69��������������������������������������  6B.20 reg 71�������������������������������   6B.4, 6B.5 reg 72��������������������������������������  6B.20 reg 75��������������������������������������  6B.16 reg 76��������������������������������������  6B.32 reg 77��������������������������������������  6B.19 reg 83��������������������������������������  6B.18 reg 84��������������������������������������  6B.18 reg 85��������������������������������������  6B.18 reg 87��������   6B.8, 6B.10, 6B.14, 6B.37 reg 88��������������������������������������  6B.12 reg 90���������������������������   6B.12, 6B.13 reg 91�������������������������������   6B.6, 6B.7 reg 92�������������������������������   6B.6, 6B.7 reg 93�������������������������������   6B.6, 6B.7 reg 95��������������������������������������  6B.31 reg 96��������������������������������������  6B.31 reg 98��������������������������������������  6B.31 reg 102������������������������������������  6B.33 Companies Act 1908 Sch 1 Table A reg 6����������������������������������������  6B.25 reg 7����������������������������������������  6B.26 reg 18��������������������������������������  6B.27 reg 19��������������������������������������  6B.27 reg 20��������������������������������������  6B.27 reg 21��������������������������������������  6B.28 reg 22��������������������������������������  6B.29 reg 51��������������������������������������  6B.39 reg 52��������������������������������������  6B.42 reg 53��������������������������������������  6B.40 reg 54��������������������������������������  6B.40 reg 55��������������������������������������  6B.42 reg 56���������������������������   6B.43, 6B.45 reg 57��������������������������������������  6B.45 reg 65��������������������������������������  6B.46 reg 66���������������������������   6B.46, 6B.47 reg 67��������������������������������������  6B.46 reg 69��������������������������������������  6B.20 reg 71�������������������������������   6B.4, 6B.5 reg 72��������������������������������������  6B.20 reg 75��������������������������������������  6B.16 reg 77��������������������������������������  6B.19 reg 83��������������������������������������  6B.18 reg 84��������������������������������������  6B.18 reg 85��������������������������������������  6B.18 reg 87��������   6B.8, 6B.10, 6B.14, 6B.37 reg 88��������������������������������������  6B.12 reg 89��������������������������������������  6B.12 reg 90��������������������������������������  6B.13 reg 91�������������������������������   6B.6, 6B.7 reg 92�������������������������������   6B.6, 6B.7 reg 93�������������������������������   6B.6, 6B.7 reg 95��������������������������������������  6B.31

Companies Act 1908 – contd Sch 1 Table A – contd reg 96��������������������������������������  6B.31 reg 98��������������������������������������  6B.31 reg 100������������������������������������  6B.32 reg 101������������������������������������  6B.32 reg 102������������������������������������  6B.33 Companies Act 1929 Sch 1 Table A reg 2����������������������������������������  6B.23 reg 3����������������������������������������  6B.23 reg 4����������������������������������������  6B.25 reg 5����������������������������������������  6B.26 reg 17��������������������������������������  6B.27 reg 18��������������������������������������  6B.27 reg 19��������������������������������������  6B.27 reg 20��������������������������������������  6B.28 reg 21��������������������������������������  6B.29 reg 45��������������������������������������  6B.39 reg 46��������������������������������������  6B.42 reg 47��������������������������������������  6B.40 reg 48��������������������������������������  6B.40 reg 49��������������������������������������  6B.42 reg 50���������������������������   6B.43, 6B.45 reg 51��������������������������������������  6B.45 reg 59��������������������������������������  6B.46 reg 60���������������������������   6B.46, 6B.47 reg 61��������������������������������������  6B.46 reg 65��������������������������������������  6B.20 reg 67�������������������������������   6B.4, 6B.5 reg 68���������������������  6B.6, 6B.7, 6B.20 reg 70��������������������������������������  6B.16 reg 71��������������������������������������  6B.50 reg 72��������������������������������������  6B.19 reg 77��������������������������������������  6B.18 reg 78��������������������������������������  6B.18 reg 79��������������������������������������  6B.18 reg 81��������   6B.8, 6B.10, 6B.14, 6B.37 reg 82��������������������������������������  6B.12 reg 83��������������������������������������  6B.12 reg 84��������������������������������������  6B.13 reg 85�������������������������������   6B.6, 6B.7 reg 86�������������������������������   6B.6, 6B.7 reg 87�������������������������������   6B.6, 6B.7 reg 88��������������������������������������  6B.31 reg 90��������������������������������������  6B.31 reg 92��������������������������������������  6B.31 reg 94��������������������������������������  6B.32 reg 95��������������������������������������  6B.32 reg 96��������������������������������������  6B.33 reg 99��������������������������������������  6B.51 Companies Act 1948 Sch 1 Table A reg 2����������������������������������������  6B.23 reg 3����������������������������������������  6B.23 reg 7����������������������������������������  6B.24

viii

Table of Statutes Companies Act 1948 – contd Sch 1 Table A – contd reg 8����������������������������������������  6B.25 reg 9����������������������������������������  6B.26 regs 22–28�������������������������������  6B.27 reg 29��������������������������������������  6B.28 reg 30��������������������������������������  6B.29 reg 31��������������������������������������  6B.29 reg 53��������������������������������������  6B.39 reg 54��������������������������������������  6B.42 reg 55��������������������������������������  6B.40 reg 56��������������������������������������  6B.40 reg 57��������������������������������������  6B.42 reg 58���������������������������   6B.43, 6B.45 reg 59��������������������������������������  6B.45 reg 66��������������������������������������  6B.44 reg 68��������������������������������������  6B.46 reg 69���������������������������   6B.46, 6B.47 reg 70��������������������������������������  6B.46 reg 71��������������������������������������  6B.46 reg 76���������������������������   6B.20, 6B.21 reg 80�������������������������������   6B.4, 6B.5 reg 81����������������������������������������  6B.6 reg 84��������������������������������������  6B.15 reg 86��������������������������������������  6B.16 reg 87��������������������������������������  6B.20 reg 88��������������������������������������  6B.19 reg 94��������������������������������������  6B.18 reg 95��������������������������������������  6B.18 reg 97��������������������������������������  6B.18 reg 98�������������������  6B.8, 6B.10, 6B.14 reg 99��������������������������������������  6B.12 reg 100������������������������������������  6B.12 reg 101������������������������������������  6B.13 reg 102�����������������������������   6B.6, 6B.7 reg 103�����������������������������   6B.6, 6B.7 reg 104�����������������������������   6B.6, 6B.7 reg 106������������������������������������    6B.9 reg 107������������������������������������  6B.20 reg 108������������������������������������  6B.20 reg 109�������������������  6B.6, 6B.7, 6B.20 reg 113������������������������������������  6B.50 reg 114������������������������������������  6B.31 reg 115������������������������������������  6B.31 reg 118������������������������������������  6B.31 reg 120������������������������������������  6B.35 reg 121������������������������������������  6B.32 reg 122������������������������������������  6B.33 reg 125������������������������������������  6B.51 reg 128������������������������������������  6B.37 reg 129������������������������������������  6B.37 reg 136������������������������������������  6B.54 Companies Act 1985���������   1.24, 1.36, 1.42, 1.48, 3.35, 6A.13, 6B.1 s 26����������������������������������������������    1.24 s 184��������������������������������������������  6B.23

Companies Act 2006�����������   1.5, 1.11, 1.24, 1.32, 1.37, 1.40–1.44, 1.47, 1.48, 2.8, 3.3, 3.26, 3.35, 4.6, 4.11, 4.18, 4.44, 5.1–5.3, 5.8, 5.10, 6A.13, 6A.18, 6A.20, 6A.21, 6B.5, 6B.23, 6B.33, 6B.34, 6B.40, 6B.46, 6B.48–6B.51, 6C.3, 6C.5, 6C.11, 6C.12, 7.4, 7.29 Ch 2�������������������������������������   1.43, 6B.4, 6B.5 Ch 3��������������������������������������������  6B.23 Pt 23���������������������������������   6B.31, 6B.35 Pt 42��������������������������������������������    3.22 s 3������������������������������������������������   4.1 s 5(2)�������������������������������������������   1.36 s 6(a)��������������������������������������������   1.36 s 6(b)�������������������������������������������   1.36 s 9������������������������������������������������   4.18 s 14����������������������������������������������   4.22 s 15����������������������������������������������   4.22 s 17������������������������������������������  1.44, 5.3 s 19����������������������������������������������   1.42 s 20(1)����������������������������������������� 6A.18 s 21����������������������������������������   1.45, 4.11 s 28�������������������������������������   1.43, 6A.20 s 29����������������������������������������������   1.44 s 30����������������������������������������������   4.32 s 31�������������������������������������  6A.13, 6C.3 s 44�����������������������������������   6B.25, 6B.50 s 44(2)������������������������������   6B.25, 6B.50 s 45(1)�����������������������������������������  6B.50 s 58(3)�����������������������������������������   1.25 s 58(3)�����������������������������������������   1.25 s 59(4)�����������������������������������������   1.25 s 59(4)�����������������������������������������   1.25 s 80����������������������������������������   4.26, 4.41 s 90����������������������������������������������   4.30 s 96(2)�����������������������������������������   4.30 s 97����������������������������������������������   4.30 s 101(2)����������������������������������������   4.30 s 102��������������������������������������������   4.30 s 116��������������������������������������������  6B.51 s 154���������������������������������   6B.12, 6B.18 s 167(1)����������������������������������������   3.24 s 167(1)(a)������������������������������������   3.24 s 167A�����������������������������������������   3.24 s 168��������������������������������������������   3.24 s 169��������������������������������������������   3.24 s 170��������������������������������������������   5.4 ss 170–177�����������������������������������������6B.4 ss 170–181�����������������������������������   6B.5 s 171��������������������������������������  5.4, 6B.17

ix

Table of Statutes Companies Act 2006 – contd s 172�����������������������������   5.4, 5.12, 6B.52 s 173��������������������������������������������   5.4 s 174��������������������������������������������   5.4 s 175��������������������������������������  5.4, 6B.15 s 175(5)����������������������������������������  6B.15 s 176��������������������������������������������   5.4 s 177��������������������������������������  5.4, 6B.15 s 205(2)(a)������������������������������������  6B.54 s 232(1)����������������������������������������  6B.54 s 232(2)����������������������������������������  6B.54 s 233��������������������������������������������  6B.54 s 247(6)����������������������������������������  6B.52 s 248���������������������������������   6B.16, 6B.23 s 284��������������������������������������������  6B.43 s 284(4)����������������������������������������  6B.43 s 311��������������������������������������������  6B.48 s 318���������������������������������   6B.39, 6B.42 s 318(1)����������������������������������������  6B.39 s 318(2)����������������������������������������  6B.39 s 319��������������������������������������������  6B.40 s 319(2)����������������������������������������  6B.40 s 321��������������������������������������������  6B.45 s 321(1)����������������������������������������  6B.45 s 323��������������������������������������������  6B.39 ss 324–331�����������������������������������  6B.46 s 330��������������������������������������������  6B.47 s 330(2)����������������������������������������  6B.47 s 330(4)����������������������������������������  6B.47 s 330(6)����������������������������������������  6B.47 s 332��������������������������������������������  6B.42 s 441��������������������������������������������   5.25 s 499��������������������������������������������   3.22 s 684(2)����������������������������������������  6B.23 s 684(3)����������������������������������������  6B.23 s 684(4)����������������������������������������  6B.23 s 685��������������������������������������������  6B.23 s 761��������������������������������������������   4.19 s 762��������������������������������������������   4.19 s 768��������������������������������������������  6B.25 s 769��������������������������������������������  6B.25 s 776��������������������������������������������  6B.25 s 830�������������������������������������   6B.31, 7.2, 7.7, 7.8 s 845��������������������������������������������  6B.35 s 1000������������������������������������������   3.37 s 1001������������������������������������������   3.37 s 1003������������������������������������������   3.37 s 1029������������������������������������������   3.37 s 1077������������������������������������������ 6A.17 ss 1143–1148�������������������������������  6B.49 s 1145(1)–(5)��������������������������������  6B.49 s 1147������������������������������������������  6B.49 s 1214������������������������������������������  6B.20 s 1284(1)��������������������������������������   2.5 Sch 2 reg 3����������������������������   1.42, 1.48

Companies (Audit, Investigations and Community Enterprise) Act 2004�������������������������������  1.6, 2.2, 2.3, 2.8, 2.9, 3.2 Pt 1���������������������������������������������   2.3 Pt 2�������������������������   1.16, 1.32, 2.1, 2.3, 2.5, 3.1, 3.52, 3.53 Pt 3���������������������������������������������   2.3 s 7������������������������������������������������   2.4 s 8������������������������������������������������   2.4 s 26����������������������������������������������   1.16 s 26(1)�����������������������������������������   1.16 s 26(2)�����������������������������������������   1.16 s 27����������������������������������������������   3.2 s 27(4)�����������������������������������������   3.6 s 28����������������������������������������������   3.11 s 29����������������������������������������������   3.12 s 30����������������������������������������������   7.9 s 30(2)�����������������������������������   7.10, 7.22 s 30(3)�����������������������������������������   7.10 s 30(4)–(8)�����������������������������������   7.11 s 31����������������������������������������������   5.16 s 32�������������������������������   1.37, 4.21, 4.23, 6A.11, 6A.16 s 32(3)(a)�������������������������������������� 6A.11 s 32(3)(b)������������������������������������� 6A.11 s 32(4)�����������������������������������������   1.37 s 32(6)����������������������������������������� 6A.11 s 33�������������������������������   1.24, 1.25, 4.21, 4.23, 4.31 s 33(1)�����������������������������������������   1.25 s 33(2)�����������������������������������   1.24, 1.25 s 33(3)�����������������������������������   1.24, 1.25 s 33(4)�����������������������������������   1.24, 1.25 s 34����������������������������������������������    5.24 s 34(2)�����������������������������������������   2.8 s 35����������������������������������������������   1.17 s 35(6)�����������������������������������������   1.17 s 36����������������������������������������   4.16, 4.18 s 36(3)(a)��������������������������������������   4.18 s 36(6)�����������������������������������������   1.17 s 36A�������������������������������������������   4.20 s 36B�������������������������������������������   4.22 s 3 (2)���������������������������������������   4.22 s 37����������������������������������������������   4.23 s 37(1)�����������������������������������������   4.17 s 37(1)(c)�������������������������������������   4.27 s 37(2)�����������������������������������������   4.17 s 37A�������������������������������������������   4.24 s 37B�������������������������������������������   4.24 s 37C�������������������������������������������   4.23 s 37C(1)(a)�����������������������������������   4.23 s 37C(3)(a)�����������������������������������   4.25 s 38A�������������������������������������������   4.27 s 38A(2)���������������������������������������   4.26 s 38A(5)���������������������������������������   4.26

x

Table of Statutes Companies (Audit, Investigations and Community Enterprise) Act 2004 – contd s 39����������������������������������������������   4.27 s 39(3)�����������������������������������������   4.27 s 40(1)�����������������������������������������   4.28 s 40(2)�����������������������������������������    4.28 s 40(4)�����������������������������������������   4.28 s 40A(1)���������������������������������������   4.29 s 41(3)�����������������������������������   3.15, 3.34 s 41(4)�����������������������������������   3.16, 3.34 s 41(5)�����������������������������������������   3.34 s 41(7)�����������������������������������������   3.34 s 41(10)����������������������������������������   3.34 s 41(11)����������������������������������������   3.34 s 41(12)����������������������������������������   3.34 ss 41–51���������������������������������������   3.14 s 42����������������������������������������   3.17, 5.15 s 43����������������������������������������   4.40, 5.15 s 44��������������������������������  3.23, 4.40, 5.15 s 45�����������������������   3.14, 3.24, 3.25, 4.40 s 46����������������������������������������   3.14, 5.15 s 46(1)�����������������������������������������   3.52 s 46(3)���������������������������  3.26, 3.52, 4.40 s 47��������������������������������  3.14, 3.27, 4.40 s 47(12)����������������������������������������   3.27 s 47(13)����������������������������������   3.27, 3.33 s 48�������������������������������  3.12–3.14, 3.34, 3.51, 5.15 s 48(1)�����������������������������������������   3.13 s 48(1)(a)��������������������������������������   3.34 s 48(1)(b)�������������������������������   3.34, 3.52 s 48(2)���������������������������  3.13, 3.52, 4.40 s 48(3)�����������������������������������   3.13, 4.40 s 49����������������������������������������������   3.35 s 49(1)�����������������������������������������   3.52 s 49(2)�����������������������������������������   3.52 s 49(4)(b)�������������������������������������   3.35 s 50����������������������������������������   3.36, 5.15 s 53����������������������������������������������   4.30 s 54�������������������������������������   4.40, 6A.17 s 54A������������������������������������   4.32, 4.33, 4.37, 4.38 s 54B(1)���������������������������������������   4.38 s 54C�������������������������������������   4.32, 4.40 s 54C(1)���������������������������������������   4.32 s 54C(4)���������������������������������������   4.41 s 55(2)�����������������������������������������   4.40 s 57����������������������������������������������   3.46 s 59����������������������������������������   3.47, 3.51 s 59(4)�����������������������������������������   3.50 s 59(5)�����������������������������������������   3.50 s 59(8)�����������������������������������������   3.50 s 59(9)�����������������������������������������   3.50 s 61����������������������������������������������   3.51 s 61(5)�����������������������������������   3.38, 3.41

Companies (Audit, Investigations and Community Enterprise) Act 2004 – contd s 62����������������������������������������������   3.53 s 62(5)�����������������������������������������   3.53 s 62(6)�����������������������������������������   3.53 Sch 2���������������������������������������������   2.4 Sch 3���������������������������������������������   2.3 para 1�������������������������������������  3.8, 3.9 para 2�������������������������������������  3.8, 3.9 para 5�����������������������������������  3.9, 3.17 para 7���������������������������������������   3.10 para 8���������������������������������������   3.10 Sch 4���������������������������������������  2.3, 3.11 para 1���������������������������������������   3.11 Sch 5�������������������������������������������   2.3 Sch 6�������������������������������������������   2.3 Sch 7�������������������������������������������   2.3 para 1��������������������������������� 3.18–3.21 para 2���������������������������������������   3.18 para 5���������������������������������������   3.51 Co-operatives and Community Benefit Societies Act 2003 s 1������������������������������������������������   1.31 Co-operative and Community Benefit Societies Act 2014����  1.5, 1.30 s 2������������������������������������������������   1.5 s 112��������������������������������������������   1.5 s 115��������������������������������������������   4.42 Corporation Tax Act 2010 Pt 11��������������������������������������������   4.39 s 480��������������������������������������������   4.39 s 481��������������������������������������������   4.39 s 1173������������������������������������������   4.39 E Enterprise Act 2002 s 237��������������������������������������������   3.49 s 243(6)����������������������������������������   3.49 G Government of Wales Act 1998��������   2.3 H Housing Act 1996����������������������������   5.21 Housing (Scotland) Act 2001�����������   5.21 I Industrial and Provident Societies Act 1965������������������������������������  1.5, 1.30 Industrial and Provident Societies Act (Northern Ireland) 1969 s 62����������������������������������������������   4.42 Insolvency Act 1986�������������������   5.18, 5.21 s 51����������������������������������������������   3.27 s 124A�����������������������������������������   3.36

xi

Table of Statutes J Joint Stock Companies Act 1844������   5.1 Joint Stock Companies Act 1856����  1.42, 5.1 Table A����������������������������������������   5.1 Table B����������������������������������������   5.1

M Mental Health (Discrimination) Act 2013����������������������������������������  6B.19 N Northern Ireland Act 1998��������������   2.3

L Limitation Act 1980�������������������������  6B.34 Limited Liability Act 1855���������������   5.1

S Scotland Act 1998����������������������������   2.3

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Table of Statutory Instruments All references are to paragraph number C Community Benefit Societies (Restriction on Use of Assets) Regulations 2006, SI 2006/264�������������������������  1.5, 1.31 Community Interest Company Regulations 2005, SI 2005/1788����� 2.1, 2.2, 2.5–2.7, 2.9, 3.1 Pt 2��������������������������������������������  1.19 Pt 6��������������������������������������������  7.18 Pt 8��������������������������������������������  3.28 Pt 11�������������������������������������������  3.11 reg 2��������������������������������������   5.22, 7.22 reg 3������������������������������  1.22, 4.13, 4.14 reg 3(1)����������������������������������   1.21, 4.14 reg 3(1)(a)�����������������������������������  1.21 reg 3(1)(b)�����������������������������������  1.21 reg 3(1)(c)�����������������������������������  1.21 reg 3(2)���������������������������������������  1.22 reg 4�������������������������������������������  4.13 reg 5��������������������������������������   1.20, 4.15 reg 6�������������������������������������������  4.12 reg 7�����������������������������������  6A.1, 6A.12 reg 8�����������������������������������  6A.1, 6A.12 reg 8(a)����������������������������������������  6A.1 reg 8(b)����������������������������������������  6A.1 reg 10������������������������������������������   7.13 reg 13������������������������������������������ 6A.15 reg 17������������������������������������   5.27, 7.13 reg 17(4)��������������������������������������   7.12 reg 17(5)��������������������������������������   7.12 reg 18������������������������������������������   5.27 reg 19������������������������������������������   5.27 reg 21����������������������������  5.28, 7.20, 7.23 reg 21(2)��������������������������������������   7.23 reg 22������������������������������������������   7.15 reg 23���������������������������   3.39–3.41, 5.21 reg 23(8)��������������������������������   3.39, 3.40 reg 24������������������������������������������   7.29 reg 25������������������������������������������   7.30 reg 26������������������������������������������   5.25 reg 26(1)(c)����������������������������������   5.25 reg 26(1A)�����������������������������������   5.25 reg 26(3)��������������������������������������   5.25 reg 27������������������������������������������   5.27 reg 27(4)��������������������������������������   5.27 reg 28(1)�������������������������������������  5.28 reg 28(2)�������������������������������������  5.28

Community Interest Company Regulations 2005, SI 2005/1788 – contd reg 32������������������������������������   3.31, 3.32 reg 33������������������������������������������   3.33 reg 37������������������������������������������   3.44 reg 38������������������������������������������   3.44 reg 40������������������������������������������   3.43 reg 41������������������������������������������   3.44 Sch 1�����������������������������������   6A.1, 6A.2, 6A.9, 6A.12 Sch 2��������������������������  6A.1, 6A.2, 6A.6, 6A.8, 6A.9, 6A.12, 7.6, 7.7 Sch 3�����������������  6A.1, 6A.2, 6A.7–6A.9, 6A.12, 7.6, 7.8, 7.14 Sch 4�������������������������������������   7.23, 7.24 Community Interest Company (Amendment) Regulations 2009, SI 2009/1942������������������������   2.2, 2.6, 2.7, 5.25 reg 2��������������������������������������������   4.28 Community Interest Company (Amendment) Regulations 2012, SI 2012/2335������������������   2.2, 2.6, 2.8 Community Interest Company (Amendment) Regulations 2014, SI 2014/2483������������������  2.2, 2.6, 2.9, 5.27, 7.18 Companies Act 2006 (Commencement No 2, Consequential Amendments, Transition Provisions and Savings) Order 2007, SI 2007/1093�����������������������  2.5, 5.25 Companies Act 2006 (Commencement No 5, Transitional Provisions and Savings) Order 2007, SI 2007/3495 Pt 3���������������������������������������������  6B.15 art 47(1)���������������������������������������  6B.15 art 47(2)���������������������������������������  6B.15 Companies Act 2006 (Consequential Amendments etc) Order 2008, SI 2008/948������������������   2.2, 2.8, 5.25 Companies Act 2006 (Consequential Amendments, Transitional Provisions and Savings) Order 2009, SI 2009/1941������������   1.24, 1.37

xiii

Table of Statutory Instruments Companies Act 2006 (Part 35) (Consequential Amendments, Transitional Provisions and Savings) Order 2009, SI 2009/1802�������������������������������  2.2 Companies (Audit, Investigations and Community Enterprise) Act 2004 (Commencement) and Companies Act 1989 (Commencement No 18) Order 2004, SI 2004/3322����������������  2.2, 2.4 art 3���������������������������������������������   2.4 art 4���������������������������������������������   2.4 Sch 1�������������������������������������������   2.4 Sch 2�������������������������������������������   2.4 Sch 3�������������������������������������������   2.4 Sch 4�������������������������������������������   2.4 Companies (Miscellaneous Reporting) Regulations 2018, SI 2008/860�����������������������������   5.25 Companies (Model Articles) Regulations 2008, SI 2008/ 3229��������������������   1.47, 6A.10, 6A.21 Sch 1��������������������������������  6A.10, 6A.19 Pt 2������������������������������������������   5.14 Art 1����������������������������������������   6B.2 Art 2����������������������������������������   6B.3 Art 3������������������������������������  5.2, 6B.4 Art 4����������������������������������  5.12, 6B.5 Art 5����������������������������������������   6B.6 Art 6����������������������������������������   6B.7 Art 7�������������������������������   6B.8, 6B.12 Art 7(2)������������������������������������  6B.12 Art 8����������������������������������������   6B.9 Art 9�������������������  6B.10, 6B.11, 6B.23 Art 9(2)(c)��������������������������������  6B.11 Art 10��������������������������������������  6B.11 Art 10(2)����������������������������������  6B.11 Art 11���������������������������   6B.12, 6B.39 Art 11(2)����������������������������������  6B.12 Art 11(3)����������������������������������  6B.12 Art 12��������������������������������������  6B.13 Art 13��������������������������������������  6B.14 Art 14��������������������������������������  6B.15 Art 15��������������������������������������  6B.16 Art 16��������������������������������������  6B.17 Art 17��������������������������������������  6B.18 Art 18��������������������������������������  6B.19 Art 19��������������������������������������  6B.20 Art 20��������������������������������������  6B.21 Art 21���������������������������   6B.22, 6B.25 Art 22��������������������������������������  6B.23 Art 23��������������������������������������  6B.24 Art 24��������������������������������������  6B.25 Art 25��������������������������������������  6B.26 Art 26��������������������������������������  6B.27

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Companies (Model Articles) Regulations 2008, SI 2008/3229 – contd Sch 1 – contd Art 27���������������������������  6B.27, 6B.28, 6B.32 Art 28���������������������������  6B.27, 6B.29, 6B.32 Art 29��������������������������������������  6B.30 Art 30��������������������������������������  6B.31 Art 31��������������������������������������  6B.32 Art 32��������������������������������������  6B.33 Art 33��������������������������������������  6B.34 Art 34��������������������������������������  6B.35 Art 35��������������������������������������  6B.36 Art 36��������������������������������������  6B.37 Art 37��������������������������������������  6B.38 Art 38��������������������������������������  6B.39 Art 39��������������������������������������  6B.40 Art 40��������������������������������������  6B.41 Art 41��������������������������������������  6B.42 Art 41(1)����������������������������������  6B.47 Art 41(2)����������������������������������  6B.47 Art 42���������������������������   6B.43, 6B.45 Art 43��������������������������������������  6B.44 Art 44��������������������������������������  6B.45 Art 45��������������������������������������  6B.46 Art 45(2)����������������������������������  6B.50 Art 46��������������������������������������  6B.47 Art 47��������������������������������������  6B.48 Art 48��������������������������������������  6B.49 Art 49��������������������������������������  6B.50 Art 50��������������������������������������  6B.51 Art 51��������������������������������������  6B.52 Art 52���������������������������   6B.53, 6B.54 Art 53��������������������������������������  6B.54 Sch 2����������������������������������  6A.10, 6C.1 Art 1���������������������������������������� 6C.14 Art 2���������������������������������������� 6C.15 Art 3���������������������������������������� 6C.16 Art 4���������������������������������������� 6C.17 Art 5���������������������������������������� 6C.18 Art 6���������������������������������������� 6C.19 Art 7���������������������������������������� 6C.20 Art 8���������������������������������������� 6C.21 Art 9���������������������������������������� 6C.22 Art 10�������������������������������������� 6C.23 Art 11�������������������������������������� 6C.24 Art 12�������������������������������������� 6C.25 Art 13�������������������������������������� 6C.26 Art 14�������������������������������������� 6C.27 Art 15�������������������������������������� 6C.28 Art 16�������������������������������������� 6C.29 Art 17�������������������������������������� 6C.30 Art 18�������������������������������������� 6C.31 Art 19�������������������������������������� 6C.32 Art 20�������������������������������������� 6C.33

Table of Statutory Instruments Companies (Model Articles) Regulations 2008, SI 2008/3229 – contd Sch 2 – contd Art 21�������������������������������������� 6C.34 Art 22�������������������������������������� 6C.35 Art 23�������������������������������������� 6C.36 Art 24�������������������������������������� 6C.37 Art 25�������������������������������������� 6C.38 Art 26�������������������������������������� 6C.39 Art 27�������������������������������������� 6C.40 Art 28�������������������������������������� 6C.41 Art 29�������������������������������������� 6C.42 Art 30�������������������������������������� 6C.43 Art 31�������������������������������������� 6C.44 Art 32�������������������������������������� 6C.45 Art 33�������������������������������������� 6C.46 Art 34�������������������������������������� 6C.47 Art 35�������������������������������������� 6C.48 Art 36�������������������������������������� 6C.49 Art 37�������������������������������������� 6C.50 Art 38�������������������������������������� 6C.51 Art 39�������������������������������������� 6C.52 Art 40�������������������������������������� 6C.53 Sch 3������������������������������������������� 6A.10 Companies (Registration) Regulations 2008, SI 2008/3014��������������������� 1.47, 6A.21 Companies (Tables A to F) Regulations 1985, SI 1985/805 Table A�������������������������  1.42, 1.48, 6B.1, 6B.19, 6B.21 reg 2����������������������������������������  6B.23 reg 3�����������������������   1.42, 1.48, 6B.23 reg 5����������������������������������������  6B.24 reg 6����������������������������������������  6B.25 reg 7����������������������������������������  6B.26 regs 23–28�������������������������������  6B.27 reg 29��������������������������������������  6B.28 reg 30��������������������������������������  6B.29 reg 40��������������������������������������  6B.39 reg 41��������������������������������������  6B.42 reg 42��������������������������������������  6B.40 reg 43��������������������������������������  6B.40 reg 44��������������������������������������  6B.41 reg 46��������������������������������������  6B.45 reg 45��������������������������������������  6B.42 reg 47��������������������������������������  6B.43 reg 48��������������������������������������  6B.45 reg 49��������������������������������������  6B.45 reg 58��������������������������������������  6B.44 reg 60��������������������������������������  6B.46 reg 61��������������������������������������  6B.46

Companies (Tables A to F) Regulations 1985, SI 1985/805 – contd Table A – contd reg 62���������������������������   6B.46, 6B.47 reg 70�������������������������������   6B.4, 6B.5 reg 71��������������������������������������    6B.6 reg 72�������������������������������   6B.6, 6B.7 reg 78��������������������������������������  6B.18 reg 79��������������������������������������  6B.18 reg 81��������������������������������������  6B.19 reg 82��������������������������������������  6B.20 reg 83��������������������������������������  6B.21 reg 84��������������������������������������  6B.20 reg 87��������������������������������������  6B.20 reg 88�����������������������������  6B.8, 6B.10, 6B.11, 6B.14 reg 89��������������������������������������  6B.12 reg 90��������������������������������������  6B.12 reg 91��������������������������������������  6B.13 reg 93��������������������������������������   6B.9 reg 95��������������������������������������  6B.15 reg 96��������������������������������������  6B.15 reg 98��������������������������������������  6B.15 reg 100������������������������������������  6B.16 reg 102������������������������������������  6B.31 reg 101������������������������������������  6B.50 reg 103������������������������������������  6B.31 reg 104������������������������������������  6B.31 reg 105������������������������������������  6B.35 reg 106������������������������������������  6B.32 reg 107������������������������������������  6B.33 reg 108������������������������������������  6B.34 reg 109������������������������������������  6B.51 reg 110������������������������������������  6B.37 reg 118������������������������������������  6B.54 Table B����������������������������������������   1.42 Table C����������������������������������   1.42, 1.48 L Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, SI 2008/410�����������������������������    5.25 Sch 5�������������������������������������������    5.25 Pt 2������������������������������������������    5.25 S Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008, SI 2008/409�����������������������������   5.25 Sch 4A�����������������������������������������   5.25

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Table of Cases All references are to paragraph number B Betts & Co Ltd v Macnaghten [1910] 1 Ch 430���������������������������������������������������������� 6B.48 Boardman v Phipps [1967] 2 AC 46���������������������������������������������������������������������������� 6B.15 Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606������������������������������������������������������������������������������������������������� 6B.15 Browne v La Trinidad (1887) 37 Ch D 1 (CA)������������������������������������������������������������ 6B.11 Buck v Revenue and Customs Comrs [2009] STC (SCD) 6��������������������������������������� 6B.36 Bushell v Faith [1970] AC 1099���������������������������������������������������������������������������������� 6B.23 Byng v London Life Association Ltd [1990] Ch 170���������������������������������������������������� 6B.42 C Clarke v Workman [1920] 1 IR 107�����������������������������������������������������������������  6B.13, 6B.40 F Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 200������������������������������������� 6B.15 G Guinness v Land Corporation of Ireland (1882) 22 Ch D 349, CA�����������������������������  6A.20 Guinness v Land Corporation of Ireland [1882] G 2624����������������������������������������������  1.43 H Harold Holdsworth & Co (Wakefield) Ltd v Caddies [1955] 1 All ER 725������������������   6B.6 Hastings Ltd v Gulliver [1967] AC 134������������������������������������������������������������������������ 6B.15 Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549����������������������������������������������������   6B.4 Henderson v Bank of Australasia (1888) 40 Ch D 170������������������������������������������������� 6B.48 Holmes v Keyes [1959] Ch 199����������������������������������������������������������������������������������  1.41 Homer District Consolidated Gold Mines, Re (1988) 39 Ch D 546 (CA)������������������� 6B.11 J John v Rees and Others [1969] 2 All ER 274�������������������������������������������������������������� 6B.42 N North Eastern Insurance Co Ltd, Re [1919] 1 Ch 198������������������������������������������������ 6B.12 P Posgate & Denby (Agencies) Ltd, Re [1987] BCLC 8�������������������������������������������������  1.41 Potel v IRC [1971] 2 All ER 504������������������������������������������������������������������������������� 6B.31 S Sierra Leone Telecommunications Co Ltd v Barclays Bank plc [1998] 2 All ER 821���� 6B.18 W Wood v Odessa Waterworks Co (1889) 42 Ch D 636�����������������������������������������   1.39, 6B.35

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Chapter 1  Introduction to Community Interest Companies Overview Introduction 1.1 For those involved in social enterprise, a common decision is the form that the organisation will take in order to meet its community objectives.There are various options which are discussed in this chapter: the charitable company, co-operative societies, community benefit societies, former industrial and provident societies, and the traditional not-for-profit private limited company limited by guarantee.

What is a CIC? 1.2 The community interest company (CIC) has proved a great success in providing a robust brand for community entrepreneurs operating social enterprises. Over 28,8871 CICs have been registered since inception in 2005, and the number incorporating each year continues to rise annually: in 2020/21, the number of CICs registering with Companies House increased by 21%. The CIC corporate structure (as opposed to the alternative charitable company) has appealed to a wide range of individuals and organisations of all sizes whose primary focus is to participate in social enterprise for the benefit of a community. CICs are private or public limited companies specifically designed by legislation for individuals who are engaged in developing a social enterprise for the community they serve. The CIC corporate structure affords the members and directors the opportunity to operate within the well-established, flexible company law framework and receive limited liability with the addition of a statutory asset lock.

1 As of 31 March 2021 (Regulator of Community Interest Companies Annual Report 2020/21).

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Chapter 1  Introduction to Community Interest Companies

The asset lock assures investors and community stakeholders that, on liquidation, any residue after the company’s debts have been settled would only be disbursed to another asset-locked body or charity. In addition (if applicable), any dividends paid to shareholders or investors are restricted to ensure that the majority of the company’s profits are used for the good of the community. CICs have proven an appropriate corporate form for holding property assets such as community halls and sports facilities, as well as for trading in a conventional sense through the provision of goods and services, either directly to the public or through contracts with service providers and local authorities.

The history of CICs 1.3 Establishing a corporate legal form for a non-charitable company which incorporates an asset lock in the UK was initially proposed in 2001 by the Public Management Foundation (PMF). Community interest companies (as we know them today) were initially dubbed public interest companies by the PMF. Prior to 2001, mutual organisations and building societies had been established for the benefit of local communities; from the 1980s onwards, numerous mutual organisations were privatised by the then Thatcher Government, which resulted in the principles of mutuality being lost. A more modern trend is mutual organisations being targeted for take-over by large private equity firms who, once the company is purchased, immediately instigate demutualisation. In terms of the members of the mutual, the perceived corporate raid predictably leads to accusations of profiteering, as the equity firm changes the strategic focus from social enterprise to profitable and inflated returns for their investors.

Demutualisation in action 1.4 The demutualisation of the Automobile Association (the AA) in 1999, and the wholesale demutualisation of the building society sector, underlines the fundamental flaw with mutual societies: they can be attacked and taken over, realigning their assets overnight from not-for-profit (NFP) focus to a profit orientation. It should be noted that not all raids on mutuals ends in triumph: the unsuccessful bid to demutualise the Co-operative Wholesale Society is a good example of members refusing the typical incentives to demutualise from private equity firms. In 2021, Bain Capital, one of the world’s leading multi-asset alternative investment firms, approached LV (known formerly as Liverpool Victoria) in a bid to buy the company and instigate demutualisation. The approach from Bain Capital led the All-Party Parliamentary Group for 2

Chapter 1  Introduction to Community Interest Companies

Mutuals to conclude2 that the planned demutualisation of LV “damages the diversity of financial services providers in the UK and weakens the mutual sector unnecessarily”. It has been argued by many that a simple solution to prevent demutualisation is a statutory asset lock for co-operative societies – as of 2022, they can only put a non-statutory asset lock in their rules3. Community benefit societies are able to use a statutory asset lock which places a legal restriction on how the society may use its assets, and the Financial Conduct Authority provides wording for inclusion into the society’s rules4.

The problem with NFP companies 1.5 A fundamental flaw in the architecture of the traditional not-for-profit structure (that is, the private limited company limited by guarantee) is that the company is susceptible to take-over if 75% of the membership vote to move the assets to a company limited by shares5. Under British law, there were organisations called industrial and provident societies6; from 1 August 2014, they were replaced under the provisions of the Co-operative and Community Benefit Societies Act 2014 and renamed either a co-operative society or a community benefit society7. Either entity can convert to a company8 and, as discussed, only the community benefit society is able to adopt an optional statutory asset lock9.

Proposals for a community interest company 1.6 Returning to the early 2000s, there was no safe place for social entrepreneurs and investors who wanted to support local community projects who would have a statutory guarantee that the assets could not be moved to another profit-orientated company. Lawyer Stephen Lloyd10 first conceived the idea of the CIC11 and was involved in drafting the initial report which outlined 2 “Could LV members go through demutualisation unscathed?” (www.ftadviser.com/yourindustry/2021/12/07/could-lv-members-go-through-demutualisation-unscathed/). 3 www.uk.coop/resources/community-shares-handbook/2-society-legislation/24-asset-lock-provisions. 4 Finalised guidance 15/12 “Guidance on the FCA’s registration function under the Co-operative and Community Benefit Societies Act 2014” (November 2015). 5 The Companies Act 2006 does not provide a statutory procedure for re-registering a company limited by guarantee to the limited by shares structure, so you cannot convert from one to the other. The members can create a new company limited by shares under the same name and then transfer the assets from the not-for-profit. 6 Established under the Industrial and Provident Societies Act 1965. 7 Co-operative and Community Benefit Societies Act 2014, s 2 (Societies that may be registered). 8 Co-operative and Community Benefit Societies Act 2014, s 112 (Conversion of society into a company, amalgamation with a company). 9 Community Benefit Societies (Restriction on Use of Assets) Regulations 2006. 10 Stephen Lloyd, “Creating the CIC”Vermont Law Review Vol. 35:031. 11 Stephen Lloyd obituary: www.theguardian.com/society/2014/aug/29/stephen-lloyd.

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the key features and the legal framework to create a new type of community company. The Government was committed to building a more enterprising society, by creating opportunities for all, and to tackling specific barriers that inhibit successful enterprise12. Today, we perhaps take for granted (especially in housing) that social enterprise will provide many of the services traditionally provided by the government or local councils. The DTI report ‘Proposals for a Community Interest Company’13 (PCIC report), published in March 2003, proposed a new type of company whose profits and assets would be used for the public good. Much of the report was based on the initial concept of the CIC outlined in the report ‘Private Action, Public Benefit’14, published by the Strategy Unit in September 2002. The CIC would present new opportunities for social enterprises to benefit the people they serve. By the creation of a new legal form for social enterprises, the CIC would protect assets against distribution to members or shareholders and create a strong not-for-profit brand for small-scale community-based social entrepreneurs. The PCIC report established the following framework which, after consultation, was applied to create the initial CIC legislation in the Companies (Audit, Investigations and Community Enterprise) Act 2004.

PCIC CIC Framework 1.7 The PCIC report outlined the following points which formed the structure for formal responses and comments: “(a) With the highlighted flaws of the traditional NFP there should be a new type of company, the community interest company. (b)

A regulator would apply a ‘reasonable person’ test of community interest and should issue guidance on the test.

(c) Political parties should not be able to become CICs or to set up CIC subsidiaries, and organisations whose purposes are support for a political party, or political campaigning, should be unable to become CICs.

12 “Enterprise for communities: Proposals for a Community Interest Company” (HM Treasury, March 2003), page 2. 13 “Enterprise for communities: Proposals for a Community Interest Company” (HM Treasury, March 2003). 14 “Private Action, Public Benefit. A Review of Charities and the Wider Not-For-Profit Sector” (Strategy Unit Report, 2002).

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Chapter 1  Introduction to Community Interest Companies (d) Once a CIC is registered, the regulator would need to approve any proposal for a change to its purposes. (e) CICs should be able to issue tradable fixed or capped rate shares, and to pay dividends to the holders of these shares up to a fixed percentage above base rate, LIBOR or another appropriate benchmark. The cap on returns on such shares should be set at a level that optimises CICs’ access to finance while maintaining a sufficient lock on profits and assets to give comfort to philanthropic lenders. The Government will work with investors and social enterprises on arrangements for the cap. (f)

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

(g) CICs should submit short annual reports on the action they have taken to pursue their public or community benefit objectives, and to involve stakeholders. (h) CICs will be encouraged to involve stakeholders in their enterprises. The Government invites views on whether a statutory requirement for CICs to seek the views of their stakeholders, with an exemption for small CICs, would be appropriate. (i)

There should be limits on the powers that investors may have to control the activities of CICs. The Government seeks views on the appropriate restrictions.

(j)

CICs should be able to transfer surplus assets to another CIC or charity, subject to certain conditions.

(k) The regulator should exercise the following functions: check that applicants for CIC status will be not-for-profit companies working in the community interest; review community interest reports, which will be published; ensure that the residual assets of wound-up CICs continue to serve the public or community benefit. (l)

The regulator should have powers to investigate complaints that CICs are not complying with the obligations of CIC status, and to take action where necessary.”

Social enterprise and the entrepreneur 1.8 The CIC’s main aim was to encourage social enterprise15. Scholars define social enterprises as hybrid organisations which pursue social value creation while engaging in commercial activities to realise organisation stability16. The

15 “Office of the Regulator of Community Interest Companies: Information and guidance notes”, Chapter 2: Preliminary considerations (May 2016). 16 Dacin, P.A., Dacin, M.T., & Matear, M. (2010). “Social entrepreneurship: Why we don’t need a new theory and how we move forward from here” Academy of Management Perspectives, 24(3), 37–57.

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organisation’s strategic core reflects both business and charitable objectives and is inclusive of both non-profit and for-profit sectors17. Some commentators see social enterprises as a promising alternative for contributing to the creation of economic and social value; arguably in the developed world it is simply not possible to have a dynamic and vibrant society and economy without a dynamic and vibrant voluntary sector18.

What is social entrepreneurship? 1.9 Social entrepreneurship (SE) receives considerable attention because, to some extent, the public and corporations have lost faith in governments to solve their social problems, perhaps ironic considering the main purpose of the CIC. Moreover, corporations are more comfortable with market-based solutions to social problems, when considering that the US extensively utilises charities and non-for-profit solutions to social challenges. “Social entrepreneurship” is “innovative, social value creating activity that can occur within or across the non-profit, business, or government sectors”19; social entrepreneurship has now entered the mainstream media, and it is captivating by its market-based approach to solving social problems. Arguably, SE provides the perfect convergence of two seemingly competing organisational aims: profit; and societal benefit20.

What is a social enterprise? 1.10 Social enterprises differ from traditional companies in that their social mission is the main objective, or is at least as important as their profit-making aim21. Social enterprises generally earn income from commercial activities as opposed to charitable donations or government grants. As with CICs, social enterprises do not add social or financial goals onto their primary activity; rather, social

17 Battilana, J. et al. (2015) “Harnessing Productive Tensions in Hybrid Organizations: The Case of Work Integration Social Enterprises” Academy of Management Journal, 58(6), pp 1658–1858 (doi: 10.5465/ amj.2013.0903). 18 “Private Action, Public Benefit. A Review of Charities and the Wider Not-For-Profit Sector” (Strategy Unit Report, 2002), page 5 (Tony Blair). 19 Austin, J., Stevenson, H., & Wei-Skillern, J. (2006) “Social and commercial entrepreneurship: same, different, or both?” Entrepreneurship Theory and Practice, 30: 1–22. 20 Moussetis, R. and Cavenagh,T. (2021) “Strategic, Legal, and Accounting Challenges for Social Enterprises”, Journal of Business & Management, 27(1), pp 23–52 (doi: 10.6347/JBM.202103_27(1).0002). 21 Dacin, M., (2011) “Social entrepreneurship: A critique and future directions” Organization Science, 22(5), 1203–1213.

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Chapter 1  Introduction to Community Interest Companies

enterprises are more often set up from their very inception as organisations that simultaneously pursue social and financial objectives22. The UK Government define a social enterprise as “a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners”. The aims of social enterprises must be social, rather than to make profits for the shareholders. Social enterprises operate in the middle ground between charitable organisations and fully commercial companies; in 2002, this gap (now fully established) was not recognised. The governance structures tend to be more committeebased, and accountability is ultimately to a range of stakeholders: customers, members and staff. Social enterprises usually re-invest any surplus they make in their business, rather than distributing it to the owners of the organisation, and conventional equity is often not an appropriate form of financing.

The role of CICs The not-for-profit sector 1.11 In the developed world, it is simply not possible to have a dynamic and vibrant society and economy without a dynamic and vibrant voluntary sector. The UK is fortunate to benefit from a long history of charitable activity through charities, community groups, self-help organisations, religious bodies, and fair-trade businesses. The independence of these groups is crucial; however, the government of the day has a role in ensuring a suitable framework of legislation to provide consumer protection and to outline how the various bodies must operate. The charity sector is governed by the Charities Act 2011 which provides legislation for charities to use the legal corporate form of a company23 incorporated under the Companies Act 2006. For the charitable company, this results in dual regulation and additional complexity; for this reason, the Act legislated for a new charitable form: the charitable incorporated organisation24 (CIO).

22 Battilana, J. (2018) “Cracking the organizational challenge of pursuing joint social and financial goals: Social enterprise as a laboratory to understand hybrid organizing” M@n@gement 2018, vol. 21(4): 1278–1305. 23 Charities Act 2011, Part 10 (Charitable Companies). 24 Charities Act 2011, Part 11 (Charitable Companies).

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Chapter 1  Introduction to Community Interest Companies

Initial considerations 1.12 Any organisation or individual may incorporate a CIC; however, thought needs to be given to such an action, as managing a company creates a legal responsibility. Distinct from unincorporated trusts or associations, winding up the CIC (once registered) or conversion to a charity is controlled by legislation, and you cannot simply walk away from the legal obligations25. Any organisation or individual that intends to form a CIC must be prepared to accept the special features and restrictions imposed. Incorporating a company and establishing the eligibility to become a CIC is a complex process, and legal advice should be sought in the first instance.

Defining “community” 1.13 The activities of a CIC must be carried on for the benefit of the community. A “community” for CIC purposes can embrace either the population as a whole or a definable sector or group of people, either in the UK or elsewhere. If the community is too narrowly defined, the company may not be eligible to be a CIC.

Why do social enterprises need to incorporate? 1.14 The report ‘Private Action, Public Benefit’26 (PAPB), published by the then strategy unit (part of the Cabinet Office) in 2002, outlined the initial concept of the CIC. The majority of not-for-profit (NFP) organisations, as they grow and take on responsibilities, wish to establish their existence formally and legally. The report highlights the main reasons for incorporation: “(1) to bring together a group of individuals in pursuing a task or mission; (2)

to ensure accountability to stakeholders;

(3)

to mobilise resources and manage assets; and

(4)

to limit liability and to give an organisation a life beyond that of its founders.”

25 A CIC cannot revert and become an ordinary company. 26 “Private Action, Public Benefit. A Review of Charities and the Wider Not-For-Profit Sector” (Strategy Unit Report. 2002).

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Chapter 1  Introduction to Community Interest Companies

The main issue with incorporation is cost, on-going compliance, company law and regulation. In many cases, for those wishing to pursue social enterprise in their communities, the existing legal forms did not suit their various requirements – for example, when imposing restrictions on financing and governance. The PAPB highlighted the main difficulties with the range of legal forms for social enterprises: “(a) Lack of protection of assets. (b) It is not currently possible to prevent the members or shareholders of an organisation from voting to sell or dissolve it, and to split the proceeds from the sale of the assets (the equivalent of demutualisation in the building society sector). (c)

Weak brand and poor recognition.

(d) The social enterprise business model in general is poorly understood. In particular, the Industrial & Provident Society (‘I&PS’) is not well recognised, and I&PS law is not as well developed as company law.This lack of knowledge impedes the creation of new social enterprises. (e)

Difficulties in raising finance.”

Some corporate legal forms impose limits on the type of finance that can be obtained – for example, companies limited by guarantee cannot raise equity.

Government proposals for a community interest company 1.15 The initial concept of the CIC was outlined in 2002 and is still true 20 years later: ●●

“Protection of assets against distribution to members or shareholders.

●●

Ability to choose the limited by guarantee or by shares format, with full adherence to UK and European company law and guidelines, including rules on insolvency, accountancy, and governance.

●●

Ability to issue preference shares with a fixed rate of return (this applies to both the limited by guarantee and limited by shares models).

●●

Increased requirements in terms of transparency and accountability.

●●

A requirement to have a clause in the constitution setting out the objects of the company.

●●

A check at the point of registration that the objects of the organisation are in the public and community interest, with subsequent changes being subject to regulatory approval.”

Local groups of people have always worked to improve local services, regenerate their environment and endeavour to create better conditions in the

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Chapter 1  Introduction to Community Interest Companies

community. The Labour government at the time was committed to building a more enterprising society, tighter with equal opportunities. A CIC was proposed as the first custom-made legal vehicle for community enterprises who wished to pursue enterprise in the public interest, and the overall strategy was focused on enabling growth in social enterprise in the most deprived areas. Socially responsible enterprises existed prior to 2002, and the CIC was seen as a new solution to tackle traditional problems in the sector and to encourage enablers in their neighbourhoods. The main obstacles that made the pursuit of social enterprise difficult was the fact that charity structures were not always aligned to social enterprise goals and, more importantly, there was no corporate legal structure to ensure that a not-forprofit company made distributions to its members or shareholders for the public good. The CIC model aimed at providing a transparent model, clearly defined, recognisable and understandable by the directors or member setting up the CIC and the wider community. CICs were never intended to provide essential public services in health care and education; their main role was aimed at childcare, social housing, leisure, and community transport.

Excluded companies Background 1.16 Part 2 of the Companies (Audit, Investigations and Community Enterprise) Act 2004 (CAICE) established the regulatory framework for CICs27. The legislation established the regulator and appeals officer and outlined its supervisory powers. In addition, the distribution cap was formed, and the details were drawn up of which companies would be excluded on the basis they would not meet the community interest test. Section 2628 established CICs as a new type of company, which could take the form of: (a) a company limited by shares or a company limited by guarantee and not having a share capital, or (b) a company limited by guarantee and having a share capital.

27 Companies (Audit, Investigations and Community Enterprise) Act 2004, s 26(1). 28 Companies (Audit, Investigations and Community Enterprise) Act 2004, s 26(2).

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Chapter 1  Introduction to Community Interest Companies

Community interest test and excluded companies 1.17 Section 35 of CAICE provides the requirements to satisfy the community interest test, which states that the CIC must carry out activities that a reasonable person would conclude are for the benefit of the community. The activities of the CIC are defined by its objects, described in the company’s articles of association. The term “community” can be a section of a larger community (either geographic or a community of interest) and can be overseas. The regulations initially included provisions to exclude companies from registering as a CIC, and political campaigning organisations are classed as excluded companies. For the purposes of section 35(6) of CAICE, the following are excluded companies29: “(a) a company which is (or when formed would be) a political party; (b) a company which is (or when formed would be) a political campaigning organisation; or (c)

a company which is (or when formed would be) a subsidiary of a political party or of a political campaigning organisation.”

Excluded political activities 1.18 To prevent debates about whether any political purposes are beneficial to the community, political parties are excluded from incorporating in the form of a CIC or setting up CIC subsidiaries30. Organisations that provide support for political parties, such as campaigning, are also excluded and unable to set up using the CIC legal form.

Reasonable person and community test 1.19 It should be noted that Part 231 of the Community Interest Company Regulations 2005 (“the CIC Regulations”) applies the reasonable person test: to use the CIC form, the regulator must be satisfied that the asserted purposes could be regarded by a reasonable person as being beneficial to the community.

29 Companies (Audit, Investigations and Community Enterprise) Act 2004, s 36(6). 30 “Enterprise for Communities. Proposals for a community interest company” (DTI, March 2003). 31 Part 2 (The community interest test and excluded companies).

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Chapter 1  Introduction to Community Interest Companies

Community test 1.20 Regulation 532 of the CIC Regulations describes the definition of “community” in terms of the community interest test.The regulations state that any group of individuals may constitute a section of the community if they share a readily identifiable characteristic and other members of the community of which that group form’s part do not share that characteristic.

Activities not for the benefit of the community 1.21 Regulation 3(1)33 of the CIC Regulations defines that any organisation whose main purpose is to promote the opposition to, or changes in, any existing law or policy by any government or public authority globally34, or those promoting opposition (on any matter) to new policies which any governmental or public authority is considering adopting, may not incorporate as a CIC. Political activities are defined as providing any support for a political party or a political campaigning organisation (financial or otherwise) that endeavour to influence voters in relation to any election or referendum35.

CIC subsidiaries and incidental activities 1.22 Outlined in the initial proposals36, organisations that were excluded based on regulation 3 could establish and incorporate a CIC subsidiary. The requirements detailed in regulation 3(2) state that the proposed CIC purposes must not themselves be political. In addition, any activities must be incidental and specifically carried out for the benefit the community. Finally, the CIC activities cannot reasonably be regarded as incidental to activities of the holding company or organisation incorporating the CIC.

32 Regulation 5 (Section of the community). 33 Regulation 3(1)(a), (b). 34 Excluded companies are not limited to political matters in Great Britain. 35 Regulation 3(1)(c). 36 “Enterprise for Communities. Proposals for a community interest company” (DTI, March 2003), page 16.

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Chapter 1  Introduction to Community Interest Companies

Community interest test 1.23 The ‘community interest’ is the defining factor and provides the basis for the overall strategy of the CIC Regulations. Therefore, the regulator must apply a robust test for those persons wishing to register and incorporate, but this must be balanced with the flexibility to encompass a large section of organisations requiring to use the CIC form.

CIC names 1.24 Section 33 of CAICE imposes restrictions on the names that CICs are authorised to use and, when it was enacted, it amended section 26 of the Companies Act 1985 to restrict registration with company names that included “community interest public limited company”, or their abbreviations or Welsh equivalents. The Companies Act 2006 superseded the Companies Act 1985, and so the Companies Act 2006 (Consequential Amendments, Transitional Provisions and Savings) Order 2009 amended section 33(2) to (4).

Names and endings 1.25 The name37 of a CIC which is not a public company must end with “community interest company” or “CIC”. In the case of a Welsh company, its name may end “cwmni buddiant cymunedol” or “c.b.c”. If the CIC is a public company, the name must end “community interest public limited company” or “community interest p.l.c.”.Welsh public companies must end with “cwmni buddiant cymunedol cyhoeddus cyfyngedig” or “cwmni buddiant cymunedol c.c.c.”. It should be noted that section 5838 does not apply to public limited companies and section 5939 to private limited companies.

37 Companies (Audit, Investigations and Community Enterprise) Act 2004, s 33. 38 Companies Act 2006, s 58(3): “This section does not apply to community interest companies (but see section 33(3) and (4) of the Companies (Audit, Investigations and Community Enterprise) Act 2004)”. 39 Companies Act 2006, s 59(4): “This section does not apply to community interest companies (but see section 33(1) and (2) of the Companies (Audit, Investigations and Community Enterprise) Act 2004)”.

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Chapter 1  Introduction to Community Interest Companies

CIC versus charity structure 1.26 When considering setting up a social enterprise, the issue of taxation ought to be considered, as charity status results in a considerable advantage over a CIC. Charities receive certain tax reliefs, and they do not pay tax on most types of income and gains40 on the basis that it is used to further the charity’s objects41. The charity must be recognised42 by HM Revenue and Customs (HMRC).

Tax relief for charities43 1.27 Tax relief for charities is available: (a) on any charitable donations; (b) on all profits from trading; (c) on rental or investment income (for example, bank interest); (d) on profits when you sell or ‘dispose of ’ an asset, such as property or shares44; and (e) when the charity buys property45.

Charitable rate relief 1.28 Charities can apply for charitable rate relief of up to 80% if a property is used for charitable purposes. A CIC may still be eligible for discretionary relief, subject to approval by the applicable local council.

40 Known as “charitable expenditure”. 41 A charity’s objects are a statement of its purposes, and they must be exclusively charitable: Charities Act 2011, Chapter 1 (General). 42 To obtain recognition for tax purposes, the charity must be based in the UK, EU, Iceland, Liechtenstein or Norway, established for charitable purposes only, registered with the Charity Commission or another regulator, and the trustees must be fit and proper persons (www.gov.uk/charities-and-tax/getrecognition). 43 www.gov.uk/charities-and-tax/tax-reliefs. 44 Capital Gains Tax is a tax on the profit when you sell (or “dispose of ”) something (an “asset”) that’s increased in value. 45 You must pay Stamp Duty Land Tax (SDLT) if you buy a property or land over a certain price in England and Northern Ireland.

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Chapter 1  Introduction to Community Interest Companies

Reclaim tax 1.29 Charities may claim back tax that’s been deducted on donations and bank interest. Gift Aid allows the reclaim of 25% of individual donations on the basis that the donor has paid income tax or capital gains tax to at least the amount they have donated46.

Registered societies Background 1.30 Under the Industrial and Provident Societies Act 196547, societies registered under the legislation were known as “industrial and provident societies”. The first ever recorded co-operative was created in Fenwick, Scotland, in March 1761, when a group of local weavers came together to form the Fenwick Weavers’ Society48. The Co-operative and Community Benefit Societies Act 2014, which repealed the 1965 Act, created three forms of registered society: (a) co-operative society; (b) community benefit society49; and (c) pre-commencement society. Registered societies are businesses which are run to benefit their members or the wider community. Co-operative societies (co-ops) operate for the benefit of their members, who receive a distribution of any profits. There are over 7,000 co-ops in the UK employing over 250,000 people, with nearly 14 million members50. In addition, community benefit societies, which are a form of mutual society, operate for the benefit of the wider community, re-investing profits in the community; any industrial and provident societies registered before 1 August 2014 are deemed pre-commencement societies.

46 “Claiming Gift Aid as a charity or CASC” (gov.uk). 47 Now repealed. 48 “Consultation outcome: Industrial and Provident Societies: growth through co-operation” (Updated 18 December 2013). 49 Community benefit societies where registered under the Industrial and Provident Societies Act 1965. 50 Uk.Coop (www.uk.coop/).

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Chapter 1  Introduction to Community Interest Companies

Asset lock 1.31 Section 1 of the Co-operatives and Community Benefit Societies Act 2003 provided for secondary legislation to allow community benefit societies to adopt an asset lock. The Community Benefit Societies (Restriction on Use of Assets) Regulations 2006 allowed societies to introduce a rule to ensure that, on dissolution or amalgamation, their assets would permanently be used to benefit the community51.

Taxation of CICs 1.32 The Company Taxation Manual52 outlines the tax treatment of a CIC. HMRC acknowledge that a CIC is a type of limited liability company which is incorporated under the Companies Act 2006 and therefore must conform to company and insolvency law in the same way as other UK companies. It should be noted that, although CICs have their own specific company law regime in Part 2 of CAICE, this does not affect how they are taxed.

Taxation 1.33 A CIC is liable to corporation tax (CT) as a company. CT will be chargeable on any trading profits (but it will be a question of fact whether or not a particular CIC is trading) and on its investment income and gains. The CIC is eligible for normal CT reliefs, but there are no CIC-specific tax exemptions or reliefs available.

Annual accounts 1.34 All companies are required to file their accounts with the registrar of companies, which are a public record. CICs are required to follow the same filing procedures as any other incorporated company. Like ordinary companies,

51 Explanatory memorandum to the Community Benefit Societies (Restriction on Use of Assets) Regulations 2006 (SI 2006/264), section 2.1. 52 CTM40145 (Particular bodies: clubs: Community Interest companies): www.gov.uk/hmrc-internalmanuals/company-taxation-manual/ctm4014.

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Chapter 1  Introduction to Community Interest Companies

CICs must keep accounting records (whether they are trading or not) which must contain records showing all money received and expended by the company, and a record of the assets and liabilities of the company. In addition, if the CIC is involved in dealing in goods, the records must include a financial statement of the stock held by the company at the end of each financial year.

Annual accounts and the members 1.35 Every company must send a copy of its annual accounts for each financial year to: (a) every member of the company; (b) every holder of the company’s debentures; and (c) every person who is entitled to receive notice of general meetings. There is no longer a statutory requirement for private companies to lay their accounts before members at a general meeting. If a private company’s articles currently specify that the company must lay accounts before members at a general meeting, it can pass a special resolution to remove that provision. A public company must lay its accounts before its members at an annual general meeting53. A company may pass a resolution, or make provision in its articles, to send or supply documents (including accounts) to its members online. Members do not have to agree to receive communications in this way and have the right to request a paper copy.

Legal structure CIC limited by guarantee or shares 1.36 Section 5(2) of the Companies Act 2006 prevents companies limited by guarantee and having share capital from being formed54; this has been the case since 22 December 1980 under the previous Companies Act 1985. Any companies

53 “Sending accounts to your company’s members. Companies House accounts guidance” (Updated 6 April 2021), 3.2. 54 Provision to this effect has been in force: (a) in Great Britain since 22 December 1980, and (b) in Northern Ireland since 1 July 1983.

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Chapter 1  Introduction to Community Interest Companies

limited by guarantee with a share capital that were formed before 1980 are permitted to transition and become a CIC55. In addition, companies that were initially incorporated as a company limited by guarantee may become a CIC56.

Constitution overview 1.37 Section 32 of CAICE outlines how the articles of association for a CIC must be drafted and the provisions that they must include. The Companies Act 2006 (Consequential Amendments, Transitional Provisions and Savings) Order 200957 amended section 32 to reflect the Companies Act 2006 which removed the necessity for a company to hold a memorandum of association. It should be noted that the CIC is free to include any specific provisions that it feels necessary on the basis that they are not inconsistent with the legislation, and any provisions so made shall have no effect. Section 32(4) of CAICE states that a CIC’s articles may be required to include the following: “(a) provisions about the transfer and distribution of the company’s assets (including their distribution on a winding up), (b)

provisions about the payment of interest on debentures issued by the company or debts of the company,

(c)

provisions about membership of the company,

(d)

provisions about the voting rights of members of the company,

(e)

provisions about the appointment and removal of directors of the company, and

(f)

provisions about voting at meetings of directors of the company.”

In addition, the regulations may restrict the CIC’s ability to amend its articles and/or its objects; the restriction provides the regulator with an assurance that the CIC’s objects will remain focused on the interest of the community.

What are the articles of association? 1.38 The company’s articles of association are the internal policies, rules and procedures that the directors and members must follow when making decisions concerning the company. 55 Companies Act 2006, s 6(b). 56 Companies Act 2006, s 6(a). 57 SI 2009/1941.

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Chapter 1  Introduction to Community Interest Companies

Members delegate all powers to the directors58, who in turn make decisions at board meetings. Members will require assurance that any decision making by the directors follows an agreed procedure. In addition, the articles provide an aide-memoire for the directors of the main statutory regulations imposed by the relevant Companies Act under which the company was incorporated.

The legality of the articles of association 1.39 The articles of association constitute a contract between the members and the company, and between each individual member and every other59. The provisions of the company’s constitution are covenants which bind the company and its members60.

What provisions should the articles of association contain? 1.40 The articles should detail members’ rights (for example, rights to attend meetings, rights to appoint and dismiss directors and members, and rights on voting) together with more complex areas of the Companies Act 2006.

Are the articles legally binding? 1.41 If detailed in the articles of association, any rights or agreements are enforceable in law (Re Posgate & Denby (Agencies) Ltd)61. Before drafting detailed provisions and procedures, care must be taken to ensure that they are for the benefit of the company and that they refer back to the directors’ duties to promote the success of the company. The courts’ overall view on the articles of association is that they ought to produce unambiguous outcomes and reasonable business efficacy. In Holmes v Keyes62 per Jenkins LJ: “the articles of association of the company should be regarded as a business document and should be construed so as to give them reasonable business efficacy where a 58 Model articles, article 3 (Directors’ general authority): “3. Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company”. 59 Wood v Odessa Waterworks Co (1889) 42 Ch D 636. 60 Companies Act 2006, s 33 (Effect of company’s constitution). 61 [1987] BCLC 8. 62 [1959] Ch 199.

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Chapter 1  Introduction to Community Interest Companies construction tending to that result is admissible on the language of the articles, in preference to a result which would or might prove unworkable.”

Restrictive articles of association that may fetter the directors’ powers, or conflict with the Companies Act 2006, could be deemed void and often make running the company more problematic.

How do I draft the articles of association for a company? 1.42 The articles are complex, legal documents, and so the government of the day acknowledges, when passing legislation concerning company law, that the drafting of such documents is typically beyond the remit of a company director or charity trustee. Acts of Parliament concerning company law have always provided model articles of association, which are prescribed by the Act or, in some cases, by statutory instrument: ●●

SI 1985/80563, Table A: Memorandum and articles of association.

●●

Companies Act 2006, Schedule 2, regulation 3: Model articles for private companies limited by guarantee64.

Table A is the name given to the prescribed format for articles of association of a company limited by shares under the Companies Act 1985 and earlier legislation. When a company incorporated, it was not required to file bespoke articles, as the relevant company legislation65 provided standard articles, often referred to as model articles. The first prescribed format, made in the Joint Stock Companies Act 1856, was called ‘Table B’, because it was preceded by a form of memorandum of association called ‘Form A’. The articles were first called ‘Table A’ in the Companies Act 1862. Table C, which amends Table A, will still apply to companies incorporated under the Companies Act 1985, and regulation 3 model articles will still apply to companies incorporated after 1 October 2009 under the Companies Act 2006.

63 Companies (Tables A to F) Regulations 2005. 64 Power of Secretary of State to prescribe model articles under Companies Act 2006, s 19. 65 Articles were brought into force by statutory instrument.

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Chapter 1  Introduction to Community Interest Companies

Constitutional documents – before 1 October 2009 1.43 Companies formed prior to 1 October 200966 were legally required to draft a memorandum of association and articles of association.The memorandum was an important constitutional document that stated the company name, powers, registered office, the company objects67 and its liability. The memorandum prevails over the articles under any circumstances of ambiguity between the two documents68. Companies that have not updated their articles of association under the Companies Act 2006 must abide by the memorandum; however, the provisions will be deemed to form part of the articles of association as, legally, they are now one document69.

Constitutional documents – after 1 October 2009 1.44 As regards companies formed after 1 October 2009, the company’s constitution excludes the memorandum, as set out in section 17 (A company’s constitution) of the 2006 Act: “Unless the context otherwise requires, references in the Companies Acts to a company’s constitution include— (a)

the company’s articles, and

(b)

any resolutions and agreements to which Chapter 3 applies (see section 29).”

The Companies Act 2006 still uses the term ‘memorandum of association’, but the document is not constitutional and simply states that the members wish to form a company and agree to become members and, in the case of companies with share capital, that the member agrees to take at least one share. The memorandum is still important as it forms part of the required registration process, as discussed; and, by virtue of section 17, it is not constitutional and the

66 Companies formed after 1 October 2006 will fall under the Companies Act 2006, Chapter 2 articles of association. 67 Company objects state the purpose of the company, powers and the range of trading activities. The company is restricted to its powers and stated objects. 68 Guinness v Land Corporation of Ireland [1882 G. 2624]. 69 Companies Act 2006, s 28 (Existing companies: provisions of memorandum treated as provisions of articles).

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majority of the elements of the pre-1 October 2009 memorandum are dealt with in additional documents and the registration process.

Amending the articles of association Non-charity 1.45 Along with providing the rules on how a company is run and governed, the company constitution binds contractually the company and its members, and so the provisions should be discussed and agreed by all parties involved in the company. The articles are amendable70 by statutory power; the company may use the prescribed articles under the Act under which it was incorporated, or it may draft its own. All articles of association are subject to the Companies Act under which they are formed, and the company is also constricted by case law (that is, rules made by judges’ decisions in court). Consequently, the articles may not contain provisions that are against the law.The company has complete freedom to draft bespoke articles and to develop rules to suit the individual company and the requirements of the members.

Charity 1.46 The members, by special resolution under statutory provisions, may amend the articles of association; if the company is also registered with the Charity Commission, section 198 of the Charities Act 2011 asserts that certain changes require the written permission of the Commission. The following section applies to all charitable companies71: “198 Alteration of objects by companies and Commission’s consent (1) Any regulated alteration by a charitable company– (a)

requires the prior written consent of the Commission, and

(b)

is ineffective if such consent has not been obtained.

70 Companies Act 2006, s 21 (Amendment of articles): “(1) A company may amend its articles by special resolution”. 71 Section 198 applies to companies incorporated prior to 1 October 2009 whose members may require alteration to the memorandum of association.

22

Chapter 1  Introduction to Community Interest Companies (2) The following are regulated alterations– (a)

an amendment of the company’s articles of association adding, removing or altering a statement of the company’s objects,

(b) any alteration of any provision of its articles of association directing the application of property of the company on its dissolution, and (c)

any alteration of any provision of its articles of association where the alteration would provide authorisation for any benefit to be obtained by directors or members of the company or persons connected with them.”

Post 1 October 2009 model articles – the position today 1.47 In terms of the company constitution today, the members only need to concern themselves with the articles of association; as discussed, they have complete freedom to draft provisions to meet the requirements of the company, provided that they do not fetter Acts of Parliament or case law. It should be noted that the articles cannot compel members to commit unlawful acts. The memorandum of association is a non-constitutional document, its requirements under the Companies Act 2006 are defined by statutory instrument72 and are primarily used as part of the registration process73. The company’s objects are not restricted (unless the members wish to restrict them), and any provisions concerning objects would be drafted in the articles. The Companies (Model Articles) Regulations 2008 prescribe three types of model articles: private companies limited by shares, private companies limited by guarantee, and public companies74. The new model articles simplified and reduced the legalistic language of the previous articles and attempted to reflect the updated Companies Act 2006. The Department for Business, Innovation and Skills75, at the time of drafting the new model articles, focused on ‘think small first’, and so the articles for private companies are designed for small companies. For any company formed after 1 October 2009, the new model articles will automatically apply by ‘default application’, unless the articles are clear that the default articles should not apply. For companies that follow the default application process, they are not required to register articles. The company may override the default application by three methods: totally exclude (stating

72 Companies (Registration) Regulations 2008, SI 2008/3014. 73 Form IN01 (Application to register a company) contains much of the information previously detailed in the pre-1 October 2009 memorandum. 74 Companies (Model Articles) Regulations 2008, SI 2008/3229. 75 Replaced by the Department for Business, Energy and Industrial Strategy.

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Chapter 1  Introduction to Community Interest Companies

that the model articles do not apply); exclude provisions of the Companies Act 2006; or state that the model articles apply with clearly drafted modifications. The ability to use these methods is useful for medium-sized limited companies limited by shares that may wish to adopt the articles by default but include some of the provisions from the public limited default articles (for example, AA Limited could include article 44 (power to pay commissions), which broadly is unlikely to affect most small private limited companies). Overall, this reduces the need to draft a complete set of bespoke articles and therefore eradicates expensive legal advice.

Key points 1.48 ●●

For not-for-profit companies incorporating today that will not register with the Charity Commission, the default articles of association are: Schedule 2 Regulation 3 Model articles for private companies limited by guarantee76.

●●

Under the Companies Act 1985, the articles of association were brought about by statutory instrument, and so long-form model articles are created by using Table A77, which is then adapted by Table C78, described in the same statutory instrument.

●●

Companies incorporated under the Companies Act 1985 will hold, in addition to the articles, a memorandum of association, which is still binding on the company.

●●

Companies that incorporated as private companies limited by guarantee prior to 1 October 2009, that have not updated their articles of association, will generally use Table C.

●●

A charity may incorporate as a company under the Companies Act 2006 and register as a charity with the Charity Commission. The company is then required to use the Charity Commission-prescribed articles of association (GD1).

●●

The articles of association form a binding contract between the company and its members, and between the members themselves as a group. The articles may be enforced in law.

76 www.gov.uk/government/publications/model-articles-for-private-companies-limited-by-guarantee. 77 SI 1985/805, Schedule, Table A (Regulations for management of a company limited by shares). 78 Table C (A company limited by guarantee and not having a share capital. Articles of association).

24

Chapter 2  Legal Background of Community Interest Companies The CIC Regulations Legislative background 2.1 Community interest companies (CICs) were brought about by the Community Interest Company Regulations 2005.1 The initial legislative groundwork was established by Part 2 of the Companies (Audit, Investigations and Community Enterprise) Act 2004, which established the Regulator of Community Interest Companies.

Main legislation overview 2.2 The key enactments are as follows: ○○

Companies (Audit, Investigations and Community Enterprise) Act 2004;

○○

Companies (Audit, Investigations and Community Enterprise) Act 2004 (Commencement) and Companies Act 1989 (Commencement No 18) Order 2004;2

○○

Community Interest Company Regulations 2005;

○○

Companies Act 2006 (Consequential Amendments etc) Order 2008; and

○○

Companies Act 2006 (Part 35) (Consequential Amendments,Transitional Provisions and Savings) Order 2009.

There are also three Amendment Regulations: ○○

Community Interest Company (Amendment) Regulations 2009;

1 SI 2005/1788. 2 SI 2004/3322.

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Chapter 2  Legal Background of Community Interest Companies

○○

Community Interest Company (Amendment) Regulations 2012; and

○○

Community Interest Company (Amendment) Regulations 2014.

The Companies (Audit, Investigations and Community Enterprise) Act 2004 (CAICE) 2.3 Following a variety of corporate failures, including Equitable Life and the global downturn in stock prices following the 11 September 2001 attacks, the government of the day endeavoured to restore investor confidence in companies and financial markets, by strengthening governance and audit practice. In addition to the introduction of CAICE, the Combined Code on Corporate Governance was overhauled in 2003, following a review by Sir Derek Higgs of the role and effectiveness of non-executive directors. The Financial Reporting Council took over the functions of the former Accountancy Foundation and, in addition, the Act assisted social enterprise by creating a new type of company – the “community interest company”. CAICE is divided into three Parts containing 67 sections, with eight schedules. Part 1 strengthened the independence of auditors and expanded their rights to information and to conduct investigations. Part 3 contained supplementary provisions concerning repeals, revocations, commencement, extent and the Act’s short title. Part 2, pertinent to this text, makes provision for the establishment of the “community interest company”, intended to make it simpler and more convenient to establish a business whose profits and assets are to be used for the benefit of the community. The territorial application of the Act extends to England, Wales and Scotland. Company law matters relating to Scotland are reserved to the UK Parliament under the Scotland Act 1998, and those relating to Wales have not been transferred to the National Assembly for Wales under the Government of Wales Act 1998. Therefore, CAICE applies to England, Scotland and Wales; in terms of the United Kingdom, the Act does not apply to Northern Island, as company law was transferred under the Northern Ireland Act 1998. Part 2 of CAICE is divided into the following six sections: ●●

introductory;

●●

requirements; 26

Chapter 2  Legal Background of Community Interest Companies

●●

becoming a community interest company;

●●

supervision by Regulator;

●●

change of status; and

●●

supplementary.

In addition, the Act includes five schedules relating to Part 2: ●●

Schedule 3: Regulator of Community Interest Companies;

●●

Schedule 4: Appeal Officer for Community Interest Companies;

●●

Schedule 5: Official Property Holder for Community Interest Companies;

●●

Schedule 6: Community interest companies: names; and

●●

Schedule 7: Community interest companies: investigations.

It should be noted that, in various sections, CAICE proposed the basic proposition and framework about CICs, leaving the finer detail to be fleshed out by secondary legislation.

Companies (Audit, Investigations and Community Enterprise) Act 2004 (Commencement) and Companies Act 1989 (Commencement No 18) Order 2004 2.4 This statutory instrument brought into force, on 1 January 2005, the provisions of CAICE set out in Schedule 1 and, on 6 April 2005, the provisions set out in Schedule 2. Schedule 33 came into force on 1 July 2005, and all remaining provisions, set out in Schedule 4,4 came into force on 1 October 2005. Therefore, CAICE was wholly in force on 1 October 2005.

Community Interest Company Regulations 2005 2.5 When CAICE was drafted, the finer details of the legislative framework applying to CICs were to be finalised by secondary legislation. Without the Community Interest Company Regulations 2005 (“CICR”), significant parts

3 Article 3 contained a transitional provision under which section 7 would not apply to company accounts for periods beginning before 1 October 2005. 4 Article 4 contained a transitional provision under which section 8 would not apply to directors’ reports concerning financial years beginning before 1 April 2005 or ending before 6 April 2005.

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Chapter 2  Legal Background of Community Interest Companies

of the regulatory regime for CICs would be missing. The instrument sets out the detailed regulatory regime for community interest companies. Numerous aspects, including the following, required further clarification by additional secondary legislation: community interest test and excluded companies; formation of a company; distribution of assets on winding up; articles of association; CIC reports; formation of company as a CIC; and appointment of manager. CICR served this purpose, to define and extend the basic framework provided by CAICE and, in particular, the statutory instrument:5 ○○

specifies that companies engaging in certain activities, and companies which are (or are owned or controlled by) political parties or political campaigning organisations, are not eligible to be CICs;

○○

makes provision concerning the memoranda and articles of association of CICs, and other documents to be sent to the Registrar of Companies by those wishing to form a CIC or convert an existing company into a CIC;

○○

specifies the limits which apply to CICs’ payment of dividends and other distributions to shareholders and to their payment of performancerelated rates of interest on debts or debentures;

○○

varies the normal procedures for distributing a company’s assets in cases where a CIC is wound up;

○○

specifies the contents of the annual “community interest company report” which CICs are required to produce;

○○

makes provision in relation to the appointment, remuneration and removal of managers of a CIC’s property and affairs by the Regulator;

○○

provides for the payment of fees in connection with certain of the Regulator’s functions under CAICE; and

○○

makes rules for the conduct of appeals against decisions of the Regulator to the Appeal Officer for Community Interest Companies (“the Appeal Officer”).

It was possible to form CICs (or convert an existing company to a CIC) from 1 July 2005, when the provisions of Part 2 of CAICE came into force. In order to provide continuity, CICR also came into force on 1 July 2005.6

5 Explanatory memorandum to CICR, Section 2.2. 6 In Northern Ireland, the Companies Act 2006 (Commencement No 2, Consequential Amendments, Transition Provisions and Savings) Order 2007 (SI 2007/1093) constituted CICs from 1 April 2007. Companies Act 2006, s 1284(1) and other related provisions related to extending Part 2 of CAICE (concerning CICs) to Northern Ireland.

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Chapter 2  Legal Background of Community Interest Companies

Three Amendment Regulations 2.6 Since 2005, the government has instigated three changes to the CIC structure by statutory instrument (SI). A public consultation is normally required to amend legislation, and this was the case in 2009 and 2014. The changes to the asset lock made by SI are co-ordinated by the Office of the CIC Regulator. The following Regulations amend CICR: ○○

Community Interest Company (Amendment) Regulations 2009, SI 2009/1942;

○○

Community Interest Company (Amendment) Regulations 2012, SI 2012/2335; and

○○

Community Interest Company (Amendment) Regulations 2014, SI 2014/2483.

SI 2009/1942 2.7 SI 2009/1942 amended CICR to update and provide further clarification of the regulations for existing CICs, prospective CICs and the Regulator. The principal changes included provisions: to enable a CIC to convert to the assetlocked form of a community benefit society (a form of industrial and provident society) or a Scottish charity to convert to a CIC; to remove requirements relating to alternate directors and casting vote; and to add a reasonable person’s test to the section of the community aspect of the community interest test. A consultation document was published on 23 February 2009. The consultation ran for six weeks (the short consultation period reflected that the proposed amendments did not represent a major change of direction in the Government’s policy). 12 responses were received, and the proposals were supported by a majority of respondents, although the level of support varied. Two instances raised significant concerns, so the provisions were removed. Another proposed amendment was omitted in light of the respondents’ views. On the amendment relating to alternate directors, the Government’s approach was revised considering respondents’ comments.

SI 2012/2335 2.8 SI 2012/2335 amended CAICE to correct an error which occurred in the implementation of the Companies Act 2006. The statutory instrument 29

Chapter 2  Legal Background of Community Interest Companies

reinstated the requirement for the directors of a CIC to deliver a copy of the community interest company report to the registrar with a CIC’s annual accounts and reports.7 No formal consultation was undertaken in relation to amending the regulations, because the proposed measure was not introducing a new policy or making changes that would burden CICs or make a difference to their current expectations.8

SI 2014/2483 2.9 SI 2014/2483 amended CAICE to remove the share dividend cap. The “share dividend cap” was a limit introduced in CICR that prevented a CIC from paying more than a certain percentage of the paid-up value of the share as a dividend in any one year. The regulations came into force on 1 October 2014, and the new provisions regarding payment of a dividend by a CIC apply to dividends declared or proposed to be declared on or after 1 October 2014, regardless of when they are paid. In addition, the regulations allow a CIC to roll over unused dividend capacity for up to four financial years if it has not declared the full dividend available under the share dividend cap. The requirement for a CIC to include, in its community interest company report, details of dividends paid or unused dividend capacity carried over in the four years preceding the year to which the report relates was rescinded, on the basis that the information is no longer required to be registered at Companies House as a consequence of the removal of the share dividend cap.9 This instrument also makes amendments to CICR consequential on this change.

7 Due to an error when drafting the legislation, the requirement was only partially reinstated after the original requirement, contained in CAICE, s 34(2), was replaced by an obligation to make provision requiring the directors of a CIC to deliver a copy of the CIC report to the registrar of companies. The substitution was made by a consequential amendment to the 2006 Act contained in the Companies Act 2006 (Consequential Amendments etc) Order 2008 (SI 2008/948). 8 Explanatory memorandum to the Community Interest Company (Amendment) Regulations 2012 (SI 2012/2335). 9 Explanatory Note to the Community Interest Company (Amendment) Regulations 2014 (SI 2014/2483), page 3.

30

Chapter 3  Regulation of Community Interest Companies Legislative background 3.1 Community interest companies (CICs) were brought about by the Community Interest Company Regulations 20051. The initial legislative groundwork was established by Part 2 of the Companies (Audit, Investigations and Community Enterprise) Act 2004 (CAICE), which established the Regulator of Community Interest Companies.

Companies (Audit, Investigations and Community Enterprise) Act 2004 Introduction Appointment of the Regulator and their function 3.2 The Secretary of State appoints an independent person to be the regulator, who is responsible for instilling good regulatory practice2 and providing clear and easily understood guidance and assistance to community interest companies3. To fulfil this obligation, the regulator provides step-by-step guidelines which are available online4.

Regulatory approach 3.3 Ove the past 20 years, successive governments have attempted to deregulate and allow charities and social enterprises greater flexibility to achieve their aims 1 SI 2005/1788. 2 The provisions complement the common law requirements that apply to all those exercising administrative and regulatory functions, such as the requirement to act reasonably. 3 CAICE, s 27 (Regulator). 4 www.gov.uk/government/publications/community-interest-companies-business-activities/cicbusiness-activities-forms-and-step-by-step-guidelines.

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Chapter 3  Regulation of Community Interest Companies

while supporting confidence through a framework of “light touch” regulation. Governments can help them by ensuring that the legal and regulatory system does not stifle small-scale activity. There is no single regulator for not-for-profit organisations; broadly speaking, those that incorporate will fall under the Companies Act 2006, and a charity that incorporates faces dual regulation under the Companies Act 2006 and the Charities Act 2011. It should be noted that, to overcome the problem of dual regulation, the alternative “charitable incorporated organisation” is available under the Charities Act 2011.

“Light touch” regulation 3.4 When considering how the Regulator would build a framework to encourage good regulatory practice, the following factors were considered by the government in 2003, and the following recommendations5 were made prior to drafting CAICE. The following principles and goals underpinned the reform of the legal and regulatory framework of charities and social enterprises, and they formed the basis of the legislation of CICs.

Regulatory principles and goals 3.5 (1) Freedom of association: In practical terms, this means that care should be taken to avoid introducing measures which increase bureaucracy and discourage people from forming associations. (2) Respect for the sector’s independence: Any proposed changes to the regulatory framework should respect and safeguard the independence of charity and social enterprises. (3) Promoting public confidence: Promoting public confidence is an important objective because the sector’s success ultimately depends on public support. (4) Supporting the delivery of public benefit: The government should also support the delivery of increased public benefit by helping organisations delivering public benefit to become more effective and efficient. (5) Promoting public accountability and transparency: Charities and not-forprofit organisations should be encouraged to be as open and accountable as possible to stakeholders. 5

“Private Action, Public Benefit. A Review of Charities and the Wider Not-For-Profit Sector” (Strategy Unit Report, September 2002).

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Chapter 3  Regulation of Community Interest Companies

(6) A proportionate, risk-based approach to regulation: Regulation should have clear objectives and be targeted and proportionate to the risk of abuse and to the risk of damage to public confidence. The size of the organisation and its assets should be taken into consideration. (7) Simplify and harmonise regulation where possible: Complexity in the regulatory framework should be avoided. (8) Clear, consistent and transparent regulation: A lack of clarity and consistency in regulation makes it difficult for organisations to understand their obligations and, therefore, to comply with them. (9) A fair, effective and accountable system: The Regulator must have the powers and capacity to deliver a fair and effective system of regulation. Holistically, considering the nine key themes discussed above, if implemented, results in a light touch system of controls. This term refers to a particular way of regulating a phenomenon entailing only limited and, therefore, light intervention by the government6. The government recognises the limitation of the light touch approach, and so certain key areas of concern are specifically targeted for tighter oversight. In relation to CICs, registration, regulatory approval and subsequent changes to the companies’ objects and the key supervision framework were established in the CAICE legislation.

Style of regulation 3.6 Taking into consideration the regulatory principles and goals described previously and the legislation as drafted, the Regulator must effect a style of regulation which considers the nature of those affected by their actions7. In particular, the Regulator must adopt an approach when discharging its functions which is based on good regulatory practice8, particularly with regard to: (a) the likely impact on those who may be affected by the discharge of those functions, (b) the outcome of consultations with, and with organisations representing, CICs and others with relevant experience, and (c) the desirability of using the Regulator’s resources in the most efficient and economical way. 6 Gatti, M. and Poli, S. (2018) ‘Accounting and political parties: explaining the “why” of an Italian light touch regulation (1974)’, Accounting, Auditing & Accountability Journal, 31(6), pp 1618–1643. 7 CAICE, Explanatory Notes, page 45. 8 CAICE, s 27(4) (Regulator).

33

Chapter 3  Regulation of Community Interest Companies

According to the Regulator9, the government has indicated that it expects a “light touch” Regulator to encourage the development of the CIC “brand” and provide guidance and assistance on matters relating to CICs. In terms of the dayto-day operations of the Regulator, the focus is on considering registration and conversion applications and the associated documentation. A specific focus of the regulation is to ensure that the purposes of the company and its constitution comply with CAICE and the Regulations and, in particular, to decide whether, in the Regulator’s view, it satisfies the community interest test.

The Regulator’s approach 3.7 In summary, the Regulator’s focus is facilitating the formation of CICs through a non-bureaucratic style. The light touch approach to regulation does not include pro-active supervision of individual CICs by the Regulator. All CICs are required to file an annual CIC report; when envisaged, the annual report would set out the action that each CIC has taken to pursue public or community benefit, and allow the company to reflect upon the role and importance of its stakeholders, and how they involve them. The Regulator would monitor these reports and make them public. Using the annual report strategy would allow stakeholders and the public to monitor whether CICs are operating in the community interest. The Government proposed in 2003, in order to provide the necessary assurance, that the Regulator will need to: ●●

check that applicants for CIC status are not-for-profit companies working in the community interest;

●●

review community interest reports, which set out the actions the company is taking to pursue public or community benefit, and to involve stakeholders;

●●

publish these reports, allowing stakeholders to check them and Companies House records to ensure the company is complying with the obligations of its status; and

●●

ensure that the residual assets of wound-up CICs continue to serve the public or community benefit.

In 2022, however, filing of the annual CIC report does not automatically make the Regulator aware of any breaches of the Regulations. The Regulator typically relies on the CIC members or stakeholders to draw such matters to the Regulator’s attention. 9 “Office of the Regulator of Community Interest Companies: Information and guidance notes”, Chapter 11: The Regulator (May 2016).

34

Chapter 3  Regulation of Community Interest Companies

If the Regulator is made aware of an issue, it will consider the CIC report filed and may make further enquiries and take appropriate action. It should be noted that, in most cases, the Regulator will endeavour to resolve any issues that arise with the interested parties, without resorting to its legislative powers10.

Terms of appointment of the Regulator 3.8 The person appointed as the Regulator may serve a maximum term of five years, and they may be reappointed once for another five years, and so, in real terms, any person may serve as the regulator for a maximum term of 10 years11.The Secretary of State may remove the Regulator on the grounds of incapacity or misbehaviour and, subject to the maximum term of appointment, the Regulator holds and vacates office as the Secretary of State sees fit12.

The Regulator’s staff 3.9 The Regulator of CICs is employed part-time, supported13 by six members of staff from the Department of Business, Innovation and Skills14.The members of staff must include a deputy to the Regulator who is to act during any vacancy in that office or if the Regulator is absent, subject to suspension or unable to act15. It should be noted that anything which the Regulator is authorised or required to do may be done by a member of the Regulator’s staff if authorised by the Regulator (generally or specifically) for that purpose16.

Reporting and corporate governance 3.10 Each financial year, the Regulator must prepare a report on the exercise of the Regulator’s functions during the financial year and a set account in respect 10 “Office of the Regulator of Community Interest Companies: Information and guidance notes”, Chapter 11: 11.1. Approach to regulation (May 2016). 11 CAICE, Sch 3, para 1 (Regulator of community interest companies. Regulator’s terms of appointment). 12 CAICE, Sch 3, para 2 (Regulator of community interest companies. Regulator’s terms of appointment. Remuneration and pensions). The Regulator is allowed to claim travelling and other expenses, subject to the discretion of the Secretary of State; in addition, a pension, allowance or gratuity may be authorised or a contribution or payments towards provision for a pension, allowance or gratuity. 13 As of June 2022. CAICE, Sch 3, para 1. The Regulator may, after consulting the Minister for the Civil Service as to numbers and terms and conditions of service, appoint such staff as the Regulator may determine. 14 Staff are based in Companies House, Cardiff. 15 CAICE, Sch 3, para 2 (Regulator of community interest companies). 16 CAICE, Sch 3, para 5 (Regulator of community interest companies).

35

Chapter 3  Regulation of Community Interest Companies

of a financial year17; additional reports or information may be requested if deemed necessary by the Secretary of State. A copy of the accounts must be sent to the Comptroller and Auditor General18 which are then certified. The Secretary of State must lay before each House of Parliament a copy of the report19.

Appointment of the Appeal Officer 3.11 The Secretary of State appoints a person to be the Appeal Officer, whose function is to determine appeals against orders of the Regulator. Schedule 420 sets out the Appeal Officer’s terms of appointment, remuneration and financing, and provides for the Secretary of State to make regulations about the procedures to be followed by the Appeal Officer. An appeal may only be brought if based on a material error of law or fact. The Appeal Officer is provided with three options: (a) dismiss the appeal; (b) allow the appeal; or (c) remit the case back to the Regulator. If the case is remitted, the Regulator must consider any rulings of law or any new facts provided by the Appeal Officer that may impact on the initial appeal21. The Act does not fetter the ability for the Regulator to be subject to a judicial review on any decision they make. The appeal process outlined in Part 11 of the Community Interest Companies Regulations 2005 (“CICR”) is discussed in paragraphs 3.38–3.45 below.

The Official Property Holder 3.12 The Official Property Holder22 is selected from the Regulator’s staff, and holds any property where an order has been made under section 48 of CAICE. The Official Property Holder holds the property vested on trust on behalf of the CIC. The Official Property Holder must consider the rights of third

17 18 19 20 21 22

CAICE, Sch 3, para 7 (Regulator of community interest companies). Government official responsible for supervising the quality of public accounting and financial reporting. CAICE, Sch 3, paras 7, 8 (Regulator of community interest companies). CAICE, Sch 4, para 1 (Regulator of community interest companies). CAICE, s 28 (Appeal Officer: Companies). CAICE, s.29 (Official Property Holder).

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Chapter 3  Regulation of Community Interest Companies

parties, trustees and any government agency if insolvent. Any proposed release of assets must be approved by the Regulator, and it should be noted that the general duties and requirements of trust law will apply to the Official Property Holder.

Protection of property 3.13 If the directors of a CIC fail to manage the company effectively, the Regulator has considerable powers to protect its assets. Under section 48 of CAICE, the Regulator may order the CIC’s property to be vested in or transferred to the Official Property Holder, or it may freeze or restrict the assets of a CIC and any commitments it may have entered into23. Failure to comply with the order will result in a civil proceeding; and, if found guilty, the directors will face a conviction for contempt of court. In addition, the Regulator may prevent the sale of any property held by the CIC, directly or in trust, order any debtors of the company not to make payment for monies owed, and thwart payments to any creditors. Any contravention of section 48(2) or (3) is an offence, resulting in a fine not exceeding level 5 on the standard scale (currently £5,000); and any proposed prosecution would require the consent of the Regulator or the Director of Public Prosecutions in England and Wales or, in Northern Island, the Director of Public Prosecutions for Northern Ireland. If an order is made, the Regulator must regularly review the order and consider discharging it in whole or in part. The company may appeal any order made under section 1, 2 or 3.

Supervision by the Regulator Supervisory powers and restrictions 3.14 The Regulator’s main aim is to maintain public confidence in CICs and, to this end, a “light touch” approach is taken. Sections 41–51 (Supervision by Regulator) constrain the Regulator to make use of its powers in such a way that its supervisory activity is not greater than is needed to maintain confidence in CICs.

23 These elements as described in s 48(1), (2) and (3) are subject to appeal.

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Chapter 3  Regulation of Community Interest Companies

The Regulator is prevented from exercising the following powers unless the “company default condition” is satisfied: (a) section 45 (appointment of director), (b) section 46 (removal of director), (c) section 47 (appointment of manager), or (d) section 48 (property),

Company default condition 3.15 Section 41(3) was expressly drafted to ensure that the Regulator uses more intrusive powers only where it is necessary, and there are specific grounds for doing so, as follows: “(a) there has been misconduct or mismanagement in the administration of the company, (b) there is a need to protect the company’s property or to secure the proper application of that property, (c)

the company is not satisfying the community interest test, or

(d) if the company has community interest objects, the company is not carrying on any activities in pursuit of those objects.”

Powers to transfer shares 3.16 Section 41(4) prevents the Regulator from exercising the power to order a transfer of shares or other membership interests in a CIC (see para 3.35) unless the CIC is an excluded company.

Investigations 3.17 Section 42 allows the Regulator to investigate the affairs of a CIC, or to appoint a third party individual24 to conduct an investigation on behalf of the Regulator; this allows for external specialist knowledge to be brought

24 Any person (other than a member of the Regulator’s staff) may be appointed.

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Chapter 3  Regulation of Community Interest Companies

in-house to help establish the facts. Paragraph 5 of Schedule 3 allows the Regulator to delegate all functions and its authorisation to any member of the Regulator’s staff.

Power to require documents and information25 3.18 Paragraph 1 of Schedule 7 specifies the Regulator’s statutory powers to request documents and information. The investigator of a CIC may require the company or any of its officers to produce specific documents or information in legible form26; a document includes any information recorded in any form. The time frame and place to produce any documents or information may be specified by the investigator. In addition, the investigator may take copies of any document that is produced, and this does not affect any lien that a person holds over the document. It should be noted that the offices of the company may require the investigator to produce evidence of their authority before any documents or information are produced.

Failure to comply 3.19 If a person fails to comply with paragraph 1 of Schedule 7, the investigator may petition the court; and if, after the hearing, the court is satisfied that the offender failed without reasonable excuse to comply with the investigator’s request, they will be guilty of contempt of the court.

Evidence 3.20 Any documents or information provided in accordance with paragraph 1 of Schedule 7 may be used in evidence against that person; however, in any criminal proceedings, no evidence relating to the statement may be adduced by or on behalf of the prosecution, and no question relating to it may be asked by or on behalf of the prosecution, unless evidence relating to it is adduced or a question relating to it is asked in the proceedings by or on behalf of that person. If the person is charged with providing false information.

25 CAICE, Sch 7, para 1 (Community interest companies: Investigations. Power to require documents and information). 26 CAICE, Sch 7, para 2:“Any documents under legal professional privilege or confidential communications are not required to be produced”.

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Chapter 3  Regulation of Community Interest Companies

False information 3.21 If the investigator makes a request to the company under paragraph 1 of Schedule 7 and any person knowingly or recklessly provides false information, if prosecuted27 and found guilty, they will be liable, on summary conviction in England and Wales, to imprisonment for a term not exceeding 12 months or a fine of an amount not exceeding the statutory maximum or to both, and on summary conviction in Scotland or Northern Ireland, to imprisonment for a term not exceeding six months or a fine of an amount not exceeding the statutory maximum or to both.

Audit 3.22 The Regulator may require a CIC annual account to be audited by a qualified auditor appointed by the Regulator, and the cost of the audit and remunerations is met by the Regulator. Any auditor appointed must be eligible for appointment under Part 42 (Statutory auditors) of the Companies Act 2006, and the auditor’s general right to information under section 499 of the Companies Act 2006 applies to the audit.

Civil proceedings 3.23 The Regulator may bring civil proceedings in the name and on behalf of a CIC by written notice to the company before instigation, and the notice to the company must state: the cause of action, the remedy sought, and a summary of the facts on which the proceedings are to be based. Any director of the company may apply to the court for an order that proposed proceedings are not to be instituted or that proceedings are to be discontinued. The court may make such order as it thinks fit, as an alternative to ordering that proposed proceedings are not to be instituted under section 44 or that proceedings instituted under that section are to be discontinued, namely: “(a) that the proposed proceedings may be instituted under this section, or the proceedings instituted under this section may be continued, on such terms and conditions as the court thinks fit,

27 A prosecution for an offence under sub-paragraph (1) may be instituted (in England and Wales) only with the consent of the Director of Public Prosecutions, and (in Northern Ireland) only with the consent of the Director of Public Prosecutions for Northern Ireland.

40

Chapter 3  Regulation of Community Interest Companies (b)

that any proceedings instituted by the company are to be discontinued, or

(c)

that any proceedings instituted by the company may be continued on such terms and conditions as the court thinks fit.”

The Regulator must indemnify the company against any costs (or expenses) incurred by it in connection with proceedings brought under section 44. Any costs (or expenses) awarded to the company in connection with proceedings brought under that section, or incurred by the company in connection with the proceedings and which it is agreed should be paid by a defendant or defender, are to be paid to the Regulator.

Appointment of director 3.24 The Regulator may by order appoint a director (anyone whom the Regulator thinks appropriate) of a CIC. The person may be a member of the Regulator’s staff or a third party, and the person is a member of the company, irrespective of any provision made by the articles of association of the company or a resolution of the company. The order must specify the terms on which the director is to hold office, and those terms have effect as if contained in a contract between the director and the company. The terms specified must include the period for which the director is to hold office and may include terms as to the remuneration of the director by the company. A director appointed under section 45 has all the powers of the directors appointed by the company (including powers exercisable only by a particular director or class of directors). A director appointed under section 45 may not be removed by the company by ordinary resolution under sections 168 and 169 of the Companies Act 2006.The obligation under section 167(1)28 (requirement that company notify change among directors to registrar) is an obligation of the Regulator.

Director appointed 3.25 If a director appointed by the Regulator under section 45 ceases to be a director of the company (without being removed by the Regulator at any time), the company must give notification of that fact to the Regulator in a form approved by the Regulator before the end of the period of 14 days beginning with the

28 Companies Act 2006, s 167A (Right to make an election): “(1) An election may be made under this section in respect of a register of directors or a register of directors’ residential addresses (or both)”.

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Chapter 3  Regulation of Community Interest Companies

date on which the person ceases to be a director. The Regulator must send a notification to the registrar of companies within 14 days from the date on which the Regulator receives notification from the company. Failure to notify the Regulator places every officer of the company in default, and this includes shadow directors. A director found guilty under the relevant subsection is liable to a fine not exceeding level 5 on the standard scale (currently £5,000) and, for continued contravention, a daily default fine not exceeding 10% of level 5 on the standard scale. The company may appeal to the Appeal Officer against an order under section 45.

Removal of director 3.26 The Regulator may by order remove (or suspend29) a director of a CIC; if removed, they cannot be reappointed by the company as a director of the company, even if approved by special resolution of the company. If the Regulator suspends a director30, it may provide directions in relation to any director’s functions they may perform. If the Regulator discharges a removal order, the director subject to the order is not automatically reinstated; however, the company may reappoint the individual as a director under the Companies Act 2006 or subject to the provisions of the company’s articles of association. Prior to making an order of removal or suspension in relation to a director, the Regulator must give at least 14 days’ notice to the director and the company, which is subject to appeal (in England and Wales or Northern Ireland) to the High Court or (in Scotland) to the Court of Session. The Regulator must, within 14 days beginning with the date on which an order is made, is discharged, expires or is quashed on appeal, give notification of that event to the registrar of companies in a form approved by the registrar of companies. The company obligation to notify the registrar of companies of an event under section 167(1)(a) of the Companies Act 2006 (requirement that company notify change among directors to registrar) does not apply.

Appointment of manager 3.27 As opposed to removing or suspending the directors of the CIC, the Regulator may by order appoint an external manager whom they deem holds the 29 The maximum period for which a director may be suspended under section 46(3) is one year. 30 The Regulator must from time to time review any order made under section 46(3) and, if it is appropriate to do so, discharge the order.

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appropriate skills or knowledge (who is not a member of the Regulator’s staff) in respect of the property and affairs of a CIC. The order may make provision as to the functions to be exercised by, and the powers of, the manager. The order may provide for the manager to hold certain functions of the company’s directors and for the company’s directors to be prevented from exercising any of those functions. The manager acts as the company’s agent when carrying out its functions, and a person dealing with the manager in good faith and for value need not inquire whether the manager is acting within their powers. In order to ensure that any powers to appoint a manager do not affect any proposed insolvency process, the Regulator must discharge the order to appoint a manager on the appointment of an administrative receiver, administrator, provisional liquidator or liquidator of the company. The appointment of the manager does not affect any right of any person to appoint a receiver under section 51 of the Insolvency Act 1986. Any management functions undertaken are supervised by the Regulator; from time to time, a review of the order by which the manager is appointed must be undertaken and, if it is appropriate to do so, the Regulator may discharge the order in whole or in part. The court has ultimate powers in relation to any matter arising in connection with the manager’s functions or powers, and the Regulator is free to make applications to the court for guidance. On an application by the Regulator, the court may give such directions or make such orders as it thinks fit. It should be noted that any costs of such an application are to be paid by the company. The Regulator may: require the appointed manager to provide management reports; require a manager to give security (or, in Scotland, to find caution) for the due exercise of the manager’s functions; and remove a manager in circumstances prescribed by the regulations31. The manager’s remuneration may be payable by the company, and the Regulator is authorised to determine the amount of a manager’s remuneration and to disallow any amount of remuneration in circumstances prescribed by the regulations32. The company may appeal to the Appeal Officer against an order under section 47.

31 Outlined in the initial legislation, which was expanded by statutory instrument (CICR); CAICE, s 47(12): “Regulations may authorise the Regulator: (a) to require a manager to make reports, (b) to require a manager to give security (or, in Scotland, to find caution) for the due exercise of the manager’s functions, and (c) to remove a manager in circumstances prescribed by the regulations”. 32 Outlined in the initial legislation which was expanded by statutory instrument (CICR); CAICE, s 47(13): “Regulations may: (a) provide for a manager’s remuneration to be payable from the property of the company, and (b) authorise the Regulator to determine the amount of a manager’s remuneration and to disallow any amount of remuneration in circumstances prescribed by the regulations”.

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Remuneration 3.28 Part 8 of CICR extends the legislation laid down in CAICE, which discusses the rules of appointments and provides additional regulations on the managers: (a) remuneration; (b) security; (c) failure and removal; and (d) reports.

Remuneration 3.29 If a manager is appointed by the Regulator, any remuneration is payable by the CIC, and the income is set by the Regulator and not the company. The Regulator is allowed to disallow the manager’s remuneration if a notice is issued and expires (see para 3.32 at (d)) or they fail to adhere to any requirements of regulation 32 (see para 3.31).

Security 3.30 Any manager appointed must provide security to the Regulator for the due discharge of the manager’s functions within such time and in such form as the Regulator may specify.

Failure and removal 3.31 Regulation 3233 provides that the appointed manager must: (1) give security within the specified time limits and in such form as specified by the Regulator; (2) satisfactorily discharge any function imposed on the manager; and (3) provide reports from time to time on such matters and in such form as the Regulator specifies. 33 Community Interest Company Regulations 2005.

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Notices 3.32 Any written notice issued34 to the manager must inform the manager of: (a) the specified failure in respect of which the notice is issued; (b) the Regulator’s power to authorise the disallowance of any amount of remuneration if satisfied as to any such failure; (c) the Regulator’s power to remove the manager if satisfied as to any such failure; and (d) the manager’s right to make representations to the Regulator in respect of any such alleged failure within such reasonable time as is specified in the notice. The Regulator may (in addition to disallowing remuneration) remove the manager if the time specified in any notice issued expires35 and, in addition, is satisfied that the manager has failed to execute any regulatory duty under regulation 32.

Reports 3.33 CAICE provided regulations to authorise the Regulator to request from the appointed manager any reports that it deemed applicable36. CICR provides a wide-ranging legislative remit, stating that the manager must make such reports to the Regulator as the Regulator may from time to time require on such matters and in such form as the Regulator specifies37.

Property 3.34 Section 48 of CAICE gives the Regulator several powers to protect the assets of a CIC. The Regulator can vest the CIC’s property in, or transfer it to, the Official Property Holder38, or freeze or otherwise restrict the assets of a CIC

34 35 36 37 38

By person or by post. The Regulator must consider any representations by the manager to the notice. CAICE, s 47(13) (Appointment of a manager). CICR, reg 33 (Reports). CAICE, s 48(1)(a), (b). (Property).

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and the commitments it may undertake.The exercise of these powers is subject to the company default condition being satisfied. The company default condition is satisfied39 in relation to a power and a company if it appears to the Regulator necessary to exercise the power in relation to the company on specific grounds (see para 3.15). Section 41(4) and (5) ensures that the use of these powers will not trigger any rights against a CIC’s property which would result in the loss of that property, or in a breach of a restriction on the transfer of the property. The discharge of an order under subsections (4) and (5) may not necessarily automatically result in the return of the property to the CIC, so subsection (7) enables the Regulator to make the necessary vesting orders. Section 41(10) creates an offence where a person contravenes an order of the Regulator in respect of the property of the CIC or the transactions that may be entered into by the CIC, and section 41(11) fixes the penalty for contravention as a fine not exceeding level 5 on the standard scale (currently £5,000). Section 41(12) ensures that the creation of a criminal offence by subsection (10) does not prevent civil proceedings. This means that a CIC will be able to seek damages if property is lost or reduced in value because it was not transferred to the Official Property Holder in breach of an order.

Transfer of shares 3.35 Section 49 of CAICE allows the Regulator to transfer shares to specified persons40 if it appears to the Regulator that the company is an excluded company. The provisions allows the Regulator to take control of a CIC with a view to the company ceasing to be an excluded company; without the power to order the transfer of shares, the Regulator would only be able to stop the CIC being an excluded company by winding up. Any provisions in the company’s articles of association41 preventing transfers of shares or interests are deemed void. If the CIC is a company limited by guarantee, the Regulator may terminate the membership interests of the current members of the CIC and appoint a new member in place of each member whose interest has been terminated. Any interests terminated by an order are the interests that the member holds by virtue of being a guarantor of the CIC. The Companies Act 2006 does not allow the formation of a company limited by guarantee (with share capital)

39 CAICE, s 41(3) (Conditions for exercise of supervisory powers). 40 “Specified”, in relation to an order, means specified in the order. 41 CAICE, s 49(4)(b), in addition, applies to any resolution of the company in general meeting.

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today; however, companies formed up to and including 1981 (under the Companies Act 1985) may have shareholders or share capital. If the CIC is a company limited by guarantee with share capital, the interests that any member holds by virtue of being a shareholder in that CIC are unaffected by any transfer order, and the interest may be subject to a separate court order. Any person who is subject to a share transfer order or has their interests terminated may appeal to the Appeal Officer.

Petition for winding up 3.36 On the basis that the decision is equitable, section 50 of CAICE allows the Regulator to petition the court for a CIC to be wound up; the section does not apply if the company is already being wound up by the court.This will be without prejudice to the power of the Secretary of State to wind up CICs and other companies on public interest grounds (section 124A of the Insolvency Act 1986).

Dissolution and striking off 3.37 If a CIC has been dissolved, or struck off the register under section 1000 or 1001 of the Companies Act 2006, the company assets become bona vacantia42, and this may result in the company’s assets bypassing the asset lock. The Regulator may apply to the court under section 1029 of that Act for an order restoring the company’s name to the register. If an application under section 1003 of the Companies Act 200643 is made on behalf of a CIC, the persons to be notified of an application must include the Regulator.

Appeals Time limits 3.38 Any appeal must be made by sending a notice of appeal to the Regulator so that it is received within two months of the date upon which the appellant 42 Property, cash and any other assets owned by a company when it is dissolved automatically pass to the Crown. If the company’s last registered office and the asset were in England or Wales, but not in the Duchies of Lancaster or Cornwall, its assets are dealt with by the Treasury Solicitor. 43 Companies Act 2006, s 1003 (Striking off on application by company).

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was given reasons for the disputed order or decision in accordance with section 61(5)44.

Distribution of assets on a winding up 3.39 When an appeal is brought against a direction of the Regulator made under regulation 2345, it must be made by sending a notice of appeal to the Regulator so that it is received within three weeks of the date upon which notice of the disputed direction was given to the CIC, in accordance with regulation 23(8)46. Any appeal which is not made within the relevant deadline will be dismissed unless the Appeal Officer is satisfied that there are exceptional circumstances to justify its being made late47.

Appeal process 3.40 On receiving the notice of appeal, the Regulator must send an acknowledgement of its receipt to the appellant and forward the notice of appeal to the Appeal Officer endorsed with the date it was received. If regulation 23 applies, the Regulator must forward with the notice of appeal a statement of the date upon which notice of the disputed direction or decision was given to the CIC in accordance with regulation 23(8), or stipulate that no such notice was given.

Notice of appeal 3.41 The notice of appeal must: (a) state the name and address of the appellant; (b) state an address for service in Great Britain; and 44 CAICE, s 61(5): “Where the Regulator makes an order or decision against which an appeal lies under or by virtue of this Part, the Regulator must give reasons for the order or decision to the persons entitled to appeal against it”. 45 CICR, reg 23 (Distribution of assets on a winding up). 46 CICR, reg 23(8): “The Regulator must give notice of any direction under this regulation to the company and the liquidator”. 47 “Office of the Regulator of Community Interest Companies: How to appeal against decisions made by the Regulator” (May 2016).

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(c) specify the date on which the appellant was given reasons by the Regulator for the disputed order or decision, or include a statement that no such reasons were given. If regulation 23 (Distribution of assets on a winding up) applies, point (c) is not required. The notice of appeal must contain: (a) a statement of the grounds for the appeal; (b) details of the disputed order, decision or direction; (c) a succinct presentation of the arguments supporting each of the grounds of appeal; and (d) a schedule listing all the documents annexed to the notice of appeal. There must be annexed to the notice of appeal, in the case of a disputed order or decision, a copy of any reasons given by the Regulator under section 61(5)48 and, as far as practicable, a copy of every document on which the appellant relies.The notice of appeal must be signed and dated by the appellant, or on his behalf by his duly authorised officer or his legal representative.

Appeal procedure 3.42 The Regulator may make a written response to the notice of appeal; if applicable, the response must be sent to the Appeal Officer so that it is received within two weeks of the date on which the Regulator received the notice of appeal, or such further time as the Appeal Officer may allow. The Appeal Officer must send a copy of the written response to the appellant and give the Regulator the opportunity to make further written or oral representations.The Appeal Officer may specify the time and manner in which such further representations are to be made. The Appeal Officer is authorised to: (a) make enquiries of any person; (b) receive representations from any person; (c) hold any meeting or hearing; and (d) subject to CICR, follow such practice and procedure, 48 See para 3.38.

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as the officer thinks fit, having regard to the just, expeditious and economical conduct of the appeal. The Appeal Officer may specify the time and place at which any meeting or hearing is to be held.

Determination of appeal 3.43 In determining an appeal, the Appeal Officer must have regard to all matters that appear to be relevant49. It should be noted that, subject to the Regulations, the Appeal Officer is given fairly wide discretion as to the details of procedure to be followed in each case50.

Dismissal of appeal 3.44 The Appeal Officer may dismiss51 an appeal at any stage if they consider that the notice of appeal holds no valid ground of appeal, if the notice of appeal fails to comply with the requirements of regulations52, or if the appellant is not entitled to bring the appeal. The Appeal Officer must dismiss an appeal if they consider that the appeal was not brought within the time limits imposed by regulation 37, unless they are satisfied that the circumstances are exceptional. The Appeal Officer may dismiss an appeal at any stage, at the request of the appellant.

Reasons 3.45 The Appeal Officer must give reasons for a decision to: (a) dismiss an appeal; (b) allow an appeal; or (c) remit a case to the Regulator.

49 CICR, reg 40 (Determination of appeal). 50 “Office of the Regulator of Community Interest Companies. How to appeal against decisions made by the Regulator” (May 2016), What is the process for appealing a decision made by the Regulator? 51 CICR, reg 41 (Dismissal of appeal). 52 CICR, reg 38 (Notice of appeal).

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The reasons must be given to the Regulator and to the person bringing the appeal.

Corporate governance Fees 3.46 Section 57 of CAICE allows the Regulator to charge fees in connection with the Regulator’s functions as specified in the regulations, at a rate comparable to company incorporations and the filing of foreign accounts. The regulations allow for fees to be paid to the registrar of companies (rather than to the Regulator), and this is applicable when making an application to register a CIC. The Regulator is authorised to charge a fee for any service which it provides otherwise if obligation imposed by law or regulations; it should be noted that the provision of guidance or other matters that the Regulator deems of interest to CICs is exempt. The table below indicates the fees payable by CICs53 to the registrar of companies on delivery of the documents relating to the listed events. In each case, £15 of the fee is transferred to the Consolidated Fund to cover an element of the Regulator’s costs. All fees paid to the Regulator authorised by section 57 are to be paid into the Consolidated Fund54.

Incorporation Conversion Annual CIC report

Total cost55

Regulator’s fee (proportion)

£35.00 £25.00 £15.00

£15.00 £15.00 £15.00

Information 3.47 Section 59 of CAICE allows the registrar of companies to notify the Regulator of matters specified in the regulations, and to provide the Regulator with copies of documents specified in the regulations.

53 “Office of the Regulator of Community Interest Companies: Leaflets. Corporate Governance” (May 2016). 54 The Consolidated Fund is the Government’s general bank account at the Bank of England. 55 Correct as of June 2022.

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Public authority 3.48 A public authority may disclose to the Regulator, for any purpose connected with the exercise of the Regulator’s functions, information received by the authority in connection with its functions. The Regulator may disclose to a public authority56 any information received by the Regulator in connection with the functions of the Regulator for a purpose connected with the exercise of those functions, or for a purpose connected with the exercise by the authority of its functions.

Disclosure 3.49 In deciding whether to disclose information to a public authority in a country or territory outside the United Kingdom, the Regulator must have regard to the considerations listed in section 243(6) of the Enterprise Act 2002 (overseas disclosures), but as if the reference to information of a kind to which section 237 of that Act applies were to information of the kind the Regulator is considering disclosing.

Restrictions on disclosure 3.50 The powers to disclose information are subject to any restriction on disclosure imposed by or by virtue of an enactment, and any express restriction on disclosure subject to which the information was supplied. Information may be disclosed under section 59(4) or (5), subject to a restriction on its further disclosure. A person who discloses information in contravention of a restriction imposed under section 59(8) is guilty of an offence, but a prosecution may be instituted (in England and Wales) only with the consent of the Regulator or the Director of Public Prosecutions, or (in Northern Ireland) only with the consent of the Regulator or the Director of Public Prosecutions for Northern Ireland.

56 “Public authority” means a person or body having functions of a public nature.

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A person guilty of an offence under section 59(9) is liable on summary conviction to a fine not exceeding level 3 on the standard scale.

Offences 3.51 Section 61 provides that, if a body corporate is proved to have committed an offence under section 48 (Property) or section 59 (Information) or paragraph 5 of Schedule 7 (False information) with the consent or connivance of an officer57, or that is attributable to any neglect on the part of an officer, the officer as well as the body corporate is guilty of the offence and liable to be proceeded against and punished accordingly.

Orders made by the Regulator 3.52 An order made by the Regulator under Part 2 of CAICE must be given to the CIC in relation to which it is made and, in addition: (a) if the order is under section 46(1) or (3), to the director removed or suspended, (b) if the order is under section 48(1)(b) or (2), to the person to whom the order is directed, (c) if the order is under section 49(1), to the persons from and to whom shares are transferred, (d) if the order is under section 49(2), to the person whose interest is extinguished and any person appointed in his place. Orders made by the Regulator under or by virtue of Part 2 may contain any incidental or supplementary provisions that the Regulator considers expedient. When discharging an order made under or by virtue of Part 2, the Regulator may make savings and transitional provisions. A document certified by the Regulator to be a true copy of an order made by the Regulator is evidence of the order without further proof; and a document purporting to be so certified will, unless the contrary is proved, be taken to be so certified. Where the Regulator makes an order or decision against which an appeal lies under or by virtue of Part 2, the Regulator must give reasons for the order or decision to the persons entitled to appeal against it.

57 “Officer” means a director, manager, secretary or other similar officer of the body corporate, or a person purporting to act in any such capacity. “Director” includes a shadow director and, if the affairs of a body corporate are managed by its members, it means a member of the body.

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Regulations 3.53 Section 62 of CAICE contains provisions about the making of regulations under Part 2 of the Act. Section 62(5) specifies which of those regulations are to be made by affirmative procedure. The other regulations made under Part 2 are subject to negative procedure in both Houses (section 62(6)).

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Chapter 4  Overview of Community Interest Companies Legal company structures 4.1 Social enterprises operate in a range of legal forms,1 and the process (of incorporation), cost, regulation, and complexity for legally establishing its structure will have a bearing on the type selected. Typical incorporated legal forms for social enterprise include:2 ●●

limited company,3

●●

community interest company (CIC),

●●

charitable company, and

●●

industrial and provident society.

Social enterprises may also operate in unincorporated form (for example, a trust or an association).

Unincorporated forms, sole traders and partnerships Taxation 4.2 If a social enterprise takes the form of a sole trader or partnership, any trading profits are taxed on the individuals themselves.Any tax due would be calculated and paid via self-assessment, and the enterprise would technically pay income tax and national insurance. The individuals would be personally liable for any debts and the actions of the enterprise; insurance is available to cover a range of eventualities (for example, public liability insurance). 1 A social enterprise can be a sole trader. 2 “A guide to legal forms for social enterprise” (Department for Business, Innovation & Skills, November 2011). 3 Companies Act 2006, s 3 (Limited and unlimited companies): “(1) A company is a ‘limited company’ if the liability of its members is limited by its constitution”.

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Unincorporated associations 4.3 By contrast, the “unincorporated association”4 is an organisation set up using an agreement made by a group of individuals whose primary aim is to provide goods or services to a community; making a profit is not a primary goal. Unincorporated associations are typically free to set up, do not need to be registered with the Charity Commission and, if the association makes a profit, it pays corporation tax via a company tax return. As with the sole trader/ partnership model, individual members are personally responsible for any debts or contractual obligations of the organisation.

VAT 4.4 All social enterprises, including CICs, are required to register with HMRC for VAT5 if: ○○

the VAT taxable turnover is expected to be more than £85,000 in the next 30-day period; or

○○

the business had a VAT taxable turnover of more than £85,000 over the last 12 months.

If the business decides to employee people, PAYE and employer national insurance contributions may apply. A range of legal requirements may be relevant, including data protection, trading business names, accounting procedures and consumer protection legislation.

Incorporated forms 4.5 Incorporation is the process by which a new or existing business registers as a limited company. A company is a legal entity, separate from the directors, shareholders and members. A limited liability company, where the liability of the members is limited by shares or by guarantee, is the main vehicle used for incorporation.

4 Unincorporated associations (www.gov.uk/unincorporated-associations). 5 You might also need to register in some other cases, depending on the kinds of goods or services you sell and where you sell them: “VAT registration:When to register” (www.gov.uk).Voluntary registration: you can register voluntarily if your business turnover is below £85,000, and you must pay HMRC any VAT you owe from the date they register you.

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Companies House6 describes four types of company: ○○

“Private company limited by shares: This company has a share capital and the liability of each member is limited to the amount, if any, unpaid on their shares. A private company cannot offer its shares for sale to the general public.

○○

Private company limited by guarantee: This company does not have a share capital and its members are guarantors rather than shareholders.The members’ liability is limited to the amount they agree to contribute to the company’s assets if it is wound up.

○○

Private unlimited company: An unlimited company may or may not have a share capital but there is no limit to the members’ liability.

○○

Public limited company: A public company has a share capital and limits the liability of each member to the amount unpaid on their shares. It may offer its shares for sale to the general public and may be quoted on the stock exchange.”

Process of incorporation 4.6 The process of incorporation can only be achieved by using the registrar of companies (Companies House) under the provisions of the Companies Act 2006. Once a company is established, the directors are required to file specific documents every year, such as annual accounts and a confirmation statement. They must also inform Companies House about any changes, such as the appointment or resignation of directors, or a change to the company’s registered office.

Who can incorporate a company? 4.7 One or more persons7 may form a company for any lawful purpose; this is achieved by subscribing to the memorandum of association. By completing the memorandum, the subscribers are confirming their agreement to form a company. Children under 16 do not have the legal capacity to enter into a contract, and the registrar will not normally accept an application for incorporation if they are aware that the subscribers are under 16.

6 “Guidance: Incorporation and names” (Updated 29 March 2021). 7 In law, “person” includes individuals, companies and other bodies.

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Industrial and provident societies 4.8 There are two kinds of industrial and provident society (IPS) – co-operative societies (which may be social enterprises) and community benefit societies – whose purpose must primarily be “for the benefit of the community”. IPSs must register with the Financial Conduct Authority rather than Companies House. This process consists of a short paper-based form to which the society must attach two copies of its proposed rules.

Limited liability partnerships 4.9 A limited liability partnership (LLP) has a separate legal personality and, unlike a standard partnership, members of the LLP enjoy limited liability. The LLP form provides a flexible model for social enterprises, specifically where they work in partnership with other similar organisations or investors. As opposed to the incorporated company form, LLPs have more scope to arrange their affairs, make decisions and determine how profits are distributed to members.

LLP disadvantages 4.10 An LLP, by definition, must have a minimum of two members.This may create a problem if the LLP is established by two persons and one member chooses to leave; in this case, the LLP may have to be dissolved. Financial accounts have to be submitted to Companies House for the public record.The accounts may declare the income of the members, which they may not wish to be made public. Income is personal income and is taxed accordingly, and profit cannot be retained in the same way as a company limited by shares. This means that all earned profit is effectively distributed, with no flexibility to hold over profit to a future tax year.

Why should a social enterprise consider incorporation? 4.11 Incorporating provides some key advantages for a social enterprise, as it offers a separate legal personality and limited liability. Incorporation is advisable

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when taking on significant contractual obligations or raising external capital, debentures and debt. The majority of individuals incorporate in the form of a private company, and the liability is limited either “by shares” or “by guarantee”. Most limited companies are “limited by shares”, which means they are owned by shareholders, who have certain rights. Companies limited by guarantee have guarantors and a “guaranteed amount”, instead of shareholders and shares.8 A private limited company is subject to stricter regulatory requirements than unincorporated forms: registration with Companies House; regulation (Companies Act 2006); and greater accountability to shareholders (or members, if limited by guarantee). To establish a limited company, the business must register with Companies House, and with HMRC in order to pay any corporation tax due and indicate if the company is adopting the model Articles of Association or bespoke articles. The limited company offers the opportunity for social enterprises to include some type of asset lock or restriction of dividend payments, by including provisions in its articles of association; the main social purpose can, in addition, be defined. It should be noted, however, that it is possible to overturn or amend these provisions by passing a special resolution of the company’s members.9

Political activities not to be treated as being carried on for the benefit of the community 4.12 Regulation 6 in Part 2 of the Community Interest Company Regulations 2005 (CICR) defines the legislative concept of “excluded companies”, and the following are excluded companies: “(a) a company which is (or when formed would be) a political party; (b) a company which is (or when formed would be) a political campaigning organisation; or (c)

a company which is (or when formed would be) a subsidiary of a political party or of a political campaigning organisation.”

8 “Shareholders and guarantors: Set up a private limited company: Shareholders and guarantors” (www. gov.uk). 9 Companies Act 2006, s 21 (Amendment of articles).

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Activities not to be treated as being carried on for the benefit of the community 4.13 Regulation 3 of CICR describes the pursuits which a reasonable person might not consider are activities carried on for the benefit of the community. In addition, if the activity of the CIC only benefits the members of a particular body or the employees of a particular employer, the activities would not be treated as being carried on for the benefit of the community, and the company would be deemed an excluded company.10

Changes in the law 4.14 The following political activities are not to be treated as being carried on for the benefit of the community: “(a) the promotion of, or the opposition to, changes in– (i)

any law applicable in Great Britain or elsewhere; or

(ii)

the policy adopted by any governmental or public authority in relation to any matter;

(b)

the promotion of, or the opposition (including the promotion of changes) to, the policy which any governmental or public authority proposes to adopt in relation to any matter; and

(c)

activities which can reasonably be regarded as intended or likely to– (i)

provide or affect support (whether financial or otherwise) for a political party or political campaigning organisation; or

(ii) influence voters in relation to any election or referendum.”

Regulation 3 does not apply if the activities can be reasonably regarded as incidental to other activities, which are carried on for the benefit the community and the incidental activities cannot reasonably be regarded as incidental to activities of any of the descriptions prescribed in regulation 3(1).

10 CICR, reg 4 (Other activities not to be treated as being carried on for the benefit of the community).

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Section of the community 4.15 Regulation 5 provides as follows: “For the purposes of the community interest test, any group of individuals may constitute a section of the community if– (a)

they share a readily identifiable characteristic; and

(b) other members of the community of which that group forms part do not share that characteristic.”

Forming a CIC Prescribed documents 4.16 Section 36 of the Companies (Audit, Investigations and Community Enterprise) Act 2004 (CAICE) specifies the prescribed formation documents required to form a CIC; it should be noted that only the prescribed documents will be filed on the public record: (a) a community interest statement signed by each person who is to be a first director of the company; and (b) a declaration that the company, when formed, will not be an excluded company. The declaration must be in a form approved by the Regulator and must be made by each person who is to be a first director of the company.

Prescribed conversion documents 4.17 Section 37(1) of CAICE describes the prescribed conversion documents: “(a) a community interest statement signed by each person who is a director of the company; (b)

a declaration that the company is not an excluded company; and

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Chapter 4  Overview of Community Interest Companies (c) either— (i)

a declaration that the company is not a charity or a Scottish charity; or

(ii) if the company is not a Scottish charitable company within the meaning of section 40 of the 2004 Act, a declaration that the Charity Commissioners have given the company the written consent required by section 39 of the 2004 Act. (2) The declarations referred to in sub-paragraphs (b) and (c) of paragraph (1) must be in a form approved by the Regulator and must be made by each person who is a director of the company.”

Private company limited by shares or guarantee 4.18 For companies not already incorporated, section 36 of CAICE describes the “prescribed formation documents” required by the Regulator, together with the registration documents required by section 9 of the Companies Act 2006. Companies House (the registrar) must not register the CIC without approval of the Regulator.11 Before 11 March 2019, applications were only available by post;12 the Regulator substantially improved the service delivery of registrations by instigating its online service. The application process incorporates three government departments: Companies House, HMRC and the Office of the Regulator of Community Interest Companies. Online applications13 require two PDF documents: Form CIC36 (application to form a community interest company); and one of the six prescribed Articles of Association. The Companies Act 2006 no longer requires a formal Memorandum of Association, as the memorandum is automatically created, based on the information provided during the online process. A postal application service is still available, which entails sending Form IN01 (application to register a company), Form CIC36 and a paper-based memorandum and articles of association. The Regulator provides “model constitutions” (discussed in Chapter 8).

11 CAICE, s 36(3)(a). 12 “CIC Incorporations: The New Online Process – Community Interest Companies” (blog.gov.uk). 13 The filing fee for online incorporation of a CIC is £27 and is payable by card or PayPal: GOV.UK, December 2021.

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Forming a community interest public limited company 4.19 The process to register a community interest public limited company (plc) is similar to the private company process; it should be noted that it must be carried out by post,14 as no online process is available. The Regulator does not provide a model constitution for businesses that wish to become or convert to public limited liability status. In addition to forms CIC36 and IN01, form SH50 (Application for trading certificate) for a public company is required. A community interest plc may not trade or enter into any borrowing agreements until the registrar of companies has issued a certificate under sections 761 and 762 of the Companies Act 2006.

Formation as community interest company: decision on eligibility 4.20 Once the application to form a CIC is received, either online or post, the Regulator is bound by section 36A of CAICE to decide if the company is eligible to be formed as a private or public CIC.

The four eligibility tests 4.21 To be eligible: (1) the company’s articles must conform to section 32 of CAICE; (2) the proposed name must comply with section 33 of CAICE; (3) the community interest test has to be satisfied; and (4) the company must not be an “excluded company”. On approval, the regulator is required to give notice to the registrar of companies (Companies House).

14 Postal applications can take up to 15 working days and cost £35: GOV.UK, December 2021.

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Formation as community interest company: implementation of decision on eligibility 4.22 If approved by the Regulator, a “certificate of incorporation” will be issued by email; the process complies with section 36B of CAICE and sections 14 and 15 of the Companies Act 2006. The certificate of incorporation must state that the company is a community interest company, and this provides conclusive evidence that the company is a CIC.15 If the Regulator decides that the company does not meet the requirements to be registered as a CIC, and rejects the application, any person named in the memorandum of association may lodge an appeal.

Company becoming a CIC An incorporated company conversion to a CIC 4.23 If an existing company limited by shares or guarantee wishes to become a CIC, it must follow the regulations in section 37 of CAICE. The company is required to pass a special resolution,16 alter its articles of association to abide by section 32, and change its name to comply with section 33. Section 37C requires the company to submit the “prescribed conversion documents” to the regulator; this relates to Form CIC37 (application to convert a company to a CIC), which includes a “community interest statement” confirming the company’s intention to serve the community rather than private benefit. To conform with section 37C(1)(a), the regulator provides a model special resolution to convert a company to a CIC. In addition, the company must complete and submit form NM01 (notice of change of name by resolution).

Becoming a CIC: application to court to cancel resolution and notice to registrar of court application or order 4.24 Sections 37A and 37B of CAICE allow for minority shareholders who may revert to taking court action if they have been unfairly prejudiced; this may

15 CAICE, s 36B(2). 16 A special resolution is a resolution of the company’s shareholders which requires at least 75% of the votes in order to pass.

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typically occur over loss of rights to dividends and rights on winding up. In addition to members, those holding debentures have rights to make applications to the court. An application to the court may be made: (a) by the holders of not less in aggregate than 15% in nominal value of the company’s issued share capital or any class of the company’s issued share capital (disregarding any shares held by the company as treasury shares); (b) if the company is not limited by shares, by not less than 15% of its members; or (c) by the holders of not less than 15% of the company’s debentures entitling the holders to object to an alteration of its objects. The application must be made within 28 days of the date of the resolutions being passed or made. On the hearing, the court may make any orders that it sees fit, adjourn proceedings so the interests of the minority may be purchased, and prevent any alterations of the company’s articles of association. If an application is made under section 37A, the applicants (the minority shareholders or their representatives) must notify Companies House within 15 days (or longer if directed by the court) of receiving the application; the company also must give notice to the registrar. Failure to notify Companies House is an offence and places all of the company’s officers in default. The offence carries a fine not exceeding level 3 on the standard scale (currently £1,000) and a daily fine not exceeding 10% of the level 3 scale. It should be noted that applications by a person who has consented to, or voted in favour of, the resolutions may not be made or counted.

Becoming a CIC: application and accompanying documents 4.25 The conversion documents are sent by post to the registrar of companies, and a £25 fee is payable to Companies House; it should be noted that all these documents and special resolutions must be submitted to the registrar of companies at the same time. On receipt, the registrar must not register the company, but Companies House will forward the documents to the Regulator for approval.17

17 CAICE, s 37C(3)(a).

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Becoming a CIC: decision by Regulator and implementation 4.26 As described above in the case of a new incorporation, if the Regulator agrees that the CIC is eligible, the registrar must proceed with changing the company name in accordance with section 80 of the Companies Act 2006. The new certificate of incorporation18 must state: “(a) that it is issued on the company’s conversion to a community interest company, (b)

the date on which it is issued, and

(c)

that the company is a community interest company.”

If the Regulator rejects the application, any person named in the memorandum of association may lodge an appeal.19

Becoming a CIC: English charities 4.27 Section 39 of CAICE describes the procedural provisions for an existing English charity20 to convert to a CIC. Firstly, the Charity Commission must consent to the change of name required under section 37(1)(c) of CAICE, and conversion to a CIC. The Charity Commission21 has a right to apply to the High Court for an order quashing any altered certificate of incorporation issued under section 38A of CAICE. Assets held by the charitable company at the time of its conversion to a CIC must remain relevant to the company’s original charitable purposes.22 Once consent is given by the Charity Commission, the procedure in terms of the Regulator is akin to a standard company application – that is, Form CIC37, Form NM01 (notice of change of name by resolution), a model special resolution to convert from a charitable company to a CIC is provided by the Regulator, and the charitable company will be required to amend its articles of association.

18 CAICE, s 38A(2). 19 CAICE, s 38A(5). 20 A CIC must be a limited company, so an unincorporated charity (including a charitable trust) cannot convert to a CIC. 21 Without prejudice to the power of the Attorney General to apply to the court to quash a registration which has been improperly or erroneously allowed. 22 CAICE, s 39(3).

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Becoming a CIC: Scottish charities 4.28 When CAICE was originally drafted, Scottish charities could not convert to a CIC; charity law in Scotland is a devolved matter, and charities were prohibited from altering their charitable purposes without forgoing their charitable status. The Charities and Trustee Investment (Scotland) Bill was published on 2 June 2004. Clause 15 of the Bill contained provisions making it possible for Scottish charities to lose their Scottish charitable status. Regulation 2 of the Community Interest Company (Amendment) Regulations 200923 repealed section 40(1) and (2) of CAICE. It should be noted that a Scottish charity must apply for permission to convert from a charity to a CIC via the Scottish Charity Regulator; if the charity’s registered office is situated in England or Wales, it must apply for permission from both the Scottish Charity Regulator and the Charity Commission. Any contravention of subsection (4)24 may result in the Scottish Charity Regulator applying to the Court of Session for an order quashing any altered certificate of incorporation. Any property, income or income from such property must be applied in accordance with its purposes as set out in its entry in the Scottish Charity Register immediately before it became a CIC.

Becoming a CIC: Northern Ireland charities 4.29 At the time of writing, a Northern Ireland charity may not become a CIC; any contravention of section 40A(1) of CAICE allows the Commissioners of Her Majesty’s Revenue and Customs to make applications to the High Court for an order quashing any altered certificate of incorporation.

Conversion to a CIC Re-registration 4.30 Section 102 of the Companies Act 2006 allows a private limited company to be re-registered as an unlimited company if all the members of the company 23 SI 2009/1942. 24 A Scottish charitable company may not become a CIC without the prior written consent, if the company’s registered office is situated in Scotland, of the Scottish Charity Regulator or, if the company’s registered office is situated in England and Wales (or Wales), of both the Scottish Charity Regulator and the Charity Commission.

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agree. A CIC is excluded from re-registering under section 102, but section 53 allows a CIC to cease being incorporated as a CIC by becoming a charity or a registered society. If a CIC is incorporated as a private company, it may re-register as a public company under section 90 of the Companies Act 2006; conversely, a CIC which is a public company may re-register as a private company under section 97 of the Companies Act 2006. In either case, the certificate of incorporation issued under section 96(2) or 101(2) of the Companies Act 2006 must contain a statement that the company is a CIC, which provides conclusive evidence that the company is a CIC.

CIC becoming a charity Ceasing to be a CIC and becoming a charity 4.31 If a CIC wishes to become a charity, the company must pass a special resolution25 stating that it is to cease to be a CIC, it must revert to the model articles of association or file bespoke articles, and it must change its name to comply with section 33.26

Application to Companies House 4.32 An application must be filed with Companies House in accordance with section 54C27 of CAICE and section 3028 of the Companies Act 2006: (a) forward copies of the resolutions together with the application in accordance with section 54C,

25 A special resolution is a resolution of the company’s shareholders or members which requires at least 75% of the votes cast to pass. 26 CAICE, s 33 (Names). 27 CAICE, s 54C (Ceasing to be a community interest company and becoming a charity: application and accompanying documents). 28 Companies Act 2006, s 30 (Copies of resolutions or agreements to be forwarded to registrar): “(1) A copy of every resolution or agreement to which this Chapter applies, or (in the case of a resolution or agreement that is not in writing) a written memorandum setting out its terms, must be forwarded to the registrar within 15 days after it is passed or made”.

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(b) copies of the resolutions must not be so forwarded before the relevant date, and (c) section 54C(1) has effect in relation to the resolutions as if it referred to 15 days after the relevant date. The relevant date depends on whether an application under section 54A has been made to the court. If an application has been made under section 54A, the relevant date is determined by the court. If there is no application, the date is when the resolution was passed (if any resolutions were passed or made on different days, the date on which the last of them was passed or made). In any other case, the relevant date is the end of the period for making such an application.

Application to court to cancel resolutions 4.33 If a special resolution to authorise the CIC to become a charity has been passed and certain members or shareholders disagree with the decision, they make an application to the court for the cancellation of the resolution.29 An application is allowable, if the following conditions are met, and made: a)

by not less in aggregate than 15% in nominal value of the company’s issued share capital or any class of the company’s issued share capital (disregarding any shares held by the company as treasury shares);

b) if the company is not limited by shares, by not less than 15% of its members; or c)

by the holders of not less than 15% of the company’s debentures entitling the holders to object to an alteration of its objects; but not by a person who has consented to or voted in favour of the resolutions.

The application 4.34 The application must be made within 28 days after the date of the resolution being passed; if various parties wish to make the application, they may appoint one of their number to make the application. This may be the case if both the members and the company debenture holders wish to file a joint application. 29 CAICE, s 54A (Ceasing to be a community interest company and becoming a charity: application to court to cancel resolutions).

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Court hearing 4.35 On hearing the application, the court has two options: to make an order cancelling the resolutions or confirming the resolutions. The terms of any order are made at the discretion of the court, and the court has the option to adjourn the proceedings so that orders can be made to purchase the interests of dissenting members, and to give such directions, and make such orders, as it thinks expedient for facilitating or carrying into effect any such arrangement.

Discretion of the court 4.36 The court may order the purchase by the company of the shares of any of its members and for the reduction accordingly of the company’s capital. In addition, the court is authorised to alter (or prevent amendment by the company of) the company articles if required to facilitate the share purchase.

Applications under section 54A 4.37 Where no application has been made to the court for cancellation of the special resolutions, having regard to the number of members who consented to or voted in favour of the resolutions, no such application may be made, or the period within which such an application could be made has expired. Where an application for cancellation of the special resolutions has been made, or the application has been withdrawn, or an order has been made confirming the resolutions, a copy of that order must be delivered to the registrar.

Ceasing to be a CIC and becoming a charity: notice to registrar of court application or order 4.38 On any application (or being served with any application) under section 54A of CAICE, the applicant30 must give notice to the registrar of

30 Or the person making the application on their behalf.

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companies.31 Within 15 days of the making of the court’s order on the application (or longer, if at the court’s direction), the company must deliver to the registrar a copy of the order. If a company fails to give notice or exceeds the 15 days, the company, and every officer of the company who is in default, commits an offence. A person guilty of an offence under this section is liable on summary conviction to a fine not exceeding level 3 on the standard scale and, for continued contravention, a daily default fine not exceeding one-tenth of level 3 on the standard scale, currently £1,000.

Ceasing to be a CIC and becoming a charity: application and accompanying documents 4.39 An application to cease to be a CIC and become a charity must be accompanied by the following documents: (a) a copy of the special resolutions, and (b) a copy of the company’s articles as proposed to be amended. In addition, the following statement is required: (a) where the company is to become an English charity, a statement by the Charity Commission that, in its opinion, if the proposed changes take effect the company will be an English charity and will not be an exempt charity;32 (b) where the company is to become a Scottish charity, a statement by the Scottish Charity Regulator that, if the proposed changes take effect, the company will be entered in the Scottish Charity Register; (c) where the company is to become a Northern Ireland charity, a statement by the Commissioners of Her Majesty’s Revenue and Customs that the company has claimed exemption under a relevant provision of Part 11 of the Corporation Tax Act 2010.33 On receiving an application to become a charity, the registrar of companies must forward a copy of each of the documents to the Regulator, and retain the documents pending the Regulator’s decision. 31 Notice must be given immediately, and without prejudice to any provision of rules of court as to service of notice of the application: CAICE, s 54B(1) (Ceasing to be a community interest company and becoming a charity: notice to registrar of court application or order). 32 “Exempt charity” is defined by Charities Act 2011, s 22, Sch 3 (Exempt Charities). 33 For present purposes, all of the provisions of Part 11 of the Corporation Tax Act 2010 under which exemption may be claimed are relevant provisions, except sections 480 (exemption for profits of smallscale trades), and 481 (exemption from charges under provisions to which section 1173 applies).

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Ceasing to be a CIC and becoming a charity: decision by Regulator 4.40 On receipt of the documents from Companies House, the Regulator must decide if the company is eligible to cease being a CIC. Eligibility to cease is dependent on compliance with sections 54 and 54C (described in 4.38 above). Once assessed, the Regulator must give notice of its decision to the registrar of companies, and it is under no obligation to record its decision. In addition, none of the following must apply:34 “(a) the Regulator has under section 43 appointed an auditor to audit the company’s annual accounts and the audit has not been completed, (b) civil proceedings instituted by the Regulator in the name of the company under section 44 have not been determined or discontinued, (c)

a director of the company holds office by virtue of an order under section 45,

(d)

a director of the company is suspended under section 46(3),

(e) there is a manager in respect of the property and affairs of the company appointed under section 47, (f)

the Official Property Holder holds property as trustee for the company,

(g)

an order under section 48(2) or (3) is in force in relation to the company,

(h) a petition has been presented for the company to be wound up.”

Ceasing to be a CIC and becoming a charity: consequences of Regulator’s decision 4.41 If the Regulator gives notice of a decision that the company is eligible to cease being a CIC, the registrar of companies must change the company’s name35 and, if the registrar enters the new name of the company on the register, retain and record the documents forwarded in compliance with section 54C(4). The new certificate of incorporation must state that it is issued on the company’s ceasing to be a CIC, and the date on which it is issued.The changes in the company name, the new articles and the cessation of the company take effect on the date when the certificate is issued. Any decision by the Regulator preventing cessation is subject to an appeal. 34 CAICE, s 55(2). 35 Companies Act 2006, s 80 (Change of name: registration and issue of new certificate of incorporation).

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Becoming a registered society 4.42 A CIC may not convert itself into a registered society under section 115 of the Co-operative and Community Benefit Societies Act 2014 or section 62 of the Industrial and Provident Societies Act (Northern Ireland) 1969.

Financing 4.43 The Labour government in 2003, when proposing the CIC concept of the day, always envisaged that CICs would need to be able to raise debt through loans or bonds on the commercial markets, like any other company. One disadvantage is that some grant funders do not give money to non-charities,36 although this is slowly changing. There are also some cases of CICs setting up supporting charities to make it easier to receive public or institutional grants. Around 75% of CICs incorporate as companies limited by guarantee, rather than limited by shares; this presents a fundamental issue when considering finance, as they cannot issue equity.37

Company’s authorised share capital 4.44 When you register a company, a “memorandum of association” is required, which is a legal statement signed by all initial shareholders or guarantors agreeing to form the company.38 This memorandum of association is used to notify Companies House39 that each subscriber to the memorandum of association: (a) wishes to form a company under the Companies Act 2006; (b) agrees to become a member of the company; and (c) agrees to take at least one share in the company.

36 Access to grant finance remains the most cited barrier for social enterprise, primarily because social enterprises did not know where to look for finance and advice. Information or mentoring support in relation to finance was the main support need stated: “State of Social Enterprise Survey 2021”. 37 “Analysis: The Rise and Rise of Community Interest Companies” (Third Sector, 1, June 2015): www. thirdsector.co.uk/analysis-rise-rise-community-interest-companies/governance/article/1348096). 38 If you register your company online, you do not need to write your own memorandum of association. It will be created automatically as part of your registration. 39 “Set up a limited company: step by step. Memorandum and articles of association”: www.gov.uk.

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The shareholders must agree to subscribe for a proportion or all the shares at their nominal value. The memorandum of association pro-forma indicates the names of the people (subscribers) who have agreed to subscribe and the number of shares they will subscribe to.

Ordinary shares 4.45 Ordinary shares generally give their owner the right to one vote at a company shareholders’ meeting. Unlike in the case of preference shares, the owner of ordinary shares is not guaranteed a dividend.

Preference shares 4.46 Preference shares, as the name indicates, have preference in terms of dividends which are paid out to shareholders before ordinary shares. On winding up of the company, preferred shares are entitled to be paid from any company assets before the ordinary or common shareholders. Preference shares typically pay a fixed dividend; unlike ordinary shares, preference shares do not usually provide any voting rights.

CIC preference shares 4.47 The CIC’s articles of association must detail any special rights, and approval should be sought from the Regulator, as the rights to a fixed dividend may breach the 34% dividend cap.

Loan capital and debentures 4.48 CICs are not restricted in terms of borrowing money and they can, like any ordinary company, raise money from various sources. It was envisaged that CICs could access the debt markets, and they might find Community Development Finance Institutions40 a valuable source of 40 The Community Development Financial Institutions Fund plays an important role in generating economic growth and opportunity in some of our nation’s most distressed communities.

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funds. The rapidly growing number of ethical investment funds may find CICs an attractive investment. The CIC has improved access to finance by creating a strong new brand; however, companies still have difficulties in raising finance. The most common debenture is the mortgage debenture, which is a legal document given by a borrower to a lender that usually gives rights over some asset held by the lender to the borrower if the loan is not repaid.

Finance key points 4.49 ●●

Companies limited by guarantee cannot issue shares and therefore cannot raise equity finance.

●●

CICs may issue ordinary and preference shares; if the dividend is fixed or the shares hold special rights, the company should seek authorisation from the Regulator.

●●

CIC-issued shareholdings have no rights to participate in the assets of a CIC on winding up.

●●

A CIC does not increase the likelihood of obtaining grants or funding.

●●

Any loan linked to the performance of the company (debt with equity characteristics) is limited by statute to 20% of the previous year’s outstanding debt, calculated daily.

●●

The CIC may mortgage its assets to a lender and provide a floating charge that applies to those encumbered assets.

●●

Invoice discounting or factoring is permissible.

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Chapter 5  Reporting Introduction Modern company law 5.1 The development of modern company law and the ability for ordinary people1 to incorporate a company was driven by the industrial revolution. The transformation began with the Joint Stock Companies Act 1844 which provided for a simple registration process of incorporation2. This was later revised by the Joint Stock Companies Act 1856 which provided the precursor of today’s model articles of association and its predecessor, Table B and Table A. The Joint Stock Companies Act 1856 Table B Regulations for management of the company specified the rules on how a company ought to manage its shares, capital, meetings, directors, dividends and accounts. The latest version of the articles of association for companies incorporated after 28 April 20133 under the Companies Act 2006 achieves the same objective as its predecessors – to set the rules that company officers must follow when running their companies.

What are the company articles? 5.2 All companies formed in the past 150 years, under the various Companies Acts (Companies Act 2006 being the most recent), must have articles of association. The company’s articles of association are the internal policies, rules and procedures that the directors and shareholders must adhere to. Shareholders

1 Prior to the Joint Stock Companies Act 1844, incorporation was possible only by royal charter or private Act. 2 No limited liability for members. Limited liability was subsequently introduced by the Limited Liability Act 1855. 3 Companies Act 2006 provides three versions of the model articles: model articles for private companies limited by shares; model articles for private companies limited by guarantee; and model articles for public companies.

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delegate all powers to the directors4, who in turn make decisions at board meetings. Shareholders will require assurance that any decision making by the directors follows a written procedure. The articles duly provide a detailed decision-making and voting procedure, together with rules on appointing directors, the distribution of profits and general administration. A more simplistic explanation is that they provide an aide-memoire for the directors of the main statutory regulations imposed by the immense Companies Act 2006. The articles are, in reality, a summary of the main points of the Companies Act 2006 that a small limited company should be focused on.

Directors’ powers and duties 5.3 All directors are governed by case law, the Companies Act 2006 and the constitution of the company. For companies incorporated after 1 October 2009, the constitution of the company is the articles of association and any resolutions and agreements5. The company constitution and the Companies Act 2006 guide the directors in managing the company without operating ultra vires6 for the benefit of themselves. The majority of private limited companies are small, with a few directors who typically are also the main shareholders. A common practical issue is that they perceive the company to be their property, to be run solely for their benefit. To offset this misconception, the Companies Act 2006 provides clear and concise legal obligations which company directors must abide by.

General duties of directors 5.4 The general duties are set out as follows: ●●

scope and nature of general duties (section 170);

●●

duty to act within powers (section 171);

●●

duty to promote the success of the company (section 172);

4 Model articles, article 3 (Directors’ general authority): “3.Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company”. 5 Companies Act 2006, s 17 (A company’s constitution). 6 Acting beyond one’s legal power or authority.

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●●

duty to exercise independent judgment (section 173);

●●

duty to exercise reasonable care, skill and diligence (section 174);

●●

duty to avoid conflicts of interest (section 175);

●●

duty not to accept benefits from third parties (section 176); and

●●

duty to declare interest in proposed transaction or arrangement (section 177).

Directors’ remuneration 5.5 The CIC legislation does not restrict directors’ pay and the company is free to reward its directors as it sees fit. The Regulator, however, follows a principles-based approach to directors’ pay and considers that remuneration should, in all cases, be reasonable and transparent.

Directors’ pay: defining reasonable 5.6 How a company rewards its directors is typically based on the outcomes over a 12-month period and tends to focus on the attainment of profits or metrics associated with the company balance sheet. With a CIC structure, the outcomes may include wider metrics – for example, increasing the benefits it provides to the community, or achieving a strategic goal in relation to a specific community outcome.

Directors’ remuneration 5.7 The Regulator provides excellent guidance in this area, which is only summarised here7. Directors’ remuneration should be agreed and based on the following key issues: (a) particular responsibilities, skills and expertise of individual directors; (b) nature, size and performance of the company’s business;

7 “Information and guidance notes: Chapter 9: Corporate governance” (Office of the Regulator of Community Interest Companies, May 2016), para 9.3.6: What is reasonable remuneration.

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(c) financial position of the company; (d) views of stakeholders; and (e) published guidance on good corporate governance8.

Defining “transparent” 5.8 There is no legal definition in terms of any company being transparent; the Companies Act 2006 provides legislation to encourage companies to trade openly and provide relevant information to their shareholders or members. All CICs are required to file an annual report to the Regulator declaring the details of directors’ remuneration. The Regulator provides the following points that it considers best practice when setting directors’ pay and encouraging stakeholder buy-in9: (a) to disclose more detailed information about individual directors’ remuneration than they would be required to disclose by law; (b) to disclose such information more widely or directly than they would be required to do by law; (c) to seek members’ approval of matters of which they would not be required by law to seek their approval.

Members and Regulator actions 5.9 If rewards are excessive, in the first instance the members may highlight to the board of directors their concerns that payments to directors, in their opinion, are too high; in addition, the Regulator under its general powers may take action if it considers that director remuneration is excessive. In 2021, we have seen shareholder revolts over excessive pay at estate agents Savills and the cinema chain Cineworld, who were both accused by their shareholders of over-indulgent reward packages during the Covid crisis10.

8 Listed companies are encouraged or required to observe various codes of practice: the UK Corporate Governance Code (Financial Reporting Council). 9 “Information and guidance notes: Chapter 9: Corporate governance” (Office of the Regulator of Community Interest Companies, May 2016), para 9.3.7: Transparency. 10 “Savills and Cineworld shareholders revolt over executive pay” The Guardian (www.theguardian.com/ business/2021/may/12/savills-cineworld-shareholder-revolts-pay-covid).

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The Regulator has indicated11 that there is no legal or policy reason why the remuneration of any CIC’s directors should not fairly reflect the value of their skills and expertise to the company’s business and the community that it exists to serve.

The Regulator 5.10 In terms of how directors may be paid for their services, the Regulator has stated12: “I want CICs to be able to attract high quality wealth creators as directors, paying them reasonable salaries, giving them immense job satisfaction, and the opportunity to put their talents to making profits for the public good.”

It should be noted that directors’ salaries are subject to the general principles of corporate governance and, as discussed, the directors’ duties under company law13.

Asset lock paradox 5.11 A fundamental problem with failing to cap directors’ remuneration in the legislation is the ability to by-pass the asset lock. The Regulator, however, considers the payment of excessive directors’ remuneration a breach of either the asset lock or the community interest test, and therefore holds considerable statutory powers to prevent circumventing the asset lock by means of excessive remuneration.

Members’ recourse to challenge excessive remuneration 5.12 The articles of association allow the members to reserve power, so they may pass a special resolution to direct the directors to refrain from taking a

11 “Information and guidance notes: Chapter 9: Corporate governance” (Office of the Regulator of Community Interest Companies, May 2016), para 9.3: Directors’ remuneration. 12 “Information and guidance notes: Chapter 9: Corporate governance” (Office of the Regulator of Community Interest Companies, May 2016), para 9.3.2: CIC Directors may be paid for their services. 13 Companies Act 2006.

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particular course of action14; in addition, the articles may restrict excessive payments, or they may allow the members to vote on the remuneration proposed, requiring more than 75% of the members to agree, although this would require entrenched provisions15 in the articles to be drafted. The members may consider bringing an action before the court centred on breaching section 172 of the Companies Act 2006 if the director(s) failed to act in the best interest of the company and reneged on the general duty to promote the success of the company.

Regulator’s recourse to challenge excessive pay 5.13 Although not tested in the courts to date16, the Regulator has several legislative options available if, having consulted with the CIC, the members or key stakeholders in order to resolve it, any issue of excessive pay is not agreed.

Commercial disputes and the courts 5.14 It should be noted that the courts generally do not get involved with internal commercial disputes of companies and will avoid overturning decisions if they are consistent with the articles of association and legally passed by a resolution of the members. To do otherwise would impede the directors’ general powers and authority which form the basis of the articles of association17. The general rule described here is not applicable to charitable companies, since the courts have a duty to protect the charitable interests and will be more proactive in changing (or interpreting certain provisions in) the articles of association or overturning company resolutions.

14 Model articles for private companies limited by shares (Sch 1), article 4 (Shareholders’ reserve power): “4. (1) The shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action. (2) No such special resolution invalidates anything which the directors have done before the passing of the resolution”. 15 A company’s articles may contain provision (“provision for entrenchment”) to the effect that specified provisions of the articles may be amended or repealed only if conditions are met, or procedures are complied with, that are more restrictive than those applicable in the case of a special resolution. 16 June 2022. 17 Model articles for private companies limited by shares (Sch 1), Part 2: Directors: Directors’ powers and responsibilities.

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Regulator’s options 5.15 The Regulator has several options under CAICE to prevent the CIC from circumventing the community interest test or the asset lock. Under section 44 of CAICE, the Regulator may bring civil proceedings in the name, and on behalf, of a CIC; the provisions were specifically drafted for occurrences where the directors or members of a CIC fail to bring an action themselves18 on matters where proceedings ought to be brought. In addition, section 46 of CAICE allows the Regulator to remove a director of a CIC who declines to reduce their remuneration, if considered excessive. Section 42 of CAICE allows the Regulator to investigate a CIC, and section 43 of CAICE permits an audit of the CIC’s accounts and company records. If more drastic measures are called for, the Regulator may make a petition for winding up19 or transfer the assets of the CIC to the Official Property Holder20.

Winding up Assets on winding up 5.16 Section 31 of CAICE allows the Regulator to make provisions on the winding up of a CIC; the remaining assets for distribution are defined as those which remain after the satisfaction of the company’s liabilities. The regulations were specifically drafted to allow scope to include various organisations that hold asset locks, defined by their articles of association. Assets may be transferred to any asset-locked body with the consent of the Regulator.

Distribution of assets on a winding up 5.17 The members or directors may choose to liquidate the CIC, commonly called “winding up” a company. The CIC will not exist once it has been

18 Explanatory Notes relating to CAICE, s 44. 19 CAICE, s 50. 20 CAICE, s 48.

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removed (“struck off ”) from the Companies House register. When the company is liquidated, its assets are used firstly to pay off its debts. In an ordinary company, the money or assets left (the “residual assets”) go to the shareholders.

Insolvency Act 1986 5.18 If a CIC is wound up under the Insolvency Act 1986, and after all the company’s liabilities have been paid, if any property remains (referred to as the “residual assets”), they will be distributed to those members of the CIC (if any) who are entitled to share in any distribution of assets on the winding up of the company, according to their rights and interests in the company. It should be noted that, in the case of a CIC liquidation, no member will receive an amount which exceeds the paid-up value of the shares which they hold in the company.

Distribution to an asset-locked body 5.19 If the articles of association specify an asset-locked body to which any residual assets of the company should be distributed, the residual assets will be distributed to that asset-locked body, subject to agreement with the Regulator. If the articles of association do not specify an asset-locked body to receive the residual assets of the company, or the Regulator is aware that the asset-locked body specified in the articles of the company is itself in the process of being wound up, the Regulator will direct how the assets will be distributed and to whom.

Members’ representations 5.20 It may be the case that a member or director of the CIC being wound up may make representations to the Regulator, stating that the asset-locked body to which the articles of the company refer is not an appropriate recipient of the company’s residual assets. If the Regulator agrees with the member or director, the Regulator will direct how the assets will be distributed and to whom.

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Regulator’s directions and considerations 5.21 When making directions under regulation 23 of the Community Interest Companies Regulations 2005 (CICR), the Regulator must21: (a) consult the directors and members of the company, to the extent that he considers it practicable and appropriate to do so; and (b) have regard to the desirability of distributing assets in accordance with any relevant provisions of the company’s articles of association. The Regulator must give notice of any direction decided to the company and the liquidator.

Redemption and purchase of shares 5.22 A relevant company22 may not distribute assets to its members by way of the redemption or purchase of the company’s own shares, unless the amount to be paid by the company in respect of any such share does not exceed the paid-up value of the share.

Reduction of share capital 5.23 A relevant company may not distribute assets to its members by way of a reduction of the company’s share capital, unless: (a) the reduction is made by extinguishing or reducing the liability of any of the members on any of the company’s shares in respect of share capital not paid up; or

21 “This regulation has effect notwithstanding anything in the Insolvency Act 1986. … This regulation has effect subject to the provisions of the Housing Act 1996 and the Housing (Scotland) Act 2001. … Any member or director of the company may appeal to the Appeal Officer against a direction of the Regulator made under this regulation.” 22 “‘Relevant company’ means a community interest company which is a company limited by shares or a company limited by guarantee with a share capital”: CICR, reg 2.

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(b) the amount to be paid by the company to members in paying off paid-up share capital does not exceed the paid-up value of their respective shares.

Company reports 5.24 Section 34 of CAICE describes the framework for directors of a CIC to prepare a “community interest company report” concerning the company’s activities during its financial year. The report must include information about the remuneration of directors. The registrar of companies must forward to the Regulator a copy of each community interest company report delivered to the registrar by virtue of this section. Section 34 of CAICE provides for further regulations on the mechanics of delivery to the registrar of companies, its form and the information that must be included.

Community interest company report 5.25 In addition to filing the annual accounts with the registrar of companies, the directors must prepare an annual CIC report which is filed with the accounts by the appropriate filing deadlines. Except for companies filing for the first time, the time normally allowed for delivering accounts to Companies House is nine months from the accounting reference date for a private company, and six months from the accounting reference date for a public company23. The date on which the accounts and the CIC report must be filed at Companies House is determined by the company’s reference date. Regulation 26 of CICR provides the statutory requirements for the CIC annual report, and it should be noted that the original legislation24 as drafted was amended by: (a) the Companies (Miscellaneous Reporting) Regulations 2018; (b) the Community Interest Company (Amendment) Regulations 2009; (c) the Companies Act 2006 (Consequential Amendments etc) Order 2008; and

23 “Companies House accounts guidance” (updated 6 April 2021), section 5 (Deadlines for filing accounts). 24 Regulation 26(1)(c) and (3) has effect for financial years ending on or after 1 October 2009.

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(d) the Companies Act 2006 (Commencement No 2, Consequential Amendments, Transitional Provisions and Savings) Order 2007. Regulation 26 states that every CIC company report must contain: (a) a fair and accurate description of the manner in which the company’s activities during the financial year have benefited the community; (b) a description of the steps, if any, which the company has taken during the financial year to consult persons affected by the company’s activities, and the outcome of any such consultation; and (c) directors’ remuneration information. If a CIC has provided the information concerning directors’ remuneration in its copy of the annual accounts for the year delivered to the registrar of companies under section 441 of the Companies Act 2006, and its CIC report contains a statement that details of the remuneration of the directors of the company during the financial year may be found in the notes to the company’s annual accounts, the CIC annual report need not duplicate the directors’ remuneration information. “Directors’ remuneration information” is defined as25: “(a) in the case of a company to which the Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 apply, the information specified in Schedule 4A to these Regulations; (b)

in the case of a company to which the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 apply, the information specified in Schedule 5 to those Regulations, save that the information specified in Part 2 of that Schedule need only be given in the case of a company which is not a quoted company.”

Transfer of assets 5.26 If, during a financial year, a CIC has transferred any of its assets other than for full consideration to any asset-locked body (other than by way of an exempt dividend) or for the benefit of the community other than by way of transfer to an asset-locked body, its CIC report for that financial year must specify the amount, or contain a fair estimate of the value, of such transfer.

25 CICR, reg 26(1A).

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Information about dividends 5.27 Regulation 27 of CICR defines the required information concerning dividends that must be included in the CIC annual report26. Not all CICs will declare a dividend27; for companies that do, the CIC annual report must state the amount of any dividend declared, or proposed to be declared, by the company on each of its shares for the financial year to which the report relates. In addition, the report must explain how the declaration or proposed declaration of any dividend declared, or proposed to be declared, by the company in respect of the financial year to which the report relates complies or will comply with regulations 17 (Declaration of dividends), 18 (Maximum dividend per share) and 19 (Maximum aggregate dividend) of CICR. The explanation of how the CIC complies or will comply must include details of any exempt dividend (and the rationale as to why the dividend is an exempt dividend) and, in the case of any other dividend, the maximum aggregate dividend. In both cases, the annual report should include information on how the exempt or maximum aggregate dividend was calculated28.

Information about debts or debentures on which a performance-related rate is payable 5.28 Where, during its financial year, a CIC has any outstanding debts or a debenture in issue where a performance-related rate of interest is payable29, the annual report must provide the following information30: “(a) the rate of interest payable on that debt or debenture as calculated over a 12 month period ending with the most recent date on which interest became payable in respect of that debt or debenture during the financial year; and

26 The new regulation 27 (amended by the Community Interest Company (Amendment) Regulations 2014) removed the requirement for a CIC to include in its community interest company report details of dividends paid or unused dividend capacity carried over in the four years preceding the year to which the report relates. Such information is no longer required to be made public as a consequence of the removal of the share dividend cap. 27 CICs incorporated by guarantee cannot issue dividends. 28 CICR, reg 27(4). 29 Only applicable to debts or debentures where CICR, reg 21 applies. 30 CICR, reg 28(1).

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Chapter 5  Reporting (b) the applicable interest cap applying to that debt or debenture, and how each of these has been determined.”

If a CIC has any debt outstanding or a debenture in issue where the interest cap does not apply31, but on which a performance-related rate of interest is payable, its report must state32: “(a) the rate of interest payable on that debt or debenture as calculated over a 12 month period ending with the most recent date on which interest became payable in respect of that debt or debenture during the financial year; and (b)

why regulation 21 does not apply to that debt or debenture.”

31 CICR, reg 21. 32 CICR, reg 28(2).

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Chapter 6A  Articles of Association Introduction All CICs must register articles of association 6A.1 The process of registering a company with Companies House includes filing the articles of association; the Regulator has published model articles of association, which are analysed in Chapter 8. There are currently six model constitutions available:1 ●●

Schedule 12 Company limited by guarantee (a) CIC model constitution: company limited by guarantee: small membership (b) CIC model constitution: company limited by guarantee: large membership



Regulation 7 of the Community Interest Company Regulations 2005 (CICR) introduces the statutory wording in Schedule 13 that forms the asset lock for a company limited by guarantee that must be inserted into the articles of association.

●●

Schedule 24 Company limited by shares (a) CIC model constitution: company limited by shares: small membership

1 “Guidance: CIC model constitutions: Introduction” (Updated 20 March 2019), Plc (public company limited by shares). There are no model constitutions for businesses wishing to become or convert to a CIC opting for public limited liability (plc) status. In these cases, you are advised to get independent legal advice: www.gov.uk/government/publications/community-interest-companies-constitutions/ cic-model-constitutions-introduction. 2 CICR, reg 7: “A community interest company which is a company limited by guarantee without a share capital must include in its memorandum or articles the provisions prescribed by Schedule 1”. 3 CICR, Sch 1 (Provisions prescribed for the memorandum or articles of a community interest company limited by guarantee without a share capital). 4 CICR, reg 8: “A community interest company which is a company limited by shares or a company limited by guarantee with a share capital must include in its memorandum or articles either: (a) the provisions prescribed by Schedule 2; or (b) the provisions prescribed by Schedule 3”.

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(b) CIC model constitution: company limited by shares: large membership

Regulation 8(a) of CICR introduces the statutory wording in Schedule 25 that forms the asset lock for a company limited by shares, or limited by guarantee with a share capital, that must be inserted into the articles of association.

●●

Schedule 36 Company limited by shares (a) CIC model constitution: company limited by shares: small membership (b) CIC model constitution: company limited by shares: large membership



Regulation 8(b) of CICR introduces the alternative statutory wording in Schedule 37 that forms the asset lock for a company limited by shares, or limited by guarantee with a share capital, that must be inserted into the articles of association.

What are the differences between the three schedules? 6A.2 The differences, as regards the payment of dividends, are as follows: (a) Schedule 1 is used for any limited company by guarantee. A company limited by guarantee cannot pay dividends. (b) Schedule 2 CICs can pay unlimited dividends (subject to company law) to any asset-locked body named in the articles of association. (c) Schedule 3 CICs can pay capped dividends to a non-asset-locked body (for example, to investors or shareholders) and unlimited dividends (subject to company law) to asset-locked bodies named in the articles of association. It should be noted that the payment of dividends may require the consent of the Regulator.

5

CICR, Sch 2 (Provisions prescribed for the memorandum or articles of a community interest company limited by shares, or limited by guarantee with a share capital). 6 CICR, reg 8: “A community interest company which is a company limited by shares or a company limited by guarantee with a share capital must include in its memorandum or articles either: (a) the provisions prescribed by Schedule 2; or (b) the provisions prescribed by Schedule 3”. 7 CICR, Sch 3 (Alternative provisions prescribed for the memorandum or articles of a community interest company limited by shares, or limited by guarantee with a share capital).

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What are the implications of selecting a small or large membership model constitution? 6A.3 CIC limited by guarantee8 Small membership: articles of association

6A.4 The small membership articles are suitable if: ●●

all the directors are also members of the CIC; and

●●

all the members are also directors of the CIC.

Large membership: articles of association

6A.5 The large membership articles are suitable if the CIC will have more members than it has directors.

CIC limited by shares Small membership: articles of association (Schedule 2)

6A.6 The small membership articles are suitable if: ●●

all the directors are also members of the CIC;

●●

all the members are also directors of the CIC; and

●●

any dividend payments made from company profits will only be paid to an asset-locked body.

8 Articles of association for a CIC that is limited by guarantee: www.gov.uk/government/collections/ articles-of-association-for-a-cic-that-is-limited-by-guarantee--2.

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Small membership: articles of association (Schedule 3)

6A.7 The small membership articles are suitable if: ●●

all the directors are also members of the CIC;

●●

all the members are also directors of the CIC; and

●●

any dividend payments made from company profits will be paid to an asset-locked body or another third party.

Large membership: articles of association

6A.8 The large membership articles (Schedule 2 or 3) are suitable if the CIC will have more members than it has directors.

Can a CIC use the new model articles? 6A.9 Broadly, the simplest and most cost-effective solution to drafting the articles of association for a CIC is to use the new model articles provided and approved by the registrar of companies and to add, subject to the type of company incorporated, one of the following schedules: ●●

Schedule 1: Provisions prescribed for the memorandum or articles of a community interest company limited by guarantee without a share capital;

●●

Schedule 2: Provisions prescribed for the memorandum or articles of a community interest company limited by shares, or limited by guarantee with a share capital;

●●

Schedule 3: Alternative provisions prescribed for the memorandum or articles of a community interest company limited by shares, or limited by guarantee with a share capital.

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Latest model articles 6A.10 For companies incorporated on or after 28 April 2013: ●●

Model articles for private companies limited by shares: Schedule 1;9

●●

Model articles for private companies limited by guarantee: Schedule 2;

●●

Model articles for public companies: Schedule 3.

What provisions must be included in the articles of association for a CIC? 6A.11 Section 32 of the Companies (Audit, Investigations and Community Enterprise) Act 2004 (CAICE) requires the articles of a CIC to state that the company is to be a community interest company. Section 32 of CAICE stipulates that the articles must include or exclude any provisions that the regulations require.10 The following provisions must be included in the articles of association of any form of CIC: ●●

provisions about the transfer and distribution of the company’s assets (including their distribution on a winding up),

●●

provisions about the payment of interest on debentures issued by the company or debts of the company,

●●

provisions about membership of the company,

●●

provisions about the voting rights of members of the company,

●●

provisions about the appointment and removal of directors of the company, and

●●

provisions about voting at meetings of directors of the company.

Any provisions inconsistent with section 32 are deemed to have no effect on the company’s constitution. Section 32(6) allows for further regulations to restrict the ability of a CIC to amend its articles to add, remove or alter the company’s objects.

9 Companies (Model Articles) Regulations 2008, SI 2008/3229. 10 CAICE, s 32(a) and (b).

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Asset-lock provisions 6A.12 In addition, a CIC which is a company limited by guarantee without a share capital must include in its memorandum or articles the provisions prescribed by Schedule 1 to the CICR.11 A CIC which is a company limited by shares, or a company limited by guarantee with a share capital, must include in its articles either: a)

the provisions prescribed by Schedule 2 to the CICR;12 or

b)

the provisions prescribed by Schedule 3 to the CICR.

Company objects 6A.13 Prior to 1 October 2009, under the Companies Act 1985, companies were required to include their objects in the memorandum of association. The Companies Act 2006 abandoned this requirement, resulting in the position today that, unless a company’s articles specifically restrict the objects of the company, its objects are unrestricted.13 Although not supported by legislation, the Regulator considers it ‘good practice’ for a CIC to restrict its objects to the nature of the proposed activities and the community which it intends to benefit.14

Examples of CIC objects 6A.14 The CIC’s objects will be specific to the company, and the following are examples of how they ought to be formed: ●●

“the promotion of community participation in healthy recreation, in particular by the provision of facilities for the playing of football”;

●●

“to develop the capacity and skills of the members of the socially disadvantaged community of Cradley Heath in such a way that they are

11 12 13 14

CICR, reg 7. CICR, reg 8. Companies Act 2006, s 31 (Statement of company’s objects). The Regulator considers that, if a CIC chose unrestricted objects, the activities of the company, the community that will benefit, and the way in which they will benefit should be clearly defined in the community interest statement.

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better able to identify, and help meet, their needs and to participate more fully in society”; ●●

“to provide transport facilities in Hull for people who have special need of such facilities because they are elderly, poor or disabled, people with young children or those living in isolated areas where there are no adequate public transport facilities”.

Alteration of objects 6A.15 It may be the case, after incorporation and registration with the Regulator, that the members decide to change the company’s objects. It should be noted that any changes must be approved by the Regulator.15 The following documents must be delivered to the registrar of companies: (a) a copy of the special resolution amending the articles of association; (b) the amended16 community interest statement; and (c) a statement, in a form approved by the Regulator, of the steps that have been taken to bring the proposed alteration to the notice of persons affected by the company’s activities.

The Regulator’s decision 6A.16 On receiving the documents, the registrar of companies must forward a copy of each of the files to the Regulator and retain them pending the Regulator’s decision. The Regulator will then decide whether to approve the proposed alteration of the CIC’s objects. Any proposed alteration must comply with section 32 of CAICE, the company must still satisfy the community interest test,17 and the company must have taken reasonable steps to bring the proposed alteration to the notice of persons affected by its activities.

15 CICR, reg 13 (Requirement for Regulator’s approval). 16 The community interest statement must be signed by each person who is a director of the company. 17 In considering whether the company will satisfy the community interest test, the Regulator must have regard to the statement of the company’s objects as altered by the special resolution, the community interest statement, and any other relevant considerations.

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Notice of the Regulator’s decision 6A.17 The Regulator must give notice to the registrar of their decision;18 once approved, the registrar may implement section 1077 of the Companies Act 2006 and record the community interest statement. If the Regulator decides not to approve the proposed changes to the company’s objects, the company may appeal to the Appeal Officer against the decision. It should be noted that the rules do not apply where a CIC is to cease being a CIC by becoming a charity or a Scottish charity, and the special resolution to alter the memorandum of the company with respect to the statement of its objects is forwarded to the registrar of companies in accordance with section 54 of CAICE.

Short form solution 6A.18 If a company incorporates and fails to register any articles of association, section 20(1) of the Companies Act 2006 will apply the relevant model articles19 in so far as they do not exclude or modify the relevant model articles. The relevant model articles form part of the company’s articles in the same manner and to the same extent as if articles in the form of those articles had been duly registered. The Companies Act 2006 allows for ‘short form’ articles which means that, instead of downloading the relevant new model articles and then including provisions, they can be simply varied or excluded; a typical precedent is detailed below.

18 The registrar is not required to record it. 19 The “relevant model articles” means the model articles prescribed for a company of that description as in force at the date on which the company is registered: Companies Act 2006.

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Model articles – excluded or varied 6A.19 The model articles for private companies limited by shares, contained or incorporated in Schedule 1 to the Companies (Model Articles) Regulations 2008 (SI 2008/3229), as amended prior to the date of adoption of the articles, apply to a company, save insofar as they are varied or excluded by, or are inconsistent with, these articles.

Pre-1 October 2009 incorporation – the memorandum 6A.20 Companies formed prior to 1 October 200920 are required to hold a memorandum of association and articles of association; the memorandum was an important constitutional document that stated the company name, powers, registered office, the company objects21 and its liability. The memorandum prevails over the articles under any circumstances of ambiguity between the two documents.22 Companies that have not updated their articles of association under the Companies Act 2006 must abide by the memorandum; however, the provisions will be deemed to form part of the articles of association as, legally, they are now one document.23

Post-1 October 2009 model articles – the position today 6A.21 In terms of the company constitution today, the members only need to concern themselves with the articles of association; as discussed, they have complete freedom to draft provisions to meet the requirements of the company, provided that they do not fetter Acts of Parliament or case law. It should be noted that the articles cannot compel members to commit unlawful acts. The memorandum of association is a non-constitutional

20 Companies formed on or after 1 October 2009 will fall under the Companies Act 2006. 21 Company objects state the purpose of the company, powers and the range of trading activities. The company is restricted to its powers and stated objects. 22 Guinness v Land Corporation of Ireland (1882) 22 Ch D 349, CA. 23 Companies Act 2006, s 28 (Existing companies: provisions of memorandum treated as provisions of articles).

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document, and its requirements under the Companies Act 2006 are defined by statutory instrument24 and are primarily used as part of the registration process.25 The company’s objects are not restricted (unless the members wish to restrict them), and any provisions concerning objects would be drafted in the articles. The Companies (Model Articles) Regulations 2008 prescribe three types of model articles: private companies limited by shares; private companies limited by guarantee; and public companies. The new model articles simplified and reduced the legalistic language of the previous articles and attempted to reflect the updated Companies Act 2006. The Department for Business, Innovation and Skills,26 at the time of drafting the new model articles, focused on ‘think small first’, and so the articles for private companies are designed for small companies. For any company formed after 1 October 2009, the new model articles will automatically apply by ‘default application’, unless the articles are clear that the default articles should not apply. Companies that follow the default application process are not required to register articles. The company may override the default application by three methods: totally exclude (stating that the model articles do not apply); exclude provisions of the Companies Act 2006; or state that the model articles apply with clearly drafted modifications. The ability to use these methods is useful for medium-sized limited companies limited by shares that may wish to adopt the articles by default but include some of the provisions from the public limited default articles. For example, AA Limited could include article 44 (power to pay commissions), which broadly is unlikely to affect most small private limited companies. Overall, this reduces the need to draft complete bespoke articles and therefore eradicates expensive legal advice.

24 Companies (Registration) Regulations 2008, SI 2008/3014. 25 Form IN01 (Application to register a company) contains much of the information previously detailed in the pre-1 October 2009 memorandum. 26 Replaced by the Department for Business, Energy and Industrial Strategy.

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Chapter 6B  Model Articles for Private Companies Limited by Shares Introduction 6B.1 The Regulator’s model articles of association are, with few exceptions, based upon the new model articles; this chapter provides a full analysis of the Model Articles for Private Companies Limited by Shares. In Chapter 8, full analysis of the six-model constitution is provided and, where applicable, the new model articles are referenced back to this chapter. In addition, each provision (where applicable) references the previous Companies Act 1985, Table A.

Model Articles for Private Companies Limited by Shares Part 1 Interpretation and limitation of liability Article 1 Defined terms 6B.2 1. In the articles, unless the context requires otherwise– “articles” means the company’s articles of association; “bankruptcy” includes individual insolvency proceedings in a jurisdiction other than England and Wales or Northern Ireland which have an effect similar to that of bankruptcy; “chairman” has the meaning given in article 12; “chairman of the meeting” has the meaning given in article 39; “Companies Acts” means the Companies Acts (as defined in section 2 of the Companies Act 2006), in so far as they apply to the company;

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“director” means a director of the company, and includes any person occupying the position of director, by whatever name called; “distribution recipient” has the meaning given in article 31; “document” includes, unless otherwise specified, any document sent or supplied in electronic form; “electronic form” has the meaning given in section 1168 of the Companies Act 2006; “fully paid” in relation to a share, means that the nominal value and any premium to be paid to the company in respect of that share have been paid to the company; “hard copy form” has the meaning given in section 1168 of the Companies Act 2006; “holder” in relation to shares means the person whose name is entered in the register of members as the holder of the shares; “instrument” means a document in hard copy form; “ordinary resolution” has the meaning given in section 282 of the Companies Act 2006; “paid” means paid or credited as paid; “participate”, in relation to a directors’ meeting, has the meaning given in article 10; “proxy notice” has the meaning given in article 45; “shareholder” means a person who is the holder of a share; “shares” means shares in the company; “special resolution” has the meaning given in section 283 of the Companies Act 2006; “subsidiary” has the meaning given in section 1159 of the Companies Act 2006; “transmittee” means a person entitled to a share by reason of the death or bankruptcy of a shareholder or otherwise by operation of law; and “writing” means the representation or reproduction of words, symbols or other information in a visible form by any method or combination of methods, whether sent or supplied in electronic form or otherwise. Unless the context otherwise requires, other words or expressions contained in these articles bear the same meaning as in the Companies Act 2006 as in force on the date when these articles become binding on the company.

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Article 2 Liability of members 6B.3 2. The liability of the members is limited to the amount, if any, unpaid on the shares held by them. Article 2 Analysis Article 2 previously appeared in the memorandum of association and defines the liability for the members. The provision must not be altered or omitted, and its inclusion means that, once all shares are fully paid up, the shareholders have no further liability. Article 2 Previous provisions No previous provisions.

Part 2 Directors Article 3 Directors’ general authority 6B.4 3. Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company.

Article 3 Analysis Article 3 is a simplified version of regulation 70 and provides that all power lies with the board of directors; or, more accurately, the managing director’s powers are an implied delegation by the board1. The term “all powers” requires the directors to act within the confines of the company constitution and they may only be exercised for the purpose for which they are granted. The company’s articles may also restrict directors’ duties, but they must not fetter the statutory obligations of the directors’ duties specified in sections 170 to 1772 of the Companies Act 2006.

1 Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549. 2 Companies Act 2006, Ch 2 (General duties of directors).

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Article 3 Previous provisions Table A 1985: Regulation 70 70. Subject to the provisions of the Act, the memorandum and the articles and to any directions given by special resolution, the business of the company shall be managed by the directors who may exercise all the powers of the company. No alteration of the memorandum or articles and no such direction shall invalidate any prior act of the directors which would have been valid if that alteration had not been made or that direction had not been given. The powers given by this regulation shall not be limited by any special power given to the directors by the articles and a meeting of directors at which a quorum is present may exercise all powers exercisable by the directors. Table A 1948: Regulation 80 Table A 1929: Regulation 67 Table A 1908: Regulation 71 Table A 1906: Regulation 71 Table A 1862: Regulation 55 Table B 1856: Regulation 46

Article 4 Shareholders’ reserve power 6B.5 4. (1) The shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action. (2) No such special resolution invalidates anything which the directors have done before the passing of the resolution.

Article 4 Analysis Article 4(1) gives an overriding power to the shareholders in a general meeting by special resolution; in principle, the members hold a veto over the directors’ authority. In order for a company to operate successfully, shareholders are obligated to delegate the responsibility of management to the directors. They may decide to reaffirm their authority in relation to a specific matter. It should be noted that the shareholders cannot alter the directors’ powers in any way that is unlawful or in contradiction of the Companies Act 2006. 104

Chapter 6B  Model Articles for Private Companies Limited by Shares

The general duties of directors outlined in sections 170–1813 cannot be fettered by the powers provided in article 4(1). Article 4(2) is important for the continuity of decisions made by the directors as it preserves any contracts or commitments that the directors have entered into on behalf of the company, prior to the passing of any special resolution. This does not, however, prevent directors from breaching any contract or the shareholders requesting them to do so. Article 4 Previous provisions Table A 1985: Regulation 70 70. Subject to the provisions of the Act, the memorandum and the articles and to any directions given by special resolution, the business of the company shall be managed by the directors who may exercise all the powers of the company. No alteration of the memorandum or articles and no such direction shall invalidate any prior act of the directors which would have been valid if that alteration had not been made or that direction had not been given. The powers given by this regulation shall not be limited by any special power given to the directors by the articles and a meeting of directors at which a quorum is present may exercise all powers exercisable by the directors. Table A 1948: Regulation 80 Table A 1929: Regulation 67 Table A 1908: Regulation 71 Table A 1906: Regulation 71 Table A 1862: Regulation 55 Table B 1856: Regulation 46

Article 5 Directors may delegate 6B.6 5. (1) Subject to the articles, the directors may delegate any of the powers which are conferred on them under the articles– (a) to such person or committee; (b) by such means (including by power of attorney); (c) to such an extent;

3 Companies Act 2006, Ch 2 (General duties of directors).

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(d) in relation to such matters or territories; and (e) on such terms and conditions; as they think fit. (2) If the directors so specify, any such delegation may authorise further delegation of the directors’ powers by any person to whom they are delegated. (3) The directors may revoke any delegation in whole or part, or alter its terms and conditions. Article 5 Analysis Article 5 replaces regulations 71 and 72 of Table A 1985 and allows the board of directors to delegate their powers to subsequent directors or committees. The article reflects how modern companies are run – for example, the board may delegate the company’s borrowing requirements to a finance committee, which in turn delegates the responsibility to the chief financial officer, who in turn delegates the key tasks to their staff. The 2007 consultation paper commented on the range of powers, as the provision in article 5(1) provides a relatively free hand on the powers of delegation. It should be noted that the scope of delegation is controlled by the powers in the articles; therefore, those to whom power is delegated have no special authority unless provided by specific provisions in the articles (Harold Holdsworth & Co (Wakefield) Ltd v Caddies4). Article 5 Previous provisions Table A 1985: Regulations 71, 72 71. The directors may, by power of attorney or otherwise, appoint any person to be the agent of the company for such purposes and on such conditions as they determine, including authority for the agent to delegate all or any of his powers. DELEGATION OF DIRECTORS’ POWERS 72. The directors may delegate any of their powers to any committee consisting of one or more directors. They may also delegate to any managing director or any director holding any other executive office such of their powers as they consider desirable to be exercised by him. Any such delegation may be made subject to any conditions the directors may impose, and either collaterally with or to the exclusion of their own powers and may be revoked or altered. Subject to any such conditions, the proceedings of a committee with two or more members shall be governed by the articles regulating the proceedings of directors so far as they are capable of applying.

4 [1955] 1 All ER 725.

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Table A 1948: Regulations 81, 102, 103, 104, 109 Table A 1929: Regulations 68, 85, 86, 87 Table A 1908: Regulations 91, 92, 93 Table A 1906: Regulations 91, 92, 93 Table A 1862: Regulations 68, 69, 70 Table B 1856: Regulations 57, 58, 59

Article 6 Committees 6B.7 6. (1) Committees to which the directors delegate any of their powers must follow procedures which are based as far as they are applicable on those provisions of the articles which govern the taking of decisions by directors. (2) The directors may make rules of procedure for all or any committees, which prevail over rules derived from the articles if they are not consistent with them. Article 6 Analysis Previous versions of the articles have all included provisions on how committees operate. A committee can be a group or an individual. Article 6 does not specify how a committee may be formed, and company boards may wish to delegate to committees consisting of directors only for certain matters, or external members only for a particular issue. The directors can adapt the articles and make specific procedures for each committee. The board may specify the delegation of powers for a limited period of time, or certain reporting procedures or rules to be followed before final implementation of any decision that the committee makes. Article 6 Previous provisions Table A 1985: Regulation 72 DELEGATION OF DIRECTORS’ POWERS 72. The directors may delegate any of their powers to any committee consisting of one or more directors. They may also delegate to any managing director or any director holding any other executive office such of their powers as they consider desirable to be exercised by him. Any such

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delegation may be made subject to any conditions the directors may impose, and either collaterally with or to the exclusion of their own powers and may be revoked or altered. Subject to any such conditions, the proceedings of a committee with two or more members shall be governed by the articles regulating the proceedings of directors so far as they are capable of applying. Table A 1948: Regulations 102, 103, 104, 109 Table A 1929: Regulations 68, 85, 86, 87 Table A 1908: Regulations 91, 92, 93 Table A 1906: Regulations 91, 92, 93 Table A 1862: Regulations 68, 69, 70 Table B 1856: Regulations 57, 58, 59

Article 7 Directors to take decisions collectively 6B.8 7. (1) The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in accordance with article 8. (2) If– (a) the company only has one director, and (b) no provision of the articles requires it to have more than one director, the general rule does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.

Article 7 Analysis Article 7 stipulates the general rule that decision-making by directors must be passed by a majority decision5. Article 7(2) provides an exclusion for companies with a single director, whereby the rules for decision-making in the articles do not apply, and so the sole director is free to make decisions as they see fit.

5

Companies Act 2006, s 282 (Ordinary resolutions): “(1) An ordinary resolution of the members (or of a class of members) of a company means a resolution that is passed by a simple majority”.

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Article 7 Previous provisions Table A 1985: Regulation 88 88. Subject to the provisions of the articles, the directors may regulate their proceedings as they think fit. A director may, and the secretary at the request of a director shall, call a meeting of the directors. It shall not be necessary to give notice of a meeting to a director who is absent from the United Kingdom. Questions arising at a meeting shall be decided by a majority of votes. In the case of an equality of votes, the chairman shall have a second or casting vote. A director who is also an alternate director shall be entitled in the absence of his appointor to a separate vote on behalf of his appointor in addition to his own vote. Table A 1948: Regulation 98 Table A 1929: Regulation 81 Table A 1908: Regulation 87 Table A 1906: Regulation 87 Table A 1862: Regulation 66 Table B 1856: Regulation 55

Article 8 Unanimous decisions 6B.9 8. (1) A decision of the directors is taken in accordance with this article when all eligible directors indicate to each other by any means that they share a common view on a matter. (2) Such a decision may take the form of a resolution in writing, copies of which have been signed by each eligible director or to which each eligible director has otherwise indicated agreement in writing. (3) References in this article to eligible directors are to directors who would have been entitled to vote on the matter had it been proposed as a resolution at a directors’ meeting. (4) A decision may not be taken in accordance with this article if the eligible directors would not have formed a quorum at such a meeting.

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Article 8 Analysis Article 8 makes new additions to the new model articles which acknowledge the increased use of technology in decision-making by directors. The “by any means” described in article 8(1) may include: mobile telephone, text, email and teleconferencing, and this allows a board of directors to make decisions without the need for written resolutions or calling a formal meeting. Care ought to taken with the phrase “indicate to each other” in article 8(1), which implies that all directors have sight of the same information on which the decision is based. For example, the directors should read any email chain in full. In 2022, sharing technology is certainly fit for purpose in order to speed up decision-making, especially in small companies with possibly two or three directors. Article 8 Previous provisions Table A 1985: Regulation 93 93. A resolution in writing signed by all the directors entitled to receive notice of a meeting of directors or of a committee of directors shall be as valid and effectual as it if had been passed at a meeting of directors or (as the case may be) a committee of directors duly convened and held and may consist of several documents in the like form each signed by one or more directors; but a resolution signed by an alternate director need not also be signed by his appointor and, if it is signed by a director who has appointed an alternate director, it need not be signed by the alternate director in that capacity. Table A 1948: Regulation 106

Article 9 Calling a directors’ meeting 6B.10 9. (1) Any director may call a directors’ meeting by giving notice of the meeting to the directors or by authorising the company secretary (if any) to give such notice. (2) Notice of any directors’ meeting must indicate– (a) its proposed date and time; (b) where it is to take place; and

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(c) if it is anticipated that directors participating in the meeting will not be in the same place, how it is proposed that they should communicate with each other during the meeting. (3) Notice of a directors’ meeting must be given to each director, but need not be in writing. (4) Notice of a directors’ meeting need not be given to directors who waive their entitlement to notice of that meeting, by giving notice to that effect to the company not more than 7 days after the date on which the meeting is held.Where such notice is given after the meeting has been held, that does not affect the validity of the meeting, or of any business conducted at it.

Article 9 Analysis Article 9 modernises the previous regulation 88 of Table A 1985 which stipulated that a director absent from the United Kingdom would not require notification of a meeting.The change reflects the advent of modern communication techniques where it is possible to hold a directors’ meeting remotely. If it is envisaged that any directors may not attend personally, article 9(2)(c) stipulates that the method of communication (for example, Skype) ought to be proposed and agreed. It is established common law that notices need not be in writing, and article 9(3) reflects this position. If the company has not appointed a company secretary, article 9(1) can be amended as below: “9. (1) Any director may call a directors’ meeting by giving notice of the meeting to the directors.” Article 9 Previous provisions Table A 1985: Regulation 88 88. Subject to the provisions of the articles, the directors may regulate their proceedings as they think fit. A director may, and the secretary at the request of a director shall, call a meeting of the directors. It shall not be necessary to give notice of a meeting to a director who is absent from the United Kingdom. Questions arising at a meeting shall be decided by a majority of votes. In the case of an equality of votes, the chairman shall have a second or casting vote. A director who is also an alternate director shall be entitled in the absence of his appointor to a separate vote on behalf of his appointor in addition to his own vote. Table A 1948: Regulation 98 Table A 1929: Regulation 81 Table A 1908: Regulation 87

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Table A 1906: Regulation 87 Table A 1862: Regulation 66 Table B 1856: Regulation 55

Article 10 Participation in directors’ meetings 6B.11 10. (1) Subject to the articles, directors participate in a directors’ meeting, or part of a directors’ meeting, when– (a) the meeting has been called and takes place in accordance with the articles, and (b) they can each communicate to the others any information or opinions they have on any particular item of the business of the meeting. (2) In determining whether directors are participating in a directors’ meeting, it is irrelevant where any director is or how they communicate with each other. (3) If all the directors participating in a meeting are not in the same place, they may decide that the meeting is to be treated as taking place wherever any of them is. Article 10 Analysis Article 10 is drafted to complement the intention of directors to facilitate the use of video-conference calls to facilitate decision-making. Case law has established the main principles for calling a board meeting, in particular that a reasonable notice period for any proposed meeting ought to be given to directors (Browne v La Trinidad6). The law fails to define what is considered as “reasonable”, and the court has considered the manipulation of the company decision-making process by calling meetings under short notice in the hope of excluding fellow directors (Re Homer District Consolidated Gold Mines7). Article 10 is a new addition to the articles which expressly allows for meetings to be held with directors in different locations8.

6 (1887) 37 Ch D 1 (CA). 7 (1988) 39 Ch D 546 (CA). 8 See article 10(2): “… it is irrelevant where any director is or how they communicate with each other”.

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It is important to consider article 9(2)(c) if a board meeting is to be called when it is known that certain directors will not attend in person; the method of communication of the proposed meeting needs to be established and conveyed to each director prior to the meeting. As the intention of articles 9 and 10 is to allow directors to attend meetings from different locations in the world using technology, the previous provision under regulation 88 of Table A 1985 meant that it was not necessary to notify any director of a proposed meeting if they were outside the UK. Article 10 Previous provisions No previous provisions.

Article 11 Quorum for directors’ meetings 6B.12 11. (1) At a directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting. (2) The quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two. (3) If the total number of directors for the time being is less than the quorum required, the directors must not take any decision other than a decision– (a) to appoint further directors, or (b) to call a general meeting so as to enable the shareholders to appoint further directors.

Article 11 Analysis A quorum is the minimum number of directors required to vote at a meeting. Case law provides that any decisions made at an inquorate board meeting are void (Re North Eastern Insurance Co Ltd9). Article 11(3) provides for the appointment of further directors if a quorum cannot be formed. Article 11(2) fixes the minimum quorum at two, and appears at odds with section 154 of the Companies Act 2006 which states that

9 [1919] 1 Ch 198.

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a private company must have at least one director. By virtue of article 7(2), sole directors may ignore the requirements for “directors to take decisions collectively”. It is obvious that article 7 and article 11 are conflicted, the former acknowledging alignment with section 154 of the Companies Act 2006, while the latter appears to insist that a private company must have at least two directors to form a quorum. To provide clarity, article 11 may be amended in two forms: precedent A1 allows the directors to adjourn a meeting if a quorum cannot be formed and gives them the option to fix the quorum at more than two directors. Precedent A1 states the voting rights of the quorum clearly. Adapted precedent A2 states clearly that sole directors will not be required to form a quorum and they alone will make all the decisions of the company; for an investor into a private company with a sole director, precedent A2 is unambiguous concerning who will have decision-making powers.

Precedent A1 The following precedent specifies a quorum for directors if more than two is required: “Quorum for directors’ meetings 11. (1) At a directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to [adjourn or] call another meeting. [If adjourned, the directors may agree in writing an alternative date, time and place] (2) The quorum for directors’ meetings may be fixed from time to time by a decision of the Directors. (3) The quorum for directors’ meetings is [specify the quorum if more than two]. (4) Subject to the other provisions of these articles, each director participating in a directors’ meeting has one vote on each proposed resolution. (3) If the total number of directors for the time being is less than the quorum required, the directors must not take any decision other than a decision– (a) to appoint further directors, or (b) to call a general meeting so as to enable the shareholders to appoint further directors.”

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Precedent A2 (sole director) The following precedent specifies the quorum requirements for a company with a single director: “Quorum for directors’ meetings 11. (1) At a directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting. (2) The quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two, [except where the company has one single director in which case they shall constitute a quorum]. (3) If the total number of directors for the time being is less than the quorum required, the directors must not take any decision other than a decision– (a) to appoint further directors, or (b) to call a general meeting so as to enable the shareholders to appoint further directors.”

Article 11 Previous provisions Table A 1985: Regulations 89 and 90 89. The quorum for the transaction of the business of the directors may be fixed by the directors and unless so fixed at any other number shall be two. A person who holds office only as an alternate director shall, if his appointor is not present, be counted in the quorum. 90. The continuing directors or a sole continuing director may act notwithstanding any vacancies in their number, but, if the number of directors is less than the number fixed as the quorum, the continuing directors or director may act only for the purpose of filling vacancies or of calling a general meeting. Table A 1948: Regulations 99, 100 Table A 1929: Regulations 82, 83 Table A 1908: Regulations 88, 89 Table A 1906: Regulations 88, 90 Table A 1862: Regulation 66 Table B 1856: Regulation 55

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Article 12 Chairing of directors’ meetings 6B.13 12. (1) The directors may appoint a director to chair their meetings. (2) The person so appointed for the time being is known as the chairman. (3) The directors may terminate the chairman’s appointment at any time. (4) If the chairman is not participating in a directors’ meeting within ten minutes of the time at which it was to start, the participating directors must appoint one of themselves to chair it. Article 12 Analysis The article allows the board of directors to appoint a chairman; this power is vested in the directors alone, and the shareholders (or members) cannot interfere with the process (Clarke v Workman10). Precedent A3 – Chairing of directors’ meetings The following precedent removes the chairman’s casting vote. For 50/50 companies and joint ventures, the disallowing of a chairman’s casting vote may be critical to retain the balance of voting rights: “12. (1) The directors may appoint a director to chair their meetings. (2) The person so appointed for the time being is known as the chairman. (3) If the numbers of votes for and against a proposal at a meeting of directors are equal, the chainman or other director acting as chairman shall not have a casting vote. (4) The directors may terminate the chairman’s appointment at any time. (5) If the chairman is not participating in a directors’ meeting within ten minutes of the time at which it was to start, the participating directors must appoint one of themselves to chair it.” Article 12 Previous provisions Table A 1985: Regulation 91 91. The directors may appoint one of their number to be the chairman of the board of directors and may at any time remove him from that office. 10 [1920] 1 IR 107.

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Unless he is unwilling to do so, the director so appointed shall preside at every meeting of directors at which he is present. But if there is no director holding that office, or if the director holding it is unwilling to preside or is not present within five minutes after the time appointed for the meeting, the directors present may appoint one of their number to be chairman of the meeting. Table A 1948: Regulation 101 Table A 1929: Regulation 84 Table A 1908: Regulation 90 Table A 1906: Regulation 90 Table A 1862: Regulation 67 Table B 1856: Regulation 56

Article 13 Casting vote 6B.14 13. (1) If the numbers of votes for and against a proposal are equal, the chairman or other director chairing the meeting has a casting vote. (2) But this does not apply if, in accordance with the articles, the chairman or other director is not to be counted as participating in the decision-making process for quorum or voting purposes. Article 13 Analysis The appointment of the chairman allows for a casting vote (article 13(1)) in directors’ meetings; the option is useful to prevent potential deadlocks. It should be noted that the chairman appointed is free to act as they see fit, with no requirement for impartiality. Article 13 Previous provisions Table A 1985: Regulation 88 88. Subject to the provisions of the articles, the directors may regulate their proceedings as they think fit. A director may, and the secretary at the request of a director shall, call a meeting of the directors. It shall not be necessary to give notice of a meeting to a director who is absent from the United Kingdom. Questions arising at a meeting shall be decided by a majority of votes. In the case of an equality of votes, the chairman shall have a second or casting vote. A director who is also an alternate director shall be entitled in the absence of his appointor to a separate vote on behalf of his appointor in addition to his own vote. 117

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Table A 1948: Regulation 98 Table A 1929: Regulation 81 Table A 1908: Regulation 87 Table A 1906: Regulation 87 Table A 1862: Regulation 66 Table B 1856: Regulation 55

Article 14 Conflicts of interest 6B.15 14. (1) If a proposed decision of the directors is concerned with an actual or proposed transaction or arrangement with the company in which a director is interested, that director is not to be counted as participating in the decisionmaking process for quorum or voting purposes. (2) But if paragraph (3) applies, a director who is interested in an actual or proposed transaction or arrangement with the company is to be counted as participating in the decision-making process for quorum and voting purposes. (3) This paragraph applies when– (a) the company by ordinary resolution disapplies the provision of the articles which would otherwise prevent a director from being counted as participating in the decision-making process; (b) the director’s interest cannot reasonably be regarded as likely to give rise to a conflict of interest; or (c) the director’s conflict of interest arises from a permitted cause. (4) For the purposes of this article, the following are permitted causes– (a) a guarantee given, or to be given, by or to a director in respect of an obligation incurred by or on behalf of the company or any of its subsidiaries; (b) subscription, or an agreement to subscribe, for shares or other securities of the company or any of its subsidiaries, or to underwrite, sub-underwrite, or guarantee subscription for any such shares or securities; and (c) arrangements pursuant to which benefits are made available to employees and directors or former employees and directors of the company or any of its subsidiaries which do not provide special benefits for directors or former directors.

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(5) For the purposes of this article, references to proposed decisions and decision-making processes include any directors’ meeting or part of a directors’ meeting. (6) Subject to paragraph (7), if a question arises at a meeting of directors or of a committee of directors as to the right of a director to participate in the meeting (or part of the meeting) for voting or quorum purposes, the question may, before the conclusion of the meeting, be referred to the chairman whose ruling in relation to any director other than the chairman is to be final and conclusive. (7) If any question as to the right to participate in the meeting (or part of the meeting) should arise in respect of the chairman, the question is to be decided by a decision of the directors at that meeting, for which purpose the chairman is not to be counted as participating in the meeting (or that part of the meeting) for voting or quorum purposes.

Article 14 Analysis On 1 October 2008, a new duty was placed on company directors to avoid conflicts of interests in the company. Section 17511 of the Companies Act 2006 requires directors to avoid conflicts of interest; the provisions replaced the previous equitable obligations that any director must account for any profit made personally in conflict with their own duty to the company12. As regards transactional conflicts of interest, section 17713 requires directors to disclose any interest in a proposed transaction or arrangement with the company, which is a separate duty to disclosing any interest in an existing transaction or arrangement with the company. The court’s view on the conflicts that a director may encounter is, first and foremost, that the appointed director must demonstrate allegiance to the company. The principle does not concern itself with proving fraud or corruption. The basic premise, in the words of Upjohn LJ, is that the company is entitled “to the undivided loyalty of its directors” (Boulting v Association of Cinematograph,Television and Allied Technicians14).

11 Companies Act 2006, s 175 (Duty to avoid conflicts of interest): “(1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company”. 12 Boardman v Phipps [1967] 2 AC 46 provides the court’s view on duty. 13 Companies Act 2006, s 177 (Duty to declare interest in proposed transaction or arrangement): “(1) If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors”. 14 [1963] 2 QB 606.

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Situational or transactional conflicts do not depend on fraud, or absence of bona fides (Hastings Ltd v Gulliver15), and the majority of conflicts may arise through business opportunities or joint ventures. If any director were to enrich themselves instead of the company, they are liable for breach of duty, regardless of the fact that they acted in good faith. A common conflict concerns a business opportunity presented to the board of directors which is dismissed by the company; subsequently, if any board member obtains the opportunity for themselves, they will be liable to the company. The fact that the company rejected the opportunity is of no consequence (Foster Bryant Surveying Ltd v Bryant16). Transitional rules on conflicts of interest For private companies incorporated before 1 October 2008, the board is required to pass an ordinary resolution to authorise any conflicts, or it may amend the articles of association. The duties under section 17517 apply to conflicts of interest that arise after 1 October 2008; therefore, as regards companies incorporated under previous Companies Acts, the law which applied will continue to pertain to any situation concerning conflicts of interest18. Precedent Article 14 of the model articles focuses on transactional conflicts only; companies formed after 1 October 2008 may rely on the statutory provisions in section 175 of the Companies Act 2006. The directors may authorise the directors’ conflict of interest, or the articles may amend or remove the statutory powers19. Article 14 Previous provisions Table A 1985: Regulations 95, 96, 9820 95. A director shall not be counted in the quorum present at a meeting in relation to a resolution on which he is not entitled to vote. 96.The company may by ordinary resolution suspend or relax to any extent, either generally or in respect of any particular matter, any provision of the

15 [1967] AC 134. 16 [2007] EWCA Civ 200. 17 Companies Act 2006 (Commencement No 5, Transitional Provisions and Savings) Order 2007, SI 2007/3495, Part 3, reg 47(1): “Section 175 of the Companies Act 2006 (duty to avoid conflicts of interest) applies where the situation described in subsection (1) of that section arises on or after 1st October 2008”. 18 Companies Act 2006 (Commencement No 5, Transitional Provisions and Savings) Order 2007, SI 2007/3495, Part 3, reg 47(2): “The law that applied before that date continues to apply to such a situation that arose before that date”. 19 Companies Act 2006, s 175(5): “Authorisation may be given by the directors (a) where the company is a private company and nothing in the company’s constitution invalidates such authorisation, by the matter being proposed to and authorised by the directors”. 20 Introduced in 1985.

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articles prohibiting a director from voting at a meeting of directors or of a committee of directors. 98. If a question arises at a meeting of directors or of a committee of directors as to the right of a director to vote, the question may, before the conclusion of the meeting, be referred to the chairman of the meeting and his ruling in relation to any director other than himself shall be final and conclusive. Table A 1948: Regulation 84

Article 15 Records of decisions to be kept 6B.16 15. The directors must ensure that the company keeps a record, in writing, for at least 10 years from the date of the decision recorded, of every unanimous or majority decision taken by the directors. Article 15 Analysis This article reinstates section 24821 that every company must keep all proceedings at meetings of the directors of the company for at least 10 years. Failure to adhere is punishable by a fine, and the articles may not fetter the Act. Article 15 Previous provisions Table A 1985: Regulation 100 100. The directors shall cause minutes to be made in books kept for the purpose– (a) of all appointments of officers made by the directors; and (b) of all proceedings at meetings of the company, of the holders of any class of shares in the company, and of the directors, and of committees of directors, including the names of the directors present at each such meeting. Table A 1948: Regulation 86 Table A 1929: Regulation 70 Table A 1908: Regulation 75 Table A 1906: Regulation 75 Table A 1862: Regulation 61 21 Companies Act 2006, s 248 (Minutes of directors’ meetings): “(1) Every company must cause minutes of all proceedings at meetings of its directors to be recorded”.

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Precedent A4 – Records of decisions to be kept (electronic) The following precedent states the rules for decisions taken by electronic means: “15. (1) The directors must ensure that the company keeps a record, in writing, for at least 10 years from the date of the decision recorded, of every unanimous or majority decision taken by the directors. (2) Where decisions of the directors are taken by electronic means, such decisions shall be recorded by the directors in permanent form, so that they may be read with the naked eye.”

Article 16 Directors’ discretion to make further rules 6B.17 16. Subject to the articles, the directors may make any rule which they think fit about how they take decisions, and about how such rules are to be recorded or communicated to directors. Article 16 Analysis Article 16 is a new provision intended to provide clear guidance that directors are able to adapt the articles of association for any particular circumstance. The provision expressly states “subject to the articles”; in principle, the directors have no scope to cause conflicting rules or amendments. When considering further rules, section 171 of the Companies Act 2006 affirms that directors must act for the company, with full consideration of its constitution. Article 16 Previous provisions No previous provisions.

Article 17 Methods of appointing directors 6B.18 17. (1) Any person who is willing to act as a director, and is permitted by law to do so, may be appointed to be a director– (a) by ordinary resolution, or (b) by a decision of the directors.

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(2) In any case where, as a result of death, the company has no shareholders and no directors, the personal representatives of the last shareholder to have died have the right, by notice in writing, to appoint a person to be a director. (3) For the purposes of paragraph (2), where 2 or more shareholders die in circumstances rendering it uncertain who was the last to die, a younger shareholder is deemed to have survived an older shareholder. Article 17 Analysis The provision outlines the methods of appointing a director and combines regulations 78 and 79 of Table A 1985. The previous requirements to fix a maximum number of directors, and to re-appoint or retire by rotation, have been removed. Although not specified, “a person who is willing to act” must have reached the age of 16 and not be an undischarged bankrupt. There is no maximum number of directors allowed for a company; section 15422 requires a minimum of one for a private company. In smaller limited companies, appointing directors without due process set out in article 17 may occur for reasons of expediency. The courts’ view is that any director not appointed in accordance with the articles is considered invalid (Sierra Leone Telecommunications Co Ltd v Barclays Bank plc23). Article 17 Previous provisions Table A 1985: Regulations 78, 79 78.The company may by ordinary resolution appoint a person who is willing to act to be a director either to fill a vacancy or as an additional director and may also determine the rotation in which any additional directors are to retire. 79. The directors may appoint a person who is willing to act to be a director, either to fill a vacancy or as an additional director, provided that the appointment does not cause the number of directors to exceed any number fixed by or in accordance with the articles as the maximum number of directors. Table A 1948: Regulations 94, 95, 97 Table A 1929: Regulations 77, 78, 79 Table A 1908: Regulations 83, 84, 85

22 Companies Act 2006, s 154 (Companies required to have directors): “(1) A private company must have at least one director. (2) A public company must have at least two directors”. 23 [1998] 2 All ER 821.

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Table A 1906: Regulations 83, 84, 85 Table A 1862: Regulations 63, 64 Table B 1856: Regulations 53, 54

Article 18 Termination of director’s appointment 6B.19 18. A person ceases to be a director as soon as– (a) that person ceases to be a director by virtue of any provision of the Companies Act 2006 or is prohibited from being a director by law; (b) a bankruptcy order is made against that person; (c) a composition is made with that person’s creditors generally in satisfaction of that person’s debts; (d) a registered medical practitioner who is treating that person gives a written opinion to the company stating that that person has become physically or mentally incapable of acting as a director and may remain so for more than three months; (e) [paragraph omitted pursuant to the Mental Health (Discrimination) Act 2013] (f) notification is received by the company from the director that the director is resigning from office, and such resignation has taken effect in accordance with its terms. Article 18 Analysis Article 18 specifies the factors that would automatically terminate a director’s appointment. The main omission from the previous Table A (1985) is the failure to attend directors’ meetings for six consecutive months, resulting in termination. Article 18(e) is now omitted, with the introduction of the Mental Health (Discrimination) Act 2013. The Act’s main objective is to remove discrimination for mental health reasons and eradicate the stigma associated with mental illness. The Act resulted in company directors having increased safeguarding from being removed as a company director on the basis of mental health. Companies formed prior to 28 April 2013 (who have not updated their articles) ought to consider amending them to include the new legislation.

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Article 18 Previous provisions Table A 1985: Regulation 81 81. The office of a director shall be vacated if– (a) he ceases to be a director by virtue of any provision of the Act or he becomes prohibited by law from being a director; or (b) he becomes bankrupt or makes any arrangement or composition with his creditors generally; or (c) he is, or may be, suffering from mental disorder and either– (i) he is admitted to hospital in pursuance of an application for admission for treatment under the Mental Health Act 1983 or, in Scotland, an application for admission under the Mental Health (Scotland) Act 1960, or (ii) an order is made by a court having jurisdiction (whether in the United Kingdom or elsewhere) in matters concerning mental disorder for his detention or for the appointment of a receiver, curator bonis or other person to exercise powers with respect to his property or affairs; or (d) he resigns his office by notice to the company; or (e) he shall for more than six consecutive months have been absent without permission of the directors from meetings of directors held during that period and the directors resolve that his office be vacated. Table A 1948: Article 88 Table A 1929: Article 72 Table A 1908: Article 77 Table A 1906: Article 77 Table A 1862: Article 57 Table B 1856: Article 47

Article 19 Directors’ remuneration 6B.20 19. (1) Directors may undertake any services for the company that the directors decide. (2) Directors are entitled to such remuneration as the directors determine– (a) for their services to the company as directors, and (b) for any other service which they undertake for the company. 125

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(3) Subject to the articles, a director’s remuneration may– (a) take any form, and (b) include any arrangements in connection with the payment of a pension, allowance or gratuity, or any death, sickness or disability benefits, to or in respect of that director. (4) Unless the directors decide otherwise, directors’ remuneration accrues from day to day. (5) Unless the directors decide otherwise, directors are not accountable to the company for any remuneration which they receive as directors or other officers or employees of the company’s subsidiaries or of any other body corporate in which the company is interested.

Article 19 Analysis The main change from the previous Table A is that the directors are able to set their own remuneration without involvement from the shareholders, and they can act (and be remunerated) as both employees and executives. It should be noted that section 1214 of the Companies Act 2006 specifies an independence requirement for auditors; article 19(1) allows “any services”, and officers and employees of the company are specifically barred from acting as auditors24. Article 19 Previous provisions Table A 1985: Regulations 82, 84, 87 82. The directors shall be entitled to such remuneration as the company may by ordinary resolution determine and, unless the resolution provides otherwise, the remuneration shall be deemed to accrue from day to day. 84. Subject to the provisions of the Act, the directors may appoint one or more of their number to the office of managing director or to any other executive office under the company and may enter into an agreement or arrangement with any director for his employment by the company or for the provision by him of any services outside the scope of the ordinary duties of a director. Any such appointment, agreement or arrangement may be made upon such terms as the directors determine and they may remunerate any such director for his services as they think fit. Any appointment of a director to an executive office shall terminate if he ceases to be a director

24 Companies Act 2006, s 1214 (Independence requirement): “(1) A person may not act as statutory auditor of an audited person if one or more of subsections (2), (3) and (4) apply to him”.

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but without prejudice to any claim to damages for breach of the contract of service between the director and the company. A managing director and a director holding any other executive office shall not be subject to retirement by rotation. 87. The directors may provide benefits, whether by the payment of gratuities or pensions or by insurance or otherwise, for any director who has held but no longer holds any executive office or employment with the company or with any body corporate which is or has been a subsidiary of the company or a predecessor in business of the company or of any such subsidiary, and for any member of his family (including a spouse and a former spouse) or any person who is or was dependent on him, and may (as well before as after he ceases to hold such office or employment) contribute to any fund and pay premiums for the purchase or provision of any such benefit. Table A 1948: Regulations 76, 87, 107, 108, 109 Table A 1929: Regulations 65, 68 Table A 1908: Regulations 69, 72 Table A 1906: Regulations 69, 72 Table A 1862: Regulation 54

Article 20 Directors’ expenses 6B.21 20. The company may pay any reasonable expenses which the directors properly incur in connection with their attendance at– (a) meetings of directors or committees of directors, (b) general meetings, or (c) separate meetings of the holders of any class of shares or of debentures of the company, or otherwise in connection with the exercise of their powers and the discharge of their responsibilities in relation to the company.

Article 20 Analysis Article 20 takes a broad approach to the payment of expenses and improves upon the previous Table A (1985) that allowed for travelling and other expenses only. The article is somewhat implicit, stating “may pay” and “reasonable expenses”; it must be assumed that the expenses which will

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be paid and the definition of “reasonable” are matters are for the board of directors to decide. The provision is, to some extent, conflicted with article 7 that promoted the use of technology to attend meetings. A director who resides 200 miles from head office who wishes to attend in person for every meeting would incur reasonable expenses in doing so – in contrast, a director who may only attend by conference call would cost the company far less in expenses. It may be appropriate (as many companies do) to expand on this general article and detail directors’ expenses by employing internal procedures and documents. The articles of association are public documents; it could be expected that companies would not want their directors’ expenses to be public knowledge, and so editing the article to include more detailed expense data ought to be avoided. Article 20 Previous provisions Table A 1985: Regulation 83 83. The directors may be paid all travelling, hotel, and other expenses properly incurred by them in connection with their attendance at meetings of directors or committees of directors or general meetings or separate meetings of the holders of any class of shares or of debentures of the company or otherwise in connection with the discharge of their duties. Table A 1948: Regulation 76

Part 3 Shares and distributions Article 21 All shares to be fully paid up 6B.22 21. (1) No share is to be issued for less than the aggregate of its nominal value and any premium to be paid to the company in consideration for its issue. (2) This does not apply to shares taken on the formation of the company by the subscribers to the company’s memorandum.

Article 21 Analysis The article was a new provision and did not appear in the previous Table A; the majority of limited companies are predominately SMEs and therefore are unlikely to use share classes that are part or nil paid. Stating

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and implementing a strategy to only use fully paid-up share classes removes the need for lengthy provisions on liens and forfeiture. The underlying concept for the current articles versus the previous Table A was simplification, based on what transpires in companies on a day-to-day basis. In ought to be noted that, should a company wish to issue part or nil paid shares, the articles of association would require amendment to reflect the new share classes issued by the company, with additional new provisions for liens and forfeiture. Article 21 Previous provisions No previous provisions.

Article 22 Powers to issue different classes of share 6B.23 22. (1) Subject to the articles, but without prejudice to the rights attached to any existing share, the company may issue shares with such rights or restrictions as may be determined by ordinary resolution. (2) The company may issue shares which are to be redeemed, or are liable to be redeemed at the option of the company or the holder, and the directors may determine the terms, conditions and manner of redemption of any such shares.

Article 22 Analysis Shares carry rights, on the basis that the article permits, and the company is free to define the rights attached to the share classes issued. The most common rights relate to dividends, capital on winding up, and voting. Redeemable shares are issued with rights to repurchase the shares back at a specified date in the future, or by agreement with the directors; they are primarily used for outside investors and employee share schemes. Financing redemption, payment and cancellation of the shares are restricted by the Companies Act 200625, and so care should be taken if adapting the article. The article aligns with section 685 of the Companies Act 2006 which permits the directors of a limited company to determine the terms,

25 Companies Act 2006, Ch 3 (Redeemable shares).

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conditions and manner of redemption of shares if they are authorised by either the company’s articles or by a resolution of the company. The articles may restrict or exclude the issue of redeemable shares26 for private limited companies, and it should be noted that a company may not issue redeemable share classes without initially issuing non-redeemable shares27. A public limited company may only issue redeemable shares if it is authorised to do so by its articles28. Companies (Tables A to F) Regulations 1985 – Article 2 “2. Subject to the provisions of the Act and without prejudice to any rights attached to any existing shares, any share may be issued with such rights or restrictions as the company may by ordinary resolution determine.” Companies (Tables A to F) Regulations 1985 – Article 3 “3. Subject to the provisions of the Act, shares may be issued which are to be redeemed or are to be liable to be redeemed at the option of the company or the holder on such terms and in such manner as may be provided by the articles.”

Weighted voting rights The majority of shares issued by private companies are ordinary shares which carry a right to one vote per share. Investors may insist on adjusting the voting rights in the event that the board attempts to remove an investor-appointed director or take actions that may adversely affect their investment. In English law, it is generally accepted (on the basis that the articles provide permission) that the share classes issued by the company may enjoy enhanced or weighted voting rights. A company may issue Class A and Class B ordinary shares with equal rights to winding up and dividends; however, on specific voting matters (such as removal of directors), the class A shares would hold three votes per share in order to defeat any resolution or poll. The Companies Act 2006 allows for weighted voting rights, and care should be taken when applying the provisions of section 284. In a family business, through succession planning and the generous benefit of gift hold-over relief, founding members typically dispose of their shareholding to the next generation without an immediate capital gain on disposal. 26 Companies Act 2006, s 684(2): “The articles of a private limited company may exclude or restrict the issue of redeemable shares”. 27 Companies Act 2006, s 684(4). 28 Companies Act 2006, s 684(3).

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Using this strategy leaves the founding members with reduced voting rights and, in the eventuality of a family feud, the possibility of being removed as a director of the company.Weighted voting rights may have the desired effect of entrenching a director. Bushell v Faith In Bushell v Faith a family-owned business, Bush Court (Southgate) Ltd, had issued capital of 300 paid-up shares, registered to Mr Faith and his two sisters, Mrs Bushell and Mrs Bayne, equally. Mr Faith’s conduct caused his two sisters to convene a meeting on 22 November 1968 where an ordinary resolution was proposed in order to remove Mr Faith as director. On a show of hands the resolution was passed, whereupon Mr Faith demanded a poll. The two sisters resorted to legal proceedings, suggesting that special article 9 (see below) frustrated section 184 of the Companies Act 1985 and should be made void. The House of Lords rejected the application on the grounds that regulation 2 of Table A 1985 (now article 22(1)) was unambiguous in allowing weighted voting rights. The company articles included special article 9 which read: “In the event of a Resolution being proposed at any General Meeting of the Company for the removal from office of any Director, any shares held by that Director shall on a poll in respect of such Resolution carry the right to three votes per share and regulation 62 of Part 1 of Table A shall be construed accordingly.”

Lord Upjohn stated: “Parliament has never sought to fetter the right of the company to issue a share with such rights or restrictions as it may think fit.”

Lord Donovan noted: “And there may be good reasons why Parliament should leave some companies with freedom of manoeuvre in this particular matter. There are many small companies which are conducted in practice as though they were little more than partnerships, particularly family companies running a family business; and it is, unfortunately, sometimes necessary to provide some safeguard against family quarrels having their repercussions in the boardroom.”

Article 22 Previous provisions Table A 1985: Regulations 2, 3 2. Subject to the provisions of the Act and without prejudice to any rights attached to any existing shares, any share may be issued with such rights or restrictions as the company may by ordinary resolution determine. 3. Subject to the provisions of the Act, shares may be issued which are to be redeemed or are to be liable to be redeemed at the option of the company

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or the holder on such terms and in such manner as may be provided by the articles. Table A 1948: Regulations 2, 3 Table A 1929: Regulations 2, 3

Article 23 Company not bound by less than absolute interests 6B.24 23. Except as required by law, no person is to be recognised by the company as holding any share upon any trust, and except as otherwise required by law or the articles, the company is not in any way to be bound by or recognise any interest in a share other than the holder’s absolute ownership of it and all the rights attaching to it. Article 23 Analysis None. Article 23 Previous provisions Table A 1985: Regulation 5 5. Except as required by law, no person shall be recognised by the company as holding any share upon any trust and (except as otherwise provided by the articles or by law) the company shall not be bound by or recognise any interest in any share except an absolute right to the entirety thereof in the holder. Table A 1948: Regulation 7

Article 24 Share certificates 6B.25 24. (1) The company must issue each shareholder, free of charge, with one or more certificates in respect of the shares which that shareholder holds. (2) Every certificate must specify– (a) in respect of how many shares, of what class, it is issued; (b) the nominal value of those shares; [(c) that the shares are fully paid]; and (d) any distinguishing numbers assigned to them. 132

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(3) No certificate may be issued in respect of shares of more than one class. (4) If more than one person holds a share, only one certificate may be issued in respect of it. (5) Certificates must– (a) have affixed to them the company’s common seal, or (b) be otherwise executed in accordance with the Companies Acts. Article 24 Analysis Article 24 outlines the company’s procedure when issuing share certificates by allotment or transfer; share certificates by virtue of section 768 of the Companies Act 2006 are still prima facie evidence of title to the shares. Article 24(5) asserts that certificates must have the company’s common seal affixed; by virtue of section 44 of the Companies Act 2006, if the company will execute all share certificates by signature29, the provision may be removed or adapted (see precedent A5). Careful drafting may be required if article 21 (All shares to be fully paid up) is considered for amendment, to include part paid shares; as article 24(2) (c) indicates, shares are fully paid-up; article 21 and article 24(2)(c) would require deletion or amendment should anything other than fully paid-up shares be issued by the company. Section 769 certificates on allotment and section 776 certificates on transfer both specify a time limit of two months; article 24(1) can be amended to include the time frame required by the Companies Act 2006 (see precedent A6). Precedent A5 The following precedent clarifies the execution of share certificates: “Certificates must be executed in accordance with the Companies Acts.” Precedent A6 The following precedent specifies the time frame on issuing share certificates: “24. (1) The company must issue each shareholder, within two months of transfer or allotment, free of charge, with one or more certificates in respect of the shares which that shareholder holds.” 29 Companies Act 2006, s 44(2): “A document is validly executed by a company if it is signed on behalf of the company (a) by two authorised signatories, or (b) by a director of the company in the presence of a witness who attests the signature”.

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Article 24 Previous provisions Table A 1985: Regulation 6 6. Every member, upon becoming the holder of any shares, shall be entitled without payment to one certificate for all the shares of each class held by him (and, upon transferring a part of his holding of shares of any class, to a certificate for the balance of such holding) or several certificates each for one or more of his shares of any class, to a certificate for the balance of such holding) or several certificates each for one or more of his shares upon payment for every certificate after the first of such reasonable sum as the directors may determine. Every certificate shall be sealed with the seal and shall specify the number, class and distinguishing numbers (if any) of the shares to which it relates and the amount or respective amounts paid up thereon.The company shall not be bound to issue more than one certificate for shares held jointly by several persons and delivery of a certificate to one joint holder shall be a sufficient delivery to all of them. Table A 1948: Regulation 8 Table A 1929: Regulation 4 Table A 1908: Regulation 6 Table A 1906: Regulation 6 Table A 1862: Regulation 2 Table B 1856: Regulation 8

Article 25 Replacement share certificates 6B.26 25. (1) If a certificate issued in respect of a shareholder’s shares is– (a) damaged or defaced, or (b) said to be lost, stolen or destroyed, that shareholder is entitled to be issued with a replacement certificate in respect of the same shares. (2) A shareholder exercising the right to be issued with such a replacement certificate– (a) may at the same time exercise the right to be issued with a single certificate or separate certificates;

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(b) must return the certificate which is to be replaced to the company if it is damaged or defaced; and (c) must comply with such conditions as to evidence, indemnity and the payment of a reasonable fee as the directors decide.

Article 25 Analysis Article 25 describes the company rules on issuing replacement share certificates. The typical procedure, if a company is required to provide replacement certificates, is for the member to return the damaged or defaced certificates and provide the company with an indemnity, for example: “The original share certificate in respect of 100 Class A Ordinary shares in ABC Limited has been lost or destroyed.”

Article 25 Previous provisions Table A 1985: Regulation 7 7. If a share certificate is defaced, worn-out, lost or destroyed, it may be renewed on such terms (if any) as to evidence and indemnity and payment of the expenses reasonably incurred by the company in investigating evidence as the directors may determine but otherwise free of charge, and (in the case of defacement or wearing-out) on delivery up of the old certificate. Table A 1948: Regulation 9 Table A 1929: Regulation 5 Table A 1908: Regulation 7 Table A 1906: Regulation 7 Table A 1862: Regulations 2, 3 Table B 1856: Regulations 8, 9

Article 26 Share transfers 6B.27 26. (1) Shares may be transferred by means of an instrument of transfer in any usual form or any other form approved by the directors, which is executed by or on behalf of the transferor. (2) No fee may be charged for registering any instrument of transfer or other document relating to or affecting the title to any share. (3) The company may retain any instrument of transfer which is registered.

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(4) The transferor remains the holder of a share until the transferee’s name is entered in the register of members as holder of it. (5) The directors may refuse to register the transfer of a share, and if they do so, the instrument of transfer must be returned to the transferee with the notice of refusal unless they suspect that the proposed transfer may be fraudulent. Article 26 Analysis A company will require control over its shares and to whom they can be transferred. A conventional procedure used regularly by companies is to offer shares on a pre-emptive basis.The member wishing to dispose of their shareholding offers first refusal to other members, and this may include the company purchasing the shares, if the articles allow it. It is unlikely that any potential external purchaser would consider acquiring a minority shareholding; typically, a sale of a company would involve all members and the purchaser buying the company outright on terms favourable to majority and minority shareholders. On the basis that a minority shareholder prompted the company or its members to buy out the holding and employed the pre-emptive provisions (assuming they are drafted in the company’s constitution), funds may not be available to complete the transaction. A common occurrence where share buybacks and pre-emption rights cause difficulties for a company is on the death of a shareholder who has, by will or intestacy, allowed the shareholding to pass to his beneficiaries or executors. The following articles 27 and 28 provide guidance on transferring shares for a deceased member. It should be noted that shareholders ought to agree, on a rolling threeyear basis, the value of the members’ shares, on the assumption that any of them might die in that period. Once a fixed price is agreed, a cross-option agreement can be put in place, with the option of a life insurance policy on each member’s life to cover the share purchase from the beneficiary. There are a number of common circumstances that company directors ought to plan for and draft suitable precedents in the articles of association to prevent expensive litigation. Broadly, the following issues should be addressed on a regular basis and a suitable strategy implemented: ●●

The death of a member and cross-option agreements.

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Deadlocked company.

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Permitted transfers to family members.

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Voluntary transfers.

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Mandatory transfer for good and bad leavers.

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Please refer to Chapters 8.0 to 8.5 which provide a full discussion on the subject of avoiding litigation, share transfers and share sales. Article 26 Previous provisions Table A 1985: Regulations 23–28 23.The instrument of transfer of a share may be in any usual form or in any other form which the directors may approve and shall be executed by or on behalf of the transferor and, unless the share is fully paid, by or on behalf of the transferee. 24. The directors may refuse to register the transfer of a share which is not fully paid to a person of whom they do not approve and they may refuse to register the transfer of a share on which the company has a lien. They may also refuse to register a transfer unless– (a) it is lodged at the office or at such other place as the directors may appoint and is accompanied by the certificate for the shares to which it relates and such other evidence as the directors may reasonably require to show the right of the transferor to make the transfer; (b) it is in respect of only one class of shares; and (c) it is in favour of not more than four transferees. 25. If the directors refuse to register a transfer of a share, they shall within two months after the date on which the transfer was lodged with the company send to the transferee notice of the refusal. 26.The registration of transfers of shares or of transfers of any class of shares may be suspended at such times and for such periods (not exceeding thirty days in any year) as the directors may determine. 27. No fee shall be charged for the registration of any instrument of transfer or other document relating to or affecting the title to any share. 28.The company shall be entitled to retain any instrument of transfer which is registered, but any instrument of transfer which the directors refuse to register shall be returned to the person lodging it when notice of the refusal is given. Table A 1948: Regulations 22, 23, 24, 25, 26, 27, 28 Table A 1929: Regulations 17, 18, 19 Table A 1908: Regulations 18, 19, 20 Table A 1906: Regulations 18, 19, 20 Table A 1862: Regulations 8, 9, 10, 11 Table B 1856: Regulations 7, 9a, 14, 27

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Article 27 Transmission of shares 6B.28 27. (1) If title to a share passes to a transmittee, the company may only recognise the transmittee as having any title to that share. (2) A transmittee who produces such evidence of entitlement to shares as the directors may properly require– (a) may, subject to the articles, choose either to become the holder of those shares or to have them transferred to another person, and (b) subject to the articles, and pending any transfer of the shares to another person, has the same rights as the holder had. (3) But transmittees do not have the right to attend or vote at a general meeting, or agree to a proposed written resolution, in respect of shares to which they are entitled, by reason of the holder’s death or bankruptcy or otherwise, unless they become the holders of those shares. Article 27 Analysis The transmission of shares is concerned with the procedure when a person becomes entitled to a shareholding by the operation of law. In the majority of cases, transmission will occur on the death of the registered shareholder or if they become bankrupt. Transmission is the automatic transfer of a share for a particular legal reason. This will occur, for example, when a shareholder dies and leaves a will, and their shares will be automatically transferred to the executor of the will. When a shareholder dies without leaving a will, their shares will be automatically transferred to their administrator when the court grants the letters of administration appointing the administrator as their personal representative. If a shareholder is declared bankrupt, their shares will be transferred to their personal representative. All transfers, or request for transfers, are subject to the articles of association and, without express permission of the directors, may be refused. Article 27 Previous provisions Table A 1985: Regulation 29 29. If a member dies the survivor or survivors where he was a joint holder, and his personal representatives where he was a sole holder or the only survivor of joint holders, shall be the only persons recognised by the company as having any title to his interest; but nothing herein contained shall release the estate of a deceased member from any liability in respect of any share which had been jointly held by him. 138

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Table A 1948: Regulation 29 Table A 1929: Regulation 20 Table A 1908: Regulation 21 Table A 1906: Regulation 21 Table A 1862: Regulation 12 Table B 1856: Regulation 10

Article 28 Exercise of transmittees’ rights 6B.29 28. (1) Transmittees who wish to become the holders of shares to which they have become entitled must notify the company in writing of that wish. (2) If the transmittee wishes to have a share transferred to another person, the transmittee must execute an instrument of transfer in respect of it. (3) Any transfer made or executed under this article is to be treated as if it were made or executed by the person from whom the transmittee has derived rights in respect of the share, and as if the event which gave rise to the transmission had not occurred.

Article 28 Analysis The article allows the individual who becomes entitled to the shareholdings, either by death or an act of law, to elect to become a member themselves or another entity by executing an instrument of transfer. Article 28 Previous provisions Table A 1985: Regulation 30 30. A person becoming entitled to a share in consequence of the death or bankruptcy of a member may, upon such evidence being produced as the directors may properly require, elect either to become the holder of the share or to have some person nominated by him registered as the transferee. If he elects to become the holder he shall give notice to the company to that effect. If he elects to have another person registered he shall execute an instrument of transfer of the share to that person. All the articles relating to the transfer of shares shall apply to the notice or instrument of transfer as if it were an instrument of transfer executed by the member and the death or bankruptcy of the member had not occurred.

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Table A 1948: Regulations 30, 31 Table A 1929: Regulation 21 Table A 1908: Regulation 22 Table A 1906: Regulation 22 Table A 1862: Regulations 13, 14 Table B 1856: Regulations 11, 12, 13, 14

Article 29 Transmittees bound by prior notices 6B.30 29. If a notice is given to a shareholder in respect of shares and a transmittee is entitled to those shares, the transmittee is bound by the notice if it was given to the shareholder before the transmittee’s name has been entered in the register of members.

Article 29 Analysis This is a new article, the purpose of which is to ensure that the transfer provisions detailed in the articles of association are adhered to. Article 29 Previous provisions No previous provisions.

Article 30 Procedure for declaring dividends 6B.31 30. (1) The company may by ordinary resolution declare dividends, and the directors may decide to pay interim dividends. (2) A dividend must not be declared unless the directors have made a recommendation as to its amount. Such a dividend must not exceed the amount recommended by the directors. (3) No dividend may be declared or paid unless it is in accordance with shareholders’ respective rights. (4) Unless the shareholders’ resolution to declare or directors’ decision to pay a dividend, or the terms on which shares are issued, specify otherwise, it must be paid by reference to each shareholder’s holding of shares on the date of the resolution or decision to declare or pay it. 140

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(5) If the company’s share capital is divided into different classes, no interim dividend may be paid on shares carrying deferred or non-preferred rights if, at the time of payment, any preferential dividend is in arrear. (6) The directors may pay at intervals any dividend payable at a fixed rate if it appears to them that the profits available for distribution justify the payment. (7) If the directors act in good faith, they do not incur any liability to the holders of shares conferring preferred rights for any loss they may suffer by the lawful payment of an interim dividend on shares with deferred or non-preferred rights.

Article 30 Analysis Part 23 of the Companies Act 2006 provides statutory obligations to which the company must adhere when declaring dividends, in particular section 83030 which specifies that dividends can only be paid from profits. Article 30(1) provides precise terminology for the declaration and payment of dividends. Final dividends are declared by the company’s board of directors, based on the full year’s financial statements, and cannot be revoked by shareholders; an interim dividend can be paid out of surplus profits from any previous financial year, if recommended by the board. The final dividend is a debt of the company when declared; an interim dividend is a mere resolution to pay and does not create any obligation or debt; this allows the directors to revoke the interim dividend should they so wish (Potel v IRC31). Article 30 Previous provisions Table A 1985: Regulations 102, 103, 104 102. Subject to the provisions of the Act, the company may by ordinary resolution declare dividends in accordance with the respective rights of the members, but no dividend shall exceed the amount recommended by the directors. 103. Subject to the provisions of the Act, the directors may pay interim dividends if it appears to them that they are justified by the profits of the company available for distribution. If the share capital is divided into different classes, the directors may pay interim dividends on shares which confer deferred or non-preferred rights with regard to dividend as well as on shares which confer preferential rights with regard to dividend, but no

30 Companies Act 2006, s 830 (Distributions to be made only out of profits available for the purpose). 31 [1971] 2 All ER 504.

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interim dividend shall be paid on shares carrying deferred or non-preferred rights if, at the time of payment, any preferential dividend is in arrear. The directors may also pay at intervals settled by them any dividend payable at a fixed rate if it appears to them that the profits available for distribution justify the payment. Provided the directors act in good faith they shall not incur any liability to the holders of shares conferring preferred rights for any loss they may suffer by the lawful payment of an interim dividend on any shares having deferred or non-preferred rights. 104. Except as otherwise provided by the rights attached to shares, all dividends shall be declared and paid according to the amounts paid up on the shares on which the dividend is paid. All dividends shall be apportioned and paid proportionately to the amounts paid up on the shares during any portion or portions of the period in respect of which the dividend is paid; but, if any share is issued on terms providing that it shall rank for dividend as from a particular date, that share shall rank for dividend accordingly. Table A 1948: Regulations 114, 115, 118 Table A 1929: Regulations 89, 90, 92 Table A 1908: Regulations 95, 96, 98 Table A 1906: Regulations 95, 96, 98 Table A 1862: Regulation 72 Table B 1856: Regulations 63, 65

Article 31 Payment of dividends and other distributions 6B.32 31. (1) Where a dividend or other sum which is a distribution is payable in respect of a share, it must be paid by one or more of the following means– (a) transfer to a bank or building society account specified by the distribution recipient either in writing or as the directors may otherwise decide; (b) sending a cheque made payable to the distribution recipient by post to the distribution recipient at the distribution recipient’s registered address (if the distribution recipient is a holder of the share), or (in any other case) to an address specified by the distribution recipient either in writing or as the directors may otherwise decide; (c) sending a cheque made payable to such person by post to such person at such address as the distribution recipient has specified either in writing or as the directors may otherwise decide; or

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(d) any other means of payment as the directors agree with the distribution recipient either in writing or by such other means as the directors decide. (2) In the articles, “the distribution recipient” means, in respect of a share in respect of which a dividend or other sum is payable– (a) the holder of the share; or (b) if the share has two or more joint holders, whichever of them is named first in the register of members; or (c) if the holder is no longer entitled to the share by reason of death or bankruptcy, or otherwise by operation of law, the transmittee.

Article 31 Analysis The article outlines the company procedure for the physical payment of dividends. Article 31(1)(a) allows for electronic transfer of dividend payments; regulation 106 of Table A 1985 prescribed payment by cheque sent to the registered address of the person entitled to receive the payment. Article 31(1)(b) allows cheque payments to be sent to any address specified in writing; it is unlikely today that a small company would issue dividend payments by cheque; it was somewhat fortuitous, when the articles were drafted in 2005, that article 31(1)(d) allows any means of payment agreed between the directors and the recipient. The articles provide (without amendment) for payment using online money transfers or e-commerce payment systems such as Paypal or Google Wallet. Article 31(2)(c) relates to the previous articles 27 and 28 and affirms that dividends will be paid to the personal representative (in the case of a bankrupt) or executor (in the case of death), prior to any potential transfer. Article 31 Previous provisions Table A 1985: Regulation 106 106. Any dividend or other moneys payable in respect of a share may be paid by cheque sent by post to the registered address of the person entitled or, if two or more persons are the holders of the share or are jointly entitled to it by reason of the death or bankruptcy of the holder, to the registered address of that one of those persons who is first named in the register of members or to such person and to such address as the person or persons entitled may in writing direct. Every cheque shall be made payable to the order of the person or persons entitled or to such other person as the person or persons entitled may in writing direct and payment of the cheque shall be a good discharge to the company. Any joint holder or other person jointly entitled

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to a share as aforesaid may give receipts for any dividend or other moneys payable in respect of the share. Table A 1948: Regulation 121 Table A 1929: Regulations 94, 95 Table A 1908: Regulations 100, 101 Table A 1906: Regulation 76 Table A 1862: Regulation 66 Table B 1856: Regulation 67

Article 32 No interest on distributions 6B.33 32. The company may not pay interest on any dividend or other sum payable in respect of a share unless otherwise provided by– (a) the terms on which the share was issued, or (b) the provisions of another agreement between the holder of that share and the company32.

Article 32 Analysis The article states the common practice that interest is not payable on distributions. The Companies Act 2006 does not prevent interest being paid, and the article could be amended accordingly, to reflect any interest payments agreed between the company and the shareholder as per article 32(b). Article 32 Previous provisions Table A 1985: Regulation 107 107. No dividend or other moneys payable in respect of a share shall bear interest against the company unless otherwise provided by the rights attached to the share. Table A 1948: Regulation 122 Table A 1929: Regulation 96

32 Article 32(b) is a new regulation.

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Table A 1908: Regulation 102 Table A 1906: Regulation 102 Table A 1862: Regulation 77 Table B 1856: Regulation 68

Article 33 Unclaimed distributions 6B.34 33. (1) All dividends or other sums which are– (a) payable in respect of shares, and (b) unclaimed after having been declared or become payable, may be invested or otherwise made use of by the directors for the benefit of the company until claimed. (2) The payment of any such dividend or other sum into a separate account does not make the company a trustee in respect of it. (3) If– (a) twelve years have passed from the date on which a dividend or other sum became due for payment, and (b) the distribution recipient has not claimed it, the distribution recipient is no longer entitled to that dividend or other sum and it ceases to remain owing by the company.

Article 33 Analysis The article provides clarity between the company and the shareholder if dividend payments are unclaimed; as discussed in article 30, final dividends are a debt to the company, and unclaimed dividends would be reflected on the company’s balance sheet. Article 33(3)(a) allows the company to write off the debt after a period of 12 years. The Limitation Act 1980 provides that the time limit is generally six years; the sample model articles of association under the Companies Act 2006 state a 12-year period, and most companies allow for 12 years. It is possible to reduce the period for unclaimed dividends (but not shares) down to six years by amending the company’s articles of association.

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Unpaid dividends by UK companies in 2018 are a staggering £100 billion33. Public companies are keen to move the debt from their balance sheet; Rentokil Initial plc, whose unpaid dividends amount to £1 million, has instigated a novel strategy by adapting its articles of association and used unclaimed shares and unclaimed dividends to support good causes34. Article 33 Previous provisions Table A 1985: Regulation 108 108. Any dividend which has remained unclaimed for twelve years from the date when it became due for payment shall, if the directors so resolve, be forfeited and cease to remain owing by the company. Table A 1862: Regulation 76 Table B 1856: Regulation 67

Article 34 Non-cash distributions 6B.35 34. (1) Subject to the terms of issue of the share in question, the company may, by ordinary resolution on the recommendation of the directors, decide to pay all or part of a dividend or other distribution payable in respect of a share by transferring non-cash assets of equivalent value (including, without limitation, shares or other securities in any company). (2) For the purposes of paying a non-cash distribution, the directors may make whatever arrangements they think fit, including, where any difficulty arises regarding the distribution– (a) fixing the value of any assets; (b) paying cash to any distribution recipient on the basis of that value in order to adjust the rights of recipients; and (c) vesting any assets in trustees. Article 34 Analysis The article allows a distribution in specie, although a dividend ought to be paid in cash (Wood v Odessa Waterworks Co35). Where a dividend is declared in cash, but satisfied by a transfer of assets, it is called “dividend in specie”. 33 www.linkgroup.eu. 34 www.rentokil-initial.com/media/news-releases/news-2019/new-approach-puts-unclaimeddividends-and-shares-to-good-use.aspx. 35 (1889) 42 Ch D 636.

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A distribution in specie occurs where a company makes a distribution of an identified non-cash asset, such as without first declaring an amount in cash. Distributions in specie are detailed under section 845 of the Companies Act 2006. Both dividends in specie and distributions in specie must be made in accordance with Part 23 of the Companies Act 2006. Article 34 Previous provisions Table A 1985: Regulation 105 105.A general meeting declaring a dividend may, upon the recommendation of the directors, direct that it shall be satisfied wholly or partly by the distribution of assets and, where any difficulty arises in regard to the distribution, the directors may settle the same and in particular may issue fractional certificates and fix the value for distribution of any assets and may determine that cash shall be paid to any member upon the footing of the value so fixed in order to adjust the rights of members and may vest any assets in trustees. Table A 1948: Regulation 120

Article 35 Waiver of distributions 6B.36 35. Distribution recipients may waive their entitlement to a dividend or other distribution payable in respect of a share by giving the company notice in writing to that effect, but if– (a) the share has more than one holder, or (b) more than one person is entitled to the share, whether by reason of the death or bankruptcy of one or more joint holders, or otherwise, the notice is not effective unless it is expressed to be given, and signed, by all the holders or persons otherwise entitled to the share.

Article 35 Analysis Article 35 is a new addition, with no previous regulation in Table A. Care ought to be taken in respect of waiver if the company has two or three directors and is a family concern.

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A strategy to avoid tax, by allowing all the dividends to be paid to a spouse, was explored in Buck v Revenue and Customs Comrs36; there must be a commercial reason for waiving rights to dividends by a member. The “arm’s length” test stipulates, “would the member have waived his rights to dividends if they had been operating at arm’s length?”. Article 35(b) relates to previous articles on transmission that, if entitlement to dividends could be claimed by multiple individuals, then permission and signature must be sought from all those with a valid claim. It should be noted that tax advice should be sought before consideration of the waiver of distributions. Article 35 Previous provisions No previous provisions.

Article 36 Authority to capitalise and appropriation of capitalised sums 6B.37 36. (1) Subject to the articles, the directors may, if they are so authorised by an ordinary resolution– (a) decide to capitalise any profits of the company (whether or not they are available for distribution) which are not required for paying a preferential dividend, or any sum standing to the credit of the company’s share premium account or capital redemption reserve; and (b) appropriate any sum which they so decide to capitalise (a “capitalised sum”) to the persons who would have been entitled to it if it were distributed by way of dividend (the “persons entitled”) and in the same proportions. (2) Capitalised sums must be applied– (a) on behalf of the persons entitled, and (b) in the same proportions as a dividend would have been distributed to them. (3) Any capitalised sum may be applied in paying up new shares of a nominal amount equal to the capitalised sum which are then allotted credited as fully paid to the persons entitled or as they may direct.

36 [2009] STC (SCD) 6.

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(4) A capitalised sum which was appropriated from profits available for distribution may be applied in paying up new debentures of the company which are then allotted credited as fully paid to the persons entitled or as they may direct. (5) Subject to the articles the directors may– (a) apply capitalised sums in accordance with paragraphs (3) and (4) partly in one way and partly in another; (b) make such arrangements as they think fit to deal with shares or debentures becoming distributable in fractions under this article (including the issuing of fractional certificates or the making of cash payments); and (c) authorise any person to enter into an agreement with the company on behalf of all the persons entitled which is binding on them in respect of the allotment of shares and debentures to them under this article. Article 36 Analysis The article and its provisions allow the company, by ordinary resolution, to capitalise on profits by converting the company’s retained earnings into capital stock. The capitalisation of profits process usually involves issuing bonus shares to existing shareholders. This allocation is achieved by issuing shares in proportion to the existing members’ shareholdings. Article 36 Previous provisions Table A 1985: Regulation 110 110. The directors may with the authority of an ordinary resolution of the company– (a) subject as hereinafter provided, resolve to capitalise any undivided profits of the company not required for paying any preferential dividend (whether or not they are available for distribution) or any sum standing to the credit of the company’s share premium account or capital redemption reserve; (b) appropriate the sum resolved to be capitalised to the members who would have been entitled to it if it were distributed by way of dividend and in the same proportions and apply such sum on their behalf either in or towards paying up the amounts, if any, for the time being unpaid on any shares held by them respectively, or in paying up in full unissued shares or debentures of the company of a nominal amount equal to that sum, and allot the shares or debentures credited as fully paid to those members, or as they may direct, in those proportions, or partly in one way and partly in the other: but the share premium account, the capital redemption reserve, and any profits which are not

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available for distribution may, for the purposes of this regulation, only be applied in paying up unissued shares to be allotted to members credited as fully paid; (c) make such provision by the issue of fractional certificates or by payment in cash or otherwise as they determine in the case of shares or debentures becoming distributable under this regulation in fractions; and (d) authorise any person to enter on behalf of all the members concerned into an agreement with the company providing for the allotment to them respectively, credited as fully paid, of any shares or debentures to which they are entitled upon such capitalisation, any agreement made under such authority being binding on all such members. Table A 1948: Regulations 128, 129 Table A 1929: Regulation 81 Table A 1908: Regulation 87 Table A 1906: Regulation 87 Table A 1862: Regulation 66 Table B 1856: Regulation 55

Part 4 Decision-making by shareholders Article 37 Attendance and speaking at general meetings 6B.38 37. (1) A person is able to exercise the right to speak at a general meeting when that person is in a position to communicate to all those attending the meeting, during the meeting, any information or opinions which that person has on the business of the meeting. (2) A person is able to exercise the right to vote at a general meeting when– (a) that person is able to vote, during the meeting, on resolutions put to the vote at the meeting, and (b) that person’s vote can be taken into account in determining whether or not such resolutions are passed at the same time as the votes of all the other persons attending the meeting. (3) The directors may make whatever arrangements they consider appropriate to enable those attending a general meeting to exercise their rights to speak or vote at it. 150

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(4) In determining attendance at a general meeting, it is immaterial whether any two or more members attending it are in the same place as each other. (5) Two or more persons who are not in the same place as each other attend a general meeting if their circumstances are such that if they have (or were to have) rights to speak and vote at that meeting, they are (or would be) able to exercise them. Article 37 Analysis Article 37, a new provision, builds on the general assumption that modern companies require the board of directors to have flexibility in how they conduct meetings. Broadly, with the advent of technology it is envisaged that the board will not always be present in a room at the same location. Article 37(3) allows for directors who may have disabilities that may impede formal communication. Article 37 Previous provisions No previous provisions.

Article 38 Quorum for general meetings 6B.39 38. No business other than the appointment of the chairman of the meeting is to be transacted at a general meeting if the persons attending it do not constitute a quorum. Article 38 Analysis Article 11 outlines the requirements for two directors to form a valid quorum, and it should be noted that the company may alter the provisions in the articles to specify how a quorum is to be formed. Section 318(2) of the Companies Act 2006 allows the articles to override this specific section of the Act. The persons who constitute the quorum are not limited to its members. Section 318 of the Companies Act 2006 stipulates a “qualifying person”, which means a member, a person appointed by proxy, or a corporate representative (as defined in section 323 of the Companies Act 2006). If the meeting is inquorate, it must be adjourned. If a company has only one member, then their attendance at a meeting is a quorum (Companies Act 2006, s 318(1)).

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Article 38 Previous provisions Table A 1985: Regulation 40 40. No business shall be transacted at any meeting unless a quorum is present. Save in the case of a company with a single member two persons entitled to vote upon the business to be transacted, each being a member or a proxy for a member or a duly authorised representative of a corporation, shall be a quorum. Table A 1948: Regulation 53 Table A 1929: Regulation 45 Table A 1908: Regulation 51 Table A 1906: Regulation 51 Table A 1862: Regulation 37 Table B 1856: Regulation 31

Article 39 Chairing general meetings 6B.40 39. (1) If the directors have appointed a chairman, the chairman shall chair general meetings if present and willing to do so. (2) If the directors have not appointed a chairman, or if the chairman is unwilling to chair the meeting or is not present within ten minutes of the time at which a meeting was due to start– (a) the directors present, or (b) (if no directors are present), the meeting, must appoint a director or shareholder to chair the meeting, and the appointment of the chairman of the meeting must be the first business of the meeting. (3) The person chairing a meeting in accordance with this article is referred to as “the chairman of the meeting”.

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Article 39 Analysis Article 39 confers the provisions in the Companies Act 2006 which allow the company to appoint a chairman37. It is allowable under the Act to draft provisions in the company constitution that state who may or may not be chairman38. The powers conferred by the constitution are vested in the directors alone, and the shareholders (or members) cannot interfere with the process of appointing a chairman (Clarke v Workman39). Article 39 Previous provisions Table A 1985: Regulations 42, 43 42. The chairman, if any, of the board of directors or in his absence some other director nominated by the directors shall preside as chairman of the meeting, but if neither the chairman nor such other director (if any) be present within fifteen minutes after the time appointed for holding the meeting and willing to act, the directors present shall elect one of their number to be chairman and, if there is only one director present and willing to act, he shall be chairman. 43. If no director is willing to act as chairman, or if no director is present within fifteen minutes after the time appointed for holding the meeting, the members present and entitled to vote shall choose one of their number to be chairman. Table A 1948: Regulations 55, 56 Table A 1929: Regulations 47, 48 Table A 1908: Regulations 53, 54 Table A 1906: Regulations 53, 54 Table A 1862: Regulations 39, 40 Table B 1856: Regulations 33, 34 Alternative precedent for companies with a single director: “55. Quorum for general meetings 55.1 No business other than the appointment of the Chairman of the Meeting is to be transacted at a general meeting if the persons attending it do not constitute a quorum. 37 Companies Act 2006, s 319 (Chairman of meeting): “(1) A member may be elected to be the chairman of a general meeting by a resolution of the company passed at the meeting”. 38 Companies Act 2006, s 319(2): “Subsection (1) is subject to any provision of the company’s articles that states who may or may not be chairman”. 39 [1920] 1 IR 107.

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55.2 If the Company has only one Shareholder, one Qualifying Person in attendance at a general meeting is a quorum. 55.3 If the Company has more than one Shareholder, two Qualifying Persons in attendance at a general meeting are a quorum, unless each is a Qualifying Person only because he is appointed as proxy of a Shareholder in relation to that meeting and they are proxies of the same Shareholder. [However, if a general meeting is adjourned pursuant to Article 54.1 and at the adjourned meeting a quorum is not present within 30 minutes from the time appointed for it, the Qualifying Person or Qualifying Persons present shall constitute a quorum.]”

Article 40 Attendance and speaking by directors and non-shareholders 6B.41 40. (1) Directors may attend and speak at general meetings, whether or not they are shareholders. (2) The chairman of the meeting may permit other persons who are not– (a) shareholders of the company, or (b) otherwise entitled to exercise the rights of shareholders in relation to general meetings, to attend and speak at a general meeting.

Article 40 Analysis The provision in article 40 allows for accountants, solicitors or other professionals to speak at general meetings. Article 40 Previous provisions Table A 1985: Regulation 44 44. A director shall, notwithstanding that he is not a member, be entitled to attend and speak at any general meeting and at any separate meeting of the holders of any class of shares in the company40.

40 Article 40 was first incorporated into Table A in 1985.

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Article 41 Adjournment 6B.42 41. (1) If the persons attending a general meeting within half an hour of the time at which the meeting was due to start do not constitute a quorum, or if during a meeting a quorum ceases to be present, the chairman of the meeting must adjourn it. (2) The chairman of the meeting may adjourn a general meeting at which a quorum is present if– (a) the meeting consents to an adjournment, or (b) it appears to the chairman of the meeting that an adjournment is necessary to protect the safety of any person attending the meeting or ensure that the business of the meeting is conducted in an orderly manner. (3) The chairman of the meeting must adjourn a general meeting if directed to do so by the meeting. (4) When adjourning a general meeting, the chairman of the meeting must– (a) either specify the time and place to which it is adjourned or state that it is to continue at a time and place to be fixed by the directors, and (b) have regard to any directions as to the time and place of any adjournment which have been given by the meeting. (5) If the continuation of an adjourned meeting is to take place more than 14 days after it was adjourned, the company must give at least 7 clear days’ notice of it (that is, excluding the day of the adjourned meeting and the day on which the notice is given)– (a) to the same persons to whom notice of the company’s general meetings is required to be given, and (b) containing the same information which such notice is required to contain. (6) No business may be transacted at an adjourned general meeting which could not properly have been transacted at the meeting if the adjournment had not taken place.

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Article 41 Analysis With the exception of section 33241, the Companies Act 2006 says very little on the issue of adjournment of meetings, and so article 41 is based on common law principles. If considering an adjournment, the chairman ought not to act alone (even with powers conferred by the articles); instead, he should gain consent or direction from the members present. The decision to adjourn ought to be decided on the facts at hand and the urgency of the matter (Byng v London Life Association Ltd42). Article 41(1) allows for automatic adjournment in the event that a meeting fails to form a quorum; the Companies Act 2006 requires two qualifying persons (unless the company has only one member43). Disorderly meetings are addressed in article 41(2); the chairman has a residual common law power of adjournment, and generally the powers are vested in the meeting as per article 41(3). It should be noted that, if the chairman has instigated the disorder by his actions, any adjournment is deemed invalid; concerning disorderly meetings (without violence), any adjournment ought to be short, with all efforts made to restore order (John v Rees and Others44). Article 41(4)–(5) outlines the requirement of seven days’ notice of the adjourned meeting which is to take place 14 days after the adjournment. Article 41 Previous provisions Table A 1985: Regulations 41, 45 41. If such a quorum is not present within half an hour from the time appointed for the meeting, or if during a meeting such a quorum ceases to be present, the meeting shall stand adjourned to the same day in the next week at the same time and place or to such time and place as the directors may determine. 45. The chairman may, with the consent of a meeting at which a quorum is present (and shall if so directed by the meeting), adjourn the meeting from time to time and from place to place, but no business shall be transacted at an adjourned meeting other than business which might properly have been transacted at the meeting had the adjournment not taken place.When a meeting is adjourned for fourteen days or more, at least seven clear days’ notice shall be given specifying the time and place of the adjourned meeting and the general nature of the business to be transacted. Otherwise it shall not be necessary to give any such notice. 41 Companies Act 2006, s 332 (Resolution passed at adjourned meeting): “Where a resolution is passed at an adjourned meeting of a company, the resolution is for all purposes to be treated as having been passed on the date on which it was in fact passed, and is not to be deemed passed on any earlier date”. 42 [1990] Ch 170. 43 Companies Act 2006, s 318 (Quorum at meeting). 44 [1969] 2 All ER 274.

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Table A 1948: Regulations 54, 57 Table A 1929: Regulations 46, 49 Table A 1908: Regulations 52, 55 Table A 1906: Regulations 52, 55 Table A 1862: Regulations 38, 41 Table B 1856: Regulations 32, 35

Article 42 Voting: general 6B.43 42. A resolution put to the vote of a general meeting must be decided on a show of hands unless a poll is duly demanded in accordance with the articles.

Article 42 Analysis The rules on voting are provided by section 284 of the Companies Act 2006, which outlines that each member has one vote in the case of a written resolution, show of hands or poll. The company is free to assign voting rights45 as it sees fit to any share classes that it may have created; article 42 would require adaptation if different share classes held unique voting rights. Article 42 Previous provisions Table A 1985: Regulation 47 47. Unless a poll is duly demanded a declaration by the chairman that a resolution has been carried or carried unanimously, or by a particular majority, or lost, or not carried by a particular majority and an entry to that effect in the minutes of the meeting shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favour of or against the resolution. Table A 1948: Regulation 58 Table A 1929: Regulation 50 Table A 1908: Regulation 56

45 Companies Act 2006, s 284(4): “The provisions of this section have effect subject to any provision of the company’s articles”.

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Table A 1906: Regulation 56 Table A 1862: Regulation 42 Table B 1856: Regulation 36

Article 43 Errors and disputes 6B.44 43. (1) No objection may be raised to the qualification of any person voting at a general meeting except at the meeting or adjourned meeting at which the vote objected to is tendered, and every vote not disallowed at the meeting is valid. (2) Any such objection must be referred to the chairman of the meeting, whose decision is final.

Article 43 Analysis Article 43 allows the chairman a decisive final decision on entitlement to vote at general meetings. Objections on the validity to vote must be raised at the meeting or adjourned meeting. Adapting the article may lead to disputes without the powers of a final decision vested in the chairman. Article 43 Previous provisions Table A 1985: Regulation 58 58. No objection shall be raised to the qualification of any voter except at the meeting or adjourned meeting at which the vote objected to is tendered, and every vote not disallowed at the meeting shall be valid. Any objection made in due time shall be referred to the chairman whose decision shall be final and conclusive. Table A 1948: Regulation 66

Article 44 Poll votes 6B.45 44. (1) A poll on a resolution may be demanded– (a) in advance of the general meeting where it is to be put to the vote, or 158

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(b) at a general meeting, either before a show of hands on that resolution or immediately after the result of a show of hands on that resolution is declared. (2) A poll may be demanded by– (a) the chairman of the meeting; (b) the directors; (c) two or more persons having the right to vote on the resolution; or (d) a person or persons representing not less than one tenth of the total voting rights of all the shareholders having the right to vote on the resolution. (3) A demand for a poll may be withdrawn if– (a) the poll has not yet been taken, and (b) the chairman of the meeting consents to the withdrawal. (4) Polls must be taken immediately and in such manner as the chairman of the meeting directs.

Article 44 Analysis The general position outlined in article 42 is that votes at general meetings are decided on a show of hands. If the vote is unclear or possibly disputed, then a poll may be called. Article 44 summarises the rules and describes who has the right to demand a poll. The provisions are founded on section 321 of the Companies Act 2006, and therefore members are provided statutory rights to call a poll, regardless of the company’s constitution. Any latitude for adapting the articles is somewhat curtailed by the provisions in the Act which, without ambiguity, state that any provisions that exclude rights to demand a poll are void, with the exception of electing a chairman or adjournment of a meeting46. Article 44 Previous provisions Table A 1985: Regulations 46, 48, 49 46. A resolution put to the vote of a meeting shall be decided on a show of hands unless before, or on the declaration of the result of, the show of hands

46 Companies Act 2006, s 321(1).

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a poll is duly demanded. Subject to the provisions of the Act, a poll may be demanded– (a) by the chairman; or (b) by at least two members having the right to vote at the meeting; or (c) by a member or members representing not less than one-tenth of the total voting rights of all the members having the right to vote at the meeting; or (d) by a member or members holding shares conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the shares conferring that right; and a demand by a person as proxy for a member shall be the same as a demand by the member. 48. The demand for a poll may, before the poll is taken, be withdrawn but only with the consent of the chairman and a demand so withdrawn shall not be taken to have invalidated the result of a show of hands declared before the demand was made. 49. A poll shall be taken as the chairman directs and he may appoint scrutineers (who need not be members) and fix a time and place for declaring the result of the poll. The result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. Table A 1948: Regulations 58, 59 Table A 1929: Regulations 50, 51 Table A 1908: Regulations 56, 57 Table A 1906: Regulations 56, 57 Table A 1862: Regulations 42, 43 Table B 1856: Regulations 36, 37

Article 45 Content of proxy notices 6B.46 45. (1) Proxies may only validly be appointed by a notice in writing (a “proxy notice”) which– (a) states the name and address of the shareholder appointing the proxy; (b) identifies the person appointed to be that shareholder’s proxy and the general meeting in relation to which that person is appointed;

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(c) is signed by or on behalf of the shareholder appointing the proxy, or is authenticated in such manner as the directors may determine; and (d) is delivered to the company in accordance with the articles and any instructions contained in the notice of the general meeting to which they relate. (2) The company may require proxy notices to be delivered in a particular form, and may specify different forms for different purposes. (3) Proxy notices may specify how the proxy appointed under them is to vote (or that the proxy is to abstain from voting) on one or more resolutions. (4) Unless a proxy notice indicates otherwise, it must be treated as– (a) allowing the person appointed under it as a proxy discretion as to how to vote on any ancillary or procedural resolutions put to the meeting, and (b) appointing that person as a proxy in relation to any adjournment of the general meeting to which it relates as well as the meeting itself. Article 45 Analysis A proxy may attend and vote at general meetings in place of a member of the company. The Companies Act 2006 provides statutory rights to appoint proxies by virtue of the provisions defined in sections 324–331. Article 45 Previous provisions Table A 1985: Regulations 60, 61, 62 60. The appointment of a proxy shall be executed by or on behalf of the appointor and shall be in the following form (or in a form as near thereto as circumstances allow or in any other form which is usual or which the directors may approve)– “ … … …… PLC/Limited …… … … I/We, … … …… , of …… …… , being a member/members of the abovenamed company, hereby appoint …… …… of …… …… , or failing him, …… …… of …… …… , as my/our proxy to vote in my/our name[s] and on my/our behalf at the general meeting of the company to be held on …… …… 19 …… … … , and at any adjournment thereof. Signed on … … …… 19 …… … … .”.

61. Where it is desired to afford members an opportunity of instructing the proxy how he shall act the appointment of a proxy shall be in the following

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form (or in a form as near thereto as circumstances allow or in any other form which is usual or which the directors may approve)– “ … … …… PLC/Limited …… … … I/We, … … …… , of …… …… , being a member/members of the abovenamed company, hereby appoint …… …… of …… …… , or failing him …… …… of …… …… , as my/our proxy to vote in my/our name[s] and on my/ our behalf at the general meeting of the company, to be held on …… …… 19 …… … … , and at any adjournment thereof. This form is to be used in respect of the resolutions mentioned below as ­follows: Resolution No. 1 *for *against Resolution No. 2 *for *against. *Strike out ­whichever is not desired. Unless otherwise instructed, the proxy may vote as he thinks fit or abstain from voting. Signed this … … …… day of …… …… 19 …… … … .”.

62. The appointment of a proxy and any authority under which it is executed or a copy of such authority certified notarially or in some other way approved by the directors may– (a) in the case of an instrument in writing be deposited at the office or at such other place within the United kingdom as is specified in the notice convening the meeting or in any instrument of proxy sent out by the company in relation to the meeting not less than 48 hours before the time for holding the meeting or adjourned meeting at which the person named in the instrument proposes to vote; or (aa) in the case of an appointment contained in an electronic communication, where an address has been specified for the purpose of receiving electronic communications– (ii) in the notice convening the meeting, or (iii) in any instrument of proxy sent out by the company in relation to the meeting, or (iv) in any invitation contained in an electronic communication to appoint a proxy issued by the company in relation to the meeting, be received at such address not less than 48 hours before the time for holding the meeting or adjourned meeting at which the person named in the appointment proposes to vote; (b) in the case of a poll taken more than 48 hours after it is demanded, be deposited or received as aforesaid after the poll has been demanded and not less than 24 hours before the time appointed for the taking of the poll; or

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(c) where the poll is not taken forthwith but is taken not more than 48 hours after it was demanded, be delivered at the meeting at which the poll was demanded to the chairman or to the secretary or to any director; and an appointment of proxy which is not deposited, delivered or received in a manner so permitted shall be invalid. In this regulation and the next, “address”, in relation to electronic communications, includes any number or address used for the purposes of such communications. Table A 1948: Regulations 68, 69, 70, 71 Table A 1929: Regulations 60, 59, 61 Table A 1908: Regulations 65, 66, 67 Table A 1906: Regulations 65, 66, 67 Table A 1862: Regulations 49, 50, 51 Table B 1856: Regulations 42, 43

Article 46 Delivery of proxy notices 6B.47 46. (1) A person who is entitled to attend, speak or vote (either on a show of hands or on a poll) at a general meeting remains so entitled in respect of that meeting or any adjournment of it, even though a valid proxy notice has been delivered to the company by or on behalf of that person. (2) An appointment under a proxy notice may be revoked by delivering to the company a notice in writing given by or on behalf of the person by whom or on whose behalf the proxy notice was given. (3) A notice revoking a proxy appointment only takes effect if it is delivered before the start of the meeting or adjourned meeting to which it relates. (4) If a proxy notice is not executed by the person appointing the proxy, it must be accompanied by written evidence of the authority of the person who executed it to execute it on the appointor’s behalf.

Article 46 Analysis Article 46 is somewhat mistitled, as it describes the revocation of proxy notices and the procedures thereof.

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Article 41(1) reiterates statutory rights under the Act47. Article 41(2) again mirrors the Companies Act48, requiring written submissions to enable revocation. It should be noted, in accordance with section 330(6) of the Companies Act 2006, that the articles cannot be modified to reduce the timeframes for delivery of any notice of termination to below the statutory 48 hours for meetings49. The articles may be adapted to nominate a specific person to whom notices ought to be given50, which replaces the relatively vague description of “company” in the article above. Article 46 Previous provisions Table A 1985: Regulation 62 62.The appointment of a proxy and any authority under which it is executed or a copy of such authority certified notarially or in some other way approved by the directors may– (a) in the case of an instrument in writing be deposited at the office or at such other place within the United kingdom as is specified in the notice convening the meeting or in any instrument of proxy sent out by the company in relation to the meeting not less than 48 hours before the time for holding the meeting or adjourned meeting at which the person named in the instrument proposes to vote; or (aa) in the case of an appointment contained in an electronic communication, where an address has been specified for the purpose of receiving electronic communications– (ii) in the notice convening the meeting, or (iii) in any instrument of proxy sent out by the company in relation to the meeting, or (iv) in any invitation contained in an electronic communication to appoint a proxy issued by the company in relation to the meeting, be received at such address not less than 48 hours before the time for holding the meeting or adjourned meeting at which the person named in the appointment proposes to vote; 47 Companies Act 2006, s 330(2). 48 Companies Act 2006, s 330 (Notice required of termination of proxy’s authority): “(A1) In the case of a traded company the termination of the authority of a person to act as proxy must be notified to the company in writing”. 49 Companies Act 2006, s 330:“(6) Any provision of the company’s articles is void in so far as it would have the effect of requiring any such appointment or document to be received by the company or another person earlier than the following time– (a) (b)

in the case of a meeting or adjourned meeting, 48 hours before the time for holding the meeting or adjourned meeting; in the case of a poll taken more than 48 hours after it was demanded, 24 hours before the time appointed for the taking of the poll;”.

50 Companies Act 2006, s 330(4).

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(b) in the case of a poll taken more than 48 hours after it is demanded, be deposited or received as aforesaid after the poll has been demanded and not less than 24 hours before the time appointed for the taking of the poll; or (c) where the poll is not taken forthwith but is taken not more than 48 hours after it was demanded, be delivered at the meeting at which the poll was demanded to the chairman or to the secretary or to any director; and an appointment of proxy which is not deposited, delivered or received in a manner so permitted shall be invalid. In this regulation and the next, “address”, in relation to electronic communications, includes any number or address used for the purposes of such communications. Table A 1948: Regulation 69 Table A 1929: Regulation 60 Table A 1908: Regulation 66 Table A 1906: Regulation 66 Table A 1862: Regulation 50 Table B 1856: Regulation 43

Article 47 Amendments to resolutions 6B.48 47. (1) An ordinary resolution to be proposed at a general meeting may be amended by ordinary resolution if– (a) notice of the proposed amendment is given to the company in writing by a person entitled to vote at the general meeting at which it is to be proposed not less than 48 hours before the meeting is to take place (or such later time as the chairman of the meeting may determine), and (b) the proposed amendment does not, in the reasonable opinion of the chairman of the meeting, materially alter the scope of the resolution. (2) A special resolution to be proposed at a general meeting may be amended by ordinary resolution, if– (a) the chairman of the meeting proposes the amendment at the general meeting at which the resolution is to be proposed, and (b) the amendment does not go beyond what is necessary to correct a grammatical or other non-substantive error in the resolution. 165

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(3) If the chairman of the meeting, acting in good faith, wrongly decides that an amendment to a resolution is out of order, the chairman’s error does not invalidate the vote on that resolution.

Article 47 Analysis Article 47 is governed by common law principles, which provide guidance for amending resolutions at general meetings. In Betts & Co Ltd v Macnaghten51 the court decided that amendments can be made with some latitude to the original resolution proposed, as the notice must simply state the general nature of the business; this is reiterated in the Companies Act 200652. In addition, on the basis that an amendment is within the scope of the notice of the meeting, substantive changes are allowable. For example, a notice to appoint one new director, John Smith, does not prevent an amendment to appoint Jane Smith in his place. Article 47(1)(b) aligns to the common law and provides direction to the chairman. Article 47(3) is drafted with the court’s decision in mind (Henderson v Bank of Australasia53), and any error in good faith does not invalidate the result of the vote on the resolution; however, if the chairman acts improperly and refuses to accept an amendment, the vote on the resolution is void. Article 47 Previous provisions No previous provisions.

Part 5 Administrative arrangements Article 48 Means of communication to be used 6B.49 48. (1) Subject to the articles, anything sent or supplied by or to the company under the articles may be sent or supplied in any way in which the Companies Act 2006 provides for documents or information which are authorised or required by any provision of that Act to be sent or supplied by or to the company. (2) Subject to the articles, any notice or document to be sent or supplied to a director in connection with the taking of decisions by directors may also be

51 [1910] 1 Ch 430. 52 Companies Act 2006, s 311 (Contents of notices of meetings): “(2) Notice of a general meeting of a company must state the general nature of the business to be dealt with at the meeting”. 53 (1888) 40 Ch D 170.

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sent or supplied by the means by which that director has asked to be sent or supplied with such notices or documents for the time being. (3) A director may agree with the company that notices or documents sent to that director in a particular way are to be deemed to have been received within a specified time of their being sent, and for the specified time to be less than 48 hours.

Article 48 Analysis The Companies Act 2006 provides detailed provisions on the sending or supplying of documents or information54. Article 48(1) allows for technological advancements and does not restrict the methods by which a company may send documents. It should be noted that, if documents are sent electronically, members are entitled to receive the same information in hard copy without charge55; it is an offence if the company fails to comply with the member’s request. Article 48(2) allows the company to agree with directors the method of delivery in relation to documents and information when making decisions; this may encompass text messages,WhatsApp, or private messaging on social media. Article 48(3) allows the company to specify “deemed delivery” time scales, and section 1147 of the Companies Act 2006 specifies a standard 48 hours for electronic, post and website. The company may amend its articles to lessen the statutory 48 hours by virtue of section 114756. Article 48 Previous provisions No previous provisions.

Article 49 Company seals 6B.50 49. (1) Any common seal may only be used by the authority of the directors. (2) The directors may decide by what means and in what form any common seal is to be used.

54 Companies Act 2006, ss 1143–1148 (Sending or supplying documents or information). 55 Companies Act 2006, s 1145(1)-(5). 56 Companies Act 2006, s 1147: “(6)(a) in its application to documents or information sent or supplied by a company to its members, any contrary provision of the company’s articles;”.

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(3) Unless otherwise decided by the directors, if the company has a common seal and it is affixed to a document, the document must also be signed by at least one authorised person in the presence of a witness who attests the signature. (4) For the purposes of this article, an authorised person is– (a) any director of the company; (b) the company secretary (if any); or (c) any person authorised by the directors for the purpose of signing documents to which the common seal is applied.

Article 49 Analysis The Companies Act 2006 makes provision for the execution of documents57 which allows execution by affixing the company’s common seal. Companies tend to execute documents using authorised signatories58. The Act provides, by virtue of section 45(2)59, that a company is not required to execute documents by common seal; for clarity, the article should be removed if execution by signatory is the preferred method of the company. Article 49 Previous provisions Table A 1985: Regulation 101 101. The seal shall only be used by the authority of the directors or of a committee of directors authorised by the directors. The directors may determine who shall sign any instrument to which the seal is affixed and unless otherwise so determined it shall be signed by a director and by the secretary or by a second director. Table A 1948: Regulation 113 Table A 1929: Regulation 71

57 Companies Act 2006, s 44 (Execution of documents): “(1) Under the law of England and Wales or Northern Ireland a document is executed by a company– (a) (b)

by the affixing of its common seal, or by signature in accordance with the following provisions”.

58 Companies Act 2006, s 44(2). 59 Companies Act 2006, s 45(1): “A company may have a common seal, but need not have one”.

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Article 50 No right to inspect accounts and other records 6B.51 50. Except as provided by law or authorised by the directors or an ordinary resolution of the company, no person is entitled to inspect any of the company’s accounting or other records or documents merely by virtue of being a shareholder. Article 50 Analysis Article 50 precludes members’ interference with the running of a company by requiring detailed accounting data or documents. Members hold certain rights conferred under the Companies Act 2006 to inspect and require copies of certain documents60. Investors may require further provisions (by adapting or editing article 50) allowing access to detailed company or financial information, to which they would have no entitlement under the Companies Act 2006. Generally, these issues are dealt with by employing a shareholder agreement, as the details remain private, unlike the articles which are public record. Companies House provides information freely to members for inspection and covers the majority of requirements under the Act. Article 50 Previous provisions Table A 1985: Regulation 109 109. No member shall (as such) have any right of inspecting any accounting records or other book or document of the company except as conferred by statute or authorised by the directors or by ordinary resolution of the company. Table A 1948: Regulation 125 Table A 1929: Regulation 99

Article 51 Provision for employees on cessation of business 6B.52 51. The directors may decide to make provision for the benefit of persons employed or formerly employed by the company or any of its subsidiaries (other than a director or former director or shadow director) in connection with the cessation or transfer to any person of the whole or part of the undertaking of the company or that subsidiary. 60 Companies Act 2006, s 116 (Rights to inspect and require copies).

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Article 51 Analysis This article aligns with section 247(6) of the Companies Act 2006, which provides powers to make provision for the benefit of existing or former employees on winding up or sale. The directors must abide by the general rule of promoting the success of the company when considering making any provisions for benefits61. The article is subject to any further provisions detailed in the company’s constitution; these take precedence and must be complied with62. Payments must be authorised by resolution and paid from profits before winding up. Directors, existing or former, do not qualify as “persons employed or formerly employed by the company” as described in the article. Article 51 Previous provisions No previous provisions.

Article 52 Indemnity 6B.53 52. (1) Subject to paragraph (2), a relevant director of the company or an associated company may be indemnified out of the company’s assets against– (a) any liability incurred by that director in connection with any negligence, default, breach of duty or breach of trust in relation to the company or an associated company, (b) any liability incurred by that director in connection with the activities of the company or an associated company in its capacity as a trustee of an occupational pension scheme (as defined in section 235(6) of the Companies Act 2006), (c) any other liability incurred by that director as an officer of the company or an associated company. (2) This article does not authorise any indemnity which would be prohibited or rendered void by any provision of the Companies Acts or by any other provision of law.

61 Companies Act 2006, s 172. 62 Companies Act 2006, s 247(6).

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(3) In this article– (a) companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate, and (b) a “relevant director” means any director or former director of the company or an associated company.

Article 53 Insurance 6B.54 53. (1) The directors may decide to purchase and maintain insurance, at the expense of the company, for the benefit of any relevant director in respect of any relevant loss. (2) In this article– (a) a “relevant director” means any director or former director of the company or an associated company, (b) a “relevant loss” means any loss or liability which has been or may be incurred by a relevant director in connection with that director’s duties or powers in relation to the company, any associated company or any pension fund or employees’ share scheme of the company or associated company, and (c) companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate.

Articles 52 and 53 Analysis Companies are able to provide indemnities for directors and adapt article 52 as they see fit. Article 52(1) outlines that the company may pay for the insurance. English company law prohibits waivers or indemnification by contract or by means of the company’s constitution. Section 232(1) of the Companies Act 2006 affirms the rule of company law that introducing into the company’s constitution any provision that may waive liability, or indemnify any director, is void. In accordance with sections 232(2) and 233 and by contravention of any of the provisions, the company may indemnify the director for negligence, default, breach of duty or breach of trust. It ought to be noted that directors’

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and officers’ liability (D&O) insurers are unlikely to cover “negligence, default, breach of duty or breach of trust in relation to the company or an associated company”, as defined in the indemnity article, if any dishonesty has taken place. It could be argued that the article is improperly drafted; the government review initially omitted articles 52 and 53, stating that the raft of variations concerning indemnification was too wide, and companies ought to consider drafting special provisions to suit their circumstances. The latter approach would appear the better option. If the company fails to cover a director employing D&O insurance, and subsequently they are required to defend themselves from any criminal or civil proceedings in connection with any alleged negligence, default, breach of duty or breach of trust, the company without shareholder consent may make funds available to cover any legal expenditure. The loan is repayable to the company if the director is convicted or any judgment is made against them63. Article 52 Previous provisions Table A 1985: Regulation 118 118. Subject to the provisions of the Act but without prejudice to any indemnity to which a director may otherwise be entitled, every director or other officer or auditor of the company shall be indemnified out of the assets of the company against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favour or in which he is acquitted or in connection with any application in which relief is granted to him by the court from liability for negligence, default, breach of duty or breach of trust in relation to the affairs of the company. Article 53 Previous provisions Table A 1948: Regulation 136

63 Companies Act 2006, s 205(2)(a).

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Chapter 6C  Articles of Association for Not for Profit Companies General comments 6C.1 The not for profit company precedent is based upon the new model articles, model articles for private companies limited by guarantee, Schedule 2.

Key changes 6C.2 ●●

Numbering structure provides increased clarity; additions, deletion and variations have been made to improve the reading and understanding of the provisions.

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Provisions for electing a chair and other officers.

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The membership articles are extended to provide improved provisions for joining and leaving.

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Membership, rights to appeal.

Drafting assumptions 6C.3 ●●

The company is a private limited company limited by guarantee and incorporated in England and Wales under the Companies Act 2006.

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The company is not a registered charity.

●●

The company’s objects are restricted; companies incorporated prior to 1 October 2009 specified their objects in the memorandum of association, a separate document to the articles that restricted the activities that the company could undertake.The Companies Act 2006 allowed a company,

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by default, unrestricted objects.1 It is arguably good practice for a not for profit company to restrict its objects in the articles of association. ●●

The company may not appoint alternative directors.

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The model articles will not apply.

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The terms “directors”,2 “trustees” and “board”, or any other term to describe the governing body of the company, are company directors and therefore must comply with the Companies Act 2006. It should be noted that, if the company is a charity, the directors are deemed by law to be trustees.

Boiler plate clauses 6C.4 The following are generic provisions, commonly referred to as “boiler plate”. The provisions provide certain statements, specific actions or limitations to the articles of association. The clauses are typically simple to understand, do not interact with other clauses and can be inserted and amended without controversy.

Powers to represent the membership 6C.5 (a) The Company [Charity] represents the [membership] to other third parties or the general public on issues that positively or negatively impact the Company [Charity]. (b) The Company [Charity] may, individually or with other organisations, approved by the directors, seek to influence public opinion, make representations to local and central governmental bodies and institutions regarding the reform, development and implementation of appropriate policies, legislation and regulations, on matters that impact on the objects of the Company [Charity]. (c) Provided that and subject to the Companies Act 2006, all such activities shall be confined to those which an English and Welsh Company [Charity] may properly undertake and are in line with any guidance published by the Charity Commission.

1 s.31 Statement of company’s objects. (1) Unless a company’s articles specifically restrict the objects of the company, its objects are unrestricted. Company Act 2006. 2 The Companies Act 2006 defines a company director as “any person occupying the position of director, by whatever name called”.

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Not for profit 6C.6 (a) The Company is not established or conducted for private gain: any surplus or assets are used principally for the benefit of the community.

Powers 6C.7 (a) To further its objects the Company may do all such lawful things as may further the Company’s objects and, in particular, but, without limitation, may borrow or raise and secure the payment of money for any purpose including for the purposes of investment or of raising funds.

Irregularities 6C.8 (a) The proceedings at any meeting or on the taking of any poll or the passing of a written resolution or the making of any decision shall not be invalidated by reason of any accidental informality or irregularity. (b) This shall include any accidental omission to give, or any non-receipt of, notice or any want of qualification in any of the persons present or voting or by reason of any business being considered which is not referred to in the notice unless a provision of the Companies Acts specifies that such informality, irregularity or want of qualification shall invalidate it.

Winding up 6C.9 (a) If any property remains after the Company [Charity] has been wound up or dissolved (“residue property”) and the debts and liabilities have been satisfied it may not be paid to or distributed among the Members of the Company [Charity]. (b) Residue property must be given to some other organisation with similar objects to the [Company][Charity]. The organisation or organisations to benefit may be selected by special resolution of the [directors][trustees] at or before the time of winding up or dissolution. (c) The prior approval of the [Council][Associated body][Directors by special resolution] shall be required to voluntarily wind up the company. 175

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Dissolution (alternative) 6C.10 (a) The members may at any time before, and in expectation of, its dissolution resolve that any net assets of the [Company][Charity] after all its debts and liabilities have been paid, or provision has been made for them, shall on or before the dissolution of the Trust be applied or transferred to:

Charity Registration Number (if applicable):



Company Registration Number (if applicable):



Registered Office:

Reviewing and amending the Memorandum and Articles 6C.11 (a) The [Company][Charity] shall be required to review the provisions of the Articles of Association on a bi-yearly basis. Any amendment to the Articles of Association shall require the following: (b) the prior approval of [membership council][associated body][specific committee]; (c) the prior approval of the [local authority][regulatory body]; (d) a special resolution of the [directors][trustees]; and (e) such other approvals, consents and filings as may from time to time be required by the Companies Act 2006.

Conflicts of Interest – Declaration 6C.12 (a) The [directors][trustees] shall effect a register of Trustees’ interests. Subject to the articles and the Companies Act 2006, a [director] [trustee] must declare the nature and extent of any interest, direct or indirect, which he or she has in a proposed transaction or arrangement with the [Company][Charity] or in any transaction or arrangement entered into by the [Company][Charity] which has not previously been declared. (b) The Trustees shall also adopt (and may review and amend from time to time) a policy in relation to Conflicts of Interest.

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Code of Conduct 6C.13 (a) The [directors][trustees] shall establish rules that all members shall be required to observe (“code of conduct”), including, but not limited to, when members are participating in activities or at events that are administered or organised by the [club][association][charity][company]. (b) The code of conduct shall include rules and regulations, as the [directors] [trustees] see fit, from time to time, including the suspension or removal of any or all of the rights and privileges of membership, including the holding of office, in relation to the contravention of the code of conduct by a member. [For the avoidance of doubt, members shall not have a right of appeal.]

Model Articles for Private Companies Limited by Guarantee Article 1 Interpretation 6C.14 In the articles, unless the context requires otherwise— “articles” means the company’s articles of association; “bankruptcy” includes individual insolvency proceedings in a jurisdiction other than England and Wales or Northern Ireland which have an effect similar to that of bankruptcy; “chairman” has the meaning given in article 13; “chairman of the meeting” has the meaning given in article 26; “Companies Acts” means the Companies Acts (as defined in section 2 of the Companies Act 2006), in so far as they apply to the company; “company” shall include any corporation or other body corporate incorporated under the Companies Act 2006; “director” means a director of the company, and includes any person occupying the position of director, by whatever name called; “document” includes, unless otherwise specified, any document sent or supplied in electronic form; “electronic form” has the meaning given in section 1168 of the Companies Act 2006;

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“member” has the meaning given in section 112 of the Companies Act 2006; “ordinary resolution” has the meaning given in section 282 of the Companies Act 2006; “participate”, in relation to a directors’ meeting, has the meaning given in article 11; “person” includes a: natural person, corporate or unincorporated body, legal representative and trustee; “proxy notice” has the meaning given in article 32; “special resolution” has the meaning given in section 283 of the Companies Act 2006; “subsidiary” has the meaning given in section 1159 of the Companies Act 2006; and “writing” means the representation or reproduction of words, symbols or other information in a visible form by any method or combination of methods, whether sent or supplied in electronic form or otherwise. Unless the context otherwise requires, other words or expressions contained in these articles bear the same meaning as in the Companies Act 2006 as in force on the date when these articles become binding on the company. Words denoting the singular shall include the plural and vice versa; words denoting a gender shall include all genders unless the context otherwise requires; and references to these articles or any other document shall be construed as references to these articles, that provision or that document as in force and as amended from time to time. The terms “including”, “include”, “in particular” or any similar expression shall not limit the sense or application of any words preceding those terms. No right to inspect accounts and other records. Except as provided by law or authorised by the Board by ordinary resolution, no member of the club is entitled to request or inspect any: ●●

accounting records;

●●

board documents;

●●

membership information.

[The directors may decide to make provision for the benefit of persons employed or formerly employed by the club or any of its subsidiaries (other

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than a director or former director or shadow director) in connection with the cessation or transfer to any person of the whole or part of the undertaking of the company or that subsidiary.]

Article 2 Model articles shall not apply 6C.15 2.1 The model articles for private companies limited by guarantee as prescribed by the Companies Act 2006 shall not apply to the Company.

Article 3 Liability of members 6C.16 3.1 The liability of each member is limited to £1, being the amount that each member undertakes to contribute to the assets of the company in the event of its being wound up while he is a member or within one year after he ceases to be a member, for: (a) payment of the company’s debts and liabilities contracted before he ceases to be a member, (b) payment of the costs, charges and expenses of winding up, and (c) adjustment of the rights of the contributories among themselves.

Article 4 Directors’ general authority 6C.17 4.1 Subject to these articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company.

Article 5 Members’ reserve power 6C.18 5.1 The members may, by special resolution, direct the directors to take, or refrain from taking, specified action. 5.2 No such special resolution invalidates anything which the directors have done before the passing of the resolution.

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Article 6 Directors may delegate 6C.19 6.1 Subject to the articles, the directors may delegate any of the powers which are conferred on them under these articles: (a) to such person or committee; (b) by such means (including by power of attorney); (c) to such an extent; (d) in relation to such matters or territories; and (e) on such terms and conditions, as they think fit. 6.2 If the directors so specify, any such delegation may authorise further delegation of the directors’ powers by any person to whom they are delegated. 6.3 The directors may revoke any delegation as they see fit at any time in whole or part, or alter its terms and conditions.

Article 7 Committees 6C.20 7.1 Committees to which the directors delegate any of their powers must follow procedures which are based as far as they are applicable on those provisions of the articles which govern the taking of decisions by directors. 7.2 The directors may make rules of procedure for all or any committees, which prevail over rules derived from the articles if they are not consistent with them.

Article 8 Directors to take decisions collectively 6C.21 8.1 The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a unanimous decision taken in accordance with article 9.

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Article 9 Unanimous decisions 6C.22 9.1 A decision of the directors is taken in accordance with this article when all eligible directors indicate to each other by any means that they share a common view on a matter. 9.2 Such a decision may take the form of a resolution in writing, copies of which have been signed by each eligible director or to which each eligible director has otherwise indicated agreement in writing. 9.3 References in this article to eligible directors are to directors who would have been entitled to vote on the matter had it been proposed as a resolution at a directors’ meeting. 9.4 A decision may not be taken in accordance with this article if the eligible directors would not have formed a quorum at such a meeting.

Article 10 Calling a directors’ meeting 6C.23 10.1 Any director may call a directors’ meeting by giving notice of the meeting to the directors. 10.2 Notice of any directors’ meeting must indicate: (a) its proposed date and time; (b) where it is to take place; (c) if it is anticipated that directors participating in the meeting will not be in the same place, how it is proposed that they should communicate with each other during the meeting. 10.3 Notice of a directors’ meeting must be given to each director, but need not be in writing. 10.4 Notice of a directors’ meeting need not be given to directors who waive their entitlement to notice of that meeting, by giving notice to that effect to the company not more than 7 days after the date on which the meeting is held. Where such notice is given after the meeting has been held, that does not affect the validity of the meeting, or of any business conducted at it.

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Article 11 Participation in directors’ meetings 6C.24 11.1 Subject to the articles, directors participate in a directors’ meeting, or part of a directors’ meeting, when: (a) the meeting has been called and takes place in accordance with the articles, and (b) they can each communicate to the others any information or opinions they have on any particular item of the business of the meeting. 11.2 In determining whether directors are participating in a directors’ meeting, it is irrelevant where any director is or how they communicate with each other. 11.3 If all the directors participating in a meeting are not in the same place, they may decide that the meeting is to be treated as taking place wherever any of them is.

Article 12 Quorum for directors’ meetings 6C.25 12.1 At a directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting. 12.2 The quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two. 12.3 If the total number of directors for the time being is less than the quorum required, the directors must not take any decision other than a decision to appoint further directors or to call a general meeting so as to enable the members to appoint further directors.

Article 13 Chairing of directors’ meetings 6C.26 13.1 Subject to article 23, the directors may appoint a director to chair their meetings. 13.2 The person so appointed for the time being is known as the chairman. The directors may terminate the chairman’s appointment at any time.

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13.3 If the chairman is not participating in a directors’ meeting within ten minutes of the time at which it was to start, the participating directors must appoint one of themselves to chair it.

Article 14 Casting vote 6C.27 14.1 If the numbers of votes for and against a proposal are equal, the chairman or other director chairing the meeting has a casting vote. 14.2 But this does not apply if, in accordance with the articles, the chairman or other director is not to be counted as participating in the decisionmaking process for quorum or voting purposes.

Article 15 Situational conflicts of interest 6C.28 15.1 A director of the company must avoid a situation in which he can have a direct or indirect interest that conflicts or possibly may conflict with the interests of the company. 15.2 Any director in breach of article 15.1 is deemed a “conflicted director”.

Authorisation of Conflicts of Interest

15.3 Subject to the provisions of section 175 of the Companies Act 2006 and the provisions of this article the Directors may authorise a “conflicted director”. 15.4 An “authorisation” is effective only if: (a) any requirement as to the quorum at the meeting at which the matter is considered is met without counting the director in question or any other interested director, and (b) the matter was agreed to without their voting or would have been agreed to if their votes had not been counted. 15.5 In accordance with section 175 (5)(a) of the Companies Act 2006 in respect to a “conflicted director” who has proposed that the board of directors (“board authorisation”) authorise his conflicted interest, they may for the avoidance of doubt: (a) apply such terms and conditions as they see fit to any authorisation; (b) vary or terminate any authorisation at any time by the directors or committee as they see fit from time to time.

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Article 16 Transactional conflicts of interest 6C.29 16.1 If a “conflicted director” of the company is directly or indirectly interested in a proposed transaction or arrangement with the company he must declare the nature and extent of that interest to the other directors. 16.2 Subject to the provisions of section 177 and section 182 of the Companies Act 2006: (a) If a proposed decision of the directors is concerned with an actual or proposed transaction or arrangement with the company in which a director is interested, that director is not to be counted as participating in the decision-making process for quorum or voting purposes. 16.3 The “conflicted director” shall not be required to disclose to the company any benefit he or any of his Connected Persons derive as a result of any “authorised conflict”.

Article 17 Records of decisions to be kept 6C.30 17.1 The directors must ensure that the company keeps a record, in writing, for at least 10 years from the date of the decision recorded, of every unanimous or majority decision taken by the directors.

Article 18 Directors’ discretion to make further rules 6C.31 18.1 Subject to the articles, the directors may make any rule which they think fit about how they take decisions, and about how such rules are to be recorded or communicated to directors.

Appointments of directors Article 19 Methods of appointing directors 6C.32 19.1 Any person who is willing to act as a director, and is permitted by law to do so, may be appointed to be a director: (a) by ordinary resolution, or (b) by a decision of the directors. 184

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19.2 In any case where, as a result of death, the company has no members and no directors, the personal representatives of the last member to have died have the right, by notice in writing, to appoint a person to be a director. 19.3 For the purposes of paragraph (2), where 2 or more members die in circumstances rendering it uncertain who was the last to die, a younger member is deemed to have survived an older member.

Article 20 Termination of director’s appointment 6C.33 20.1 A person ceases to be a director as soon as: (a) that person ceases to be a director by virtue of any provision of the Companies Act 2006 or is prohibited from being a director by law; (b) a bankruptcy order is made against that person; (c) a composition is made with that person’s creditors generally in satisfaction of that person’s debts; (d) a registered medical practitioner who is treating that person gives a written opinion to the company stating that that person has become physically or mentally incapable of acting as a director and may remain so for more than three months; (e) notification is received by the company from the director that the director is resigning from office, and such resignation has taken effect in accordance with its terms.

Article 21 Directors’ remuneration 6C.34 21.1 Directors may undertake any services for the company that the directors decide. 21.2 Directors are entitled to such remuneration as the directors determine: (a) for their services to the company as directors; (b) for any other service which they undertake for the company. 21.3 Subject to the articles, a director’s remuneration may: (a) take any form, and include any arrangements in connection with the payment of a pension, allowance or gratuity, or any death, sickness or disability benefits, to or in respect of that director.

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(b) Unless the directors decide otherwise, directors’ remuneration accrues from day to day. (c) Unless the directors decide otherwise, directors are not accountable to the company for any remuneration which they receive as directors or other officers or employees of the company’s subsidiaries or of any other body corporate in which the company is interested.

Article 22 Directors’ expenses 6C.35 22.1 The company may pay any reasonable expenses which the directors properly incur in connection with their attendance at: (a) meetings of directors; (b) committees of directors; (c) general meetings; or (d) otherwise in connection with the exercise of their powers and the discharge of their responsibilities in relation to the company.

Appointments and elections Article 23 Appointments and elections 6C.36

Election of the Chairman

23.1 At the annual general meeting each year a Chairman will be elected in accordance with article 24. 23.2 The term of Chairman shall be for [2] years “board term”.The Chairman will have full voting rights subject to these articles. 23.3 A chairman shall not be eligible for re-election after the “board term” for a period of [5] years. 23.4 The board on the appointment of a chairman in accordance with article 24 shall 14 days after the date of the AGM appoint or revoke any “board position” by ordinary resolution from time to time as they see fit. For the avoidance of doubt “board position” means: (a) vice-chairman

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(b) secretary (c) treasurer together “board position”.

Article 24 Chairman Elections 6C.37 24.1 A voting member of the club may nominate another member “nominee” for any board position. 24.2 Nominations shall be made by the “nominee form” authorised by the board from time to time. 24.3 The board shall provide nominee forms to voting members at least [14] days prior to the agreed date of the annual general meeting. 24.4 Nominee forms shall be returned to the board [5] days prior to the “AGM”. 24.5 A nominee shall be a voting member of the club in good standing with a least [2] years continuous membership of the club. 24.6 If the board shall receive only one nomination then that person shall be appointed without election or the matter shall be put to board for election at the “AGM” on terms the directors agree.

Becoming and ceasing to be a member Article 25 Membership 6C.38 25.1 No person shall become a member of the company unless: (a) that person has completed an application for membership in a form approved by the directors, and (b) the board have approved the application. 25.2 The board may from time to time fix the levels of entrance fees and annual subscriptions to be paid by the different categories of members. 25.3 All members shall be subject to these articles and any other club rules authorised by the board.

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25.4 Any member whose [annual fee – subscription] is [2] months in arrears shall be deemed to have resigned from the club. 25.5 Any person ceasing to be a member forfeits all rights in relation to and claims upon the club, its property and its funds and has no right to the return of any part of his subscription.

Article 26 Termination of membership 6C.39 26.1 A member may withdraw from membership of the company by giving 7 days’ notice to the company in writing. (a) Membership is not transferable. (b) A person’s membership terminates when that person dies or ceases to exist. 26.2 The board shall at their discretion request a member withdraw from membership (“leaver”) immediately in writing (“leaving notice”). (a) The leaver shall within 14 days of receiving the leaving notice inform the board in writing they request a board or any committee to consider their position (“leaver committee”). 26.3 The leaver may: (a) attend the club premises or any other venue the board sees fit on the date and time of the leaver committee; (b) not use any club facilities (other than disabled facilities) on the day of his attendance at the leaver committee without the express permission of a member of the leaver committee; (c) present his case in person or by written submission; (d) at the discretion of the board, be allowed to attend the meeting with a third party for the purpose of support only. (e) No third party present at the meeting may give verbal or written submission. 26.4 In the event of any non-attendance at the leavers meeting without good reason the leaver shall be deemed to have resigned from the club. 26.5 On the closing of the written or verbal submission the leaver committee shall vote on the matter; (a) if the vote is carried the leaver shall be deemed to have resigned from the club.

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26.6 The leaver may within 14 days of the date of the leaver committee request in writing that an appeal be instigated and a full vote be put to a general meeting of the board. (a) For the avoidance of doubt the leaver shall have no rights to attend the general meeting or present any further written submissions. (b) The chairman or vice-chairman may prior to the general meeting request any further information he deems fit from the leaver or the leaver committee.

Organisation of general meetings Article 27 Attendance and speaking at general meetings 6C.40 27.1 A person is able to exercise the right to speak at a general meeting when that person is in a position to communicate to all those attending the meeting, during the meeting, any information or opinions which that person has on the business of the meeting. 27.2 A person is able to exercise the right to vote at a general meeting when: (a) that person is able to vote, during the meeting, on resolutions put to the vote at the meeting, and (b) that person’s vote can be taken into account in determining whether or not such resolutions are passed at the same time as the votes of all the other persons attending the meeting. 27.3 The directors may make whatever arrangements they consider appropriate to enable those attending a general meeting to exercise their rights to speak or vote at it. 27.4 In determining attendance at a general meeting, it is immaterial whether any two or more members attending it are in the same place as each other. 27.5 Two or more persons who are not in the same place as each other attend a general meeting if their circumstances are such that if they have (or were to have) rights to speak and vote at that meeting, they are (or would be) able to exercise them.

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Article 28 Quorum for general meetings 6C.41 28.1 No business other than the appointment of the chairman of the meeting is to be transacted at a general meeting if the persons attending it do not constitute a quorum.

Article 29 Chairing general meetings 6C.42 29.1 The chairman shall chair general meetings if present and willing to do so. 29.2 If the directors have not appointed a chairman, or if the chairman is unwilling to chair the meeting or is not present within ten minutes of the time at which a meeting was due to start: (a) the directors present, or (b) (if no directors are present), at the meeting, they must appoint a director or member to chair the meeting, and the appointment of the chairman of the meeting must be the first business of the meeting. 29.3 The person chairing a meeting in accordance with this article is referred to as “the chairman of the meeting”.

Article 30 Attendance and speaking by directors and non-members 6C.43 30.1 Directors may attend and speak at general meetings, whether or not they are members. 30.2 The chairman of the meeting may permit other persons who are not members of the company to attend and speak at a general meeting.

Article 31 Adjournment 6C.44 31.1 If the persons attending a general meeting within half an hour of the time at which the meeting was due to start do not constitute a quorum, or if during a meeting a quorum ceases to be present, the chairman of the meeting must adjourn it.

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31.2 The chairman of the meeting may adjourn a general meeting at which a quorum is present if: (a) the meeting consents to an adjournment, or (b) it appears to the chairman of the meeting that an adjournment is necessary to protect the safety of any person attending the meeting or ensure that the business of the meeting is conducted in an orderly manner. 31.3 The chairman of the meeting must adjourn a general meeting if directed to do so by the meeting. 31.4 When adjourning a general meeting, the chairman of the meeting must: (a) either specify the time and place to which it is adjourned or state that it is to continue at a time and place to be fixed by the directors, and (b) have regard to any directions as to the time and place of any adjournment which have been given by the meeting. 31.5 If the continuation of an adjourned meeting is to take place more than 14 days after it was adjourned, the company must give at least 7 clear days’ notice of it (that is, excluding the day of the adjourned meeting and the day on which the notice is given): (a) to the same persons to whom notice of the company’s general meetings is required to be given and containing the same information which such notice is required to contain. (b) No business may be transacted at an adjourned general meeting which could not properly have been transacted at the meeting if the adjournment had not taken place.

Voting at general meetings Article 32 Voting: general 6C.45 32.1 A resolution put to the vote of a general meeting must be decided on a show of hands unless a poll is duly demanded in accordance with the articles.

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Article 33 Errors and disputes 6C.46 33.1 No objection may be raised to the qualification of any person voting at a general meeting except at the meeting or adjourned meeting at which the vote objected to is tendered, and every vote not disallowed at the meeting is valid.

Any such objection must be referred to the chairman of the meeting whose decision is final.

Article 34 Poll votes 6C.47 34.1 A poll on a resolution may be demanded: (a) in advance of the general meeting where it is to be put to the vote, or (b) at a general meeting, either before a show of hands on that resolution or immediately after the result of a show of hands on that resolution is declared. 34.2 A poll may be demanded by: (a) the chairman of the meeting; (b) the directors; (c) two or more persons having the right to vote on the resolution; or (d) a person or persons representing not less than one tenth of the total voting rights of all the members having the right to vote on the resolution. 34.3 A demand for a poll may be withdrawn if: (a) the poll has not yet been taken, and (b) the chairman of the meeting consents to the withdrawal. 34.4 Polls must be taken immediately and in such manner as the chairman of the meeting directs.

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Article 35 Content of proxy notices 6C.48 35.1 Proxies may only validly be appointed by a notice in writing (a “proxy notice”). The proxy notice shall: (a) state the name and address of the member appointing the proxy; (b) identify the person appointed to be that member’s proxy; (c) state the general meeting in relation to which that person is appointed; (d) be signed by or on behalf of the member appointing the proxy, or be authenticated in such manner as the directors may determine; (e) be delivered to the company in accordance with the articles and any instructions contained in the notice of the general meeting to which they relate. 35.2 The company may require proxy notices to be delivered in a particular form, and may specify different forms for different purposes. 35.3 Proxy notices may specify how the proxy appointed under them is to vote (or that the proxy is to abstain from voting) on one or more resolutions. 35.4 Unless a proxy notice indicates otherwise it shall be treated as: (a) allowing the person appointed under it as a proxy discretion as to how to vote on any ancillary or procedural resolutions put to the meeting, and (b) appointing that person as a proxy in relation to any adjournment of the general meeting to which it relates as well as the meeting itself.

Article 36 Delivery of proxy notices 6C.49 36.1 A person who is entitled to attend, speak or vote (either on a show of hands or on a poll) at a general meeting remains so entitled in respect of that meeting or any adjournment of it, even though a valid proxy notice has been delivered to the company by or on behalf of that person. 36.2 An appointment under a proxy notice may be revoked by delivering to the company a notice in writing given by or on behalf of the person by whom or on whose behalf the proxy notice was given.

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36.3 A notice revoking a proxy appointment only takes effect if it is delivered before the start of the meeting or adjourned meeting to which it relates. 36.4 If a proxy notice is not executed by the person appointing the proxy, it must be accompanied by written evidence of the authority of the person who executed it to execute it on the appointor’s behalf.

Article 37 Amendments to resolutions 6C.50 37.1 An ordinary resolution to be proposed at a general meeting may be amended by ordinary resolution if: (a) notice of the proposed amendment is given to the company in writing by a person entitled to vote at the general meeting at which it is to be proposed not less than 48 hours before the meeting is to take place (or such later time as the chairman of the meeting may determine); (b) the proposed amendment does not, in the reasonable opinion of the chairman of the meeting, materially alter the scope of the resolution. 37.2 A special resolution to be proposed at a general meeting may be amended by ordinary resolution if: (a) the chairman of the meeting proposes the amendment at the general meeting at which the resolution is to be proposed, and (b) the amendment does not go beyond what is necessary to correct a grammatical or other non-substantive error in the resolution. 37.3 If the chairman of the meeting, acting in good faith, wrongly decides that an amendment to a resolution is out of order, the chairman’s error does not invalidate the vote on that resolution.

Administrative arrangements Article 38 Means of communication to be used 6C.51 38.1 Subject to the articles, anything sent or supplied by or to the company under the articles may be sent or supplied in any way in which the Companies Act 2006 provides for documents or information which are

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authorised or required by any provision of that Act to be sent or supplied by or to the company. 38.2 Subject to the articles, any notice or document to be sent or supplied to a director in connection with the taking of decisions by directors may also be sent or supplied by the means by which that director has asked to be sent or supplied with such notices or documents for the time being. 38.3 A director may agree with the company that notices or documents sent to that director in a particular way are to be deemed to have been received within a specified time of their being sent, and for the specified time to be less than 48 hours.

Article 39 Company seals 6C.52 39.1 Any common seal may only be used by the authority of the directors. The directors may decide by what means and in what form any common seal is to be used. 39.2 Unless otherwise decided by the directors, if the company has a common seal and it is affixed to a document, the document must also be signed by at least one authorised person in the presence of a witness who attests the signature. 39.3 For the purposes of this article an authorised person is: (a) any director of the company; (b) any person authorised by the directors for the purpose of signing documents to which the common seal is applied.

Indemnity and insurance Article 40 Indemnity 6C.53 40.1 Subject to article 40.2 only in relation to the club any relevant director may be indemnified out of the club’s resources against any liability incurred by that director in connection with any: (a) negligence; (b) default; (c) breach of duty; (d) breach of trust;

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(e) [liability incurred by that director in connection with the activities of the club in its capacity as a trustee of an occupational pension scheme (as defined in section 235(6) of the Companies Act 2006)]; (f)

liability incurred by that director as an officer of the club.

40.2 This article does not authorise any indemnity which would be prohibited or rendered void by any provision of the Companies Acts or by any other provision of law. 40.3 The directors may decide to purchase and maintain insurance, at the expense of the company, for the benefit of any relevant director in respect of any relevant loss. 40.4 In this article “relevant director” means any director or former director of the club. A “relevant loss” means any loss or liability which has been or may be incurred by a relevant director in connection with that director’s duties or powers in relation to the club or any pension fund or employees’ share scheme.

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Chapter 7  Asset Lock Introduction Asset lock 7.1 Social and philanthropic investors may be deterred when supporting and investing in social enterprises. If there is no obvious way of the company locking in profits and restricting the distribution of assets on any winding up, typically this has resulted in investors predominately supporting the charity sector. In addition, commercial investors and lenders may find the complexity and diversity of not-for-profit structures a barrier to lending and see social enterprises presenting additional risk, which is then reflected in the cost of borrowing. The purpose of the statutory asset lock is to provide social and philanthropic investors with assurances that the company will only use the assets of the company for the benefit of the community and not for private gain. It should be noted that the purpose of the asset lock is not to ‘lock in’ the physical assets themselves in a commercial sense; this would reduce the freedom of CICs to use their assets for any appropriate business objective if the directors agreed that it would help achieve their community interest goals. For example, a CIC may wish to use its assets as collateral to raise finance for its activities.

The asset lock concept 7.2 A CIC is subject to various restrictions in relation to the distribution of company assets; together, the statutory restrictions provide the concept of the asset lock, which is overseen and supervised by the Regulator. The asset lock prevents the distribution of profits or financial assets to members of a company or investors whilst commercially trading and on winding up. The asset lock is entrenched by statutory means: CICs limited by shares were permitted to pay exempt dividends or the maximum aggregate dividend before 1 October 2014, referred to as the “maximum dividend per share”. The general principle of the asset lock is built on the community interest test and the reinvestment

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of profits for the benefit of the wider community; in other words, the wider public is central to the asset lock concept1.

What are dividends? 7.3 If a company makes a trading profit and the company authorises the profit to be distributed to its shareholders, it does so by declaring a dividend. Typically, the company will pay dividends to all shareholders.

Tax on dividends 7.4 The company is not liable to pay tax on the dividend payments it makes; however, shareholders may have to pay income tax if the dividend payment exceeds £2,000. It should be noted that the Companies Act 2006 restricts the distribution of profits; if applicable, a CIC may only make a distribution out of profits available for the purpose2 – a company cannot, for example, borrow money or mortgage property to pay dividends.

Dividend cap 7.5 The dividend cap strikes a balance between encouraging people to invest in CICs and the principle that the assets and profits of a CIC should be devoted to the benefit of the community. This helps to ensure that the dividends are not disproportionate to the amount invested and the profits made by the company. The dividend cap is not applicable to companies limited by guarantee without share capital, as the company has no shareholders and, by default, cannot declare dividends.

Relevant company 7.6 Any CIC limited by shares, or a company limited by guarantee with a share capital, is a relevant company, and this includes CICs incorporated by limited shares under Schedule 2 or Schedule 3. 1

“Enterprise for Communities: proposals for a Community Interest Company” (Consultation Document, March 2003). 2 Companies Act 2006, s 830.

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Schedule 2 7.7 A CIC which is a company limited by shares, adopting Schedule 2 articles of association, may, if permitted by the Regulator, pay dividends to specified asset-locked bodies or other asset-locked bodies. The amount distributed (if authorised) is only restricted by section 830 of the Companies Act 2006.

Schedule 3 7.8 A company limited by shares adopting Schedule 3 articles of association may pay dividends to shareholders who are not asset-locked bodies. A distribution to any private investor is subject to a dividend restriction, the rules of which are detailed in section 830 of the Companies Act 2006. Under Schedule 3, the company may in addition pay unlimited dividends to other asset-locked bodies; however, in both instances, permission must be sought from the Regulator.

Cap on distributions and interest 7.9 Section 30 of the Companies (Audit, Investigations and Community Enterprise) Act 2004 (CAICE) provides a cap on the ability for a CIC to make distributions of its assets, and the restriction forms an important element of the asset lock. Assets that are covered by the restrictions are: dividends, issues of bonus shares, and payments on the purchase or redemption of shares or on the reduction of share capital. It should be noted that unlimited distributions are allowed to other CICs, asset-locked bodies and registered charities.

Limits on the payments of interest 7.10 The legislation is carefully drafted to avoid prohibiting limits on conventional interest payments, where the interest payment is fixed over a set term (for example, a traditional bank loan or commercial mortgage). Section 30(3) of CAICE is directed specifically towards instruments with floating interest rates that may provide the ability to make distributions which contravene section 30(2). The Regulator is authorised to impose limits on the distributions to members and payments of interest on issued debentures3 or any other debts. 3 A debenture is a long-term security which pays a fixed rate of interest, typically issued by a company and secured against some asset of the company.

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Setting the limits on payments of interest 7.11 Section 30(4) to (8) of CAICE provides that the Regulator (or another person) must undertake a consultation before setting any limit, and any proposed limit must take into consideration that lower limits may encourage investment, while higher rates may impede public confidence in CICs. Once the Regulator sets a limit, it must publish the rates in the Gazette; the legislation allows the Secretary of State to request that limits are set in a particular way, as opposed to providing powers to specify limits4.

Declaration of dividends Exempt dividends 7.12 A dividend declared on a share in a relevant company is an exempt dividend if the dividend is declared on a share which is held by (or on behalf of) an asset-locked body5. In addition, the Regulator must consent to the declaration of the dividend to the asset-locked body which is specifically named in the company’s memorandum or articles of association6.

Declaring dividends 7.13 The relevant company may only declare a dividend7 if permitted by the company’s articles of association, and in addition an ordinary or special resolution of the company’s members has approved the declaration of the dividend. If authorised by the company, the declaration of the dividend must not cause8: a)

the total amount of dividend declared on any of the company’s shares for the financial year for which it is declared to exceed the maximum dividend per share for that financial year; or

4 CAICE, Explanatory notes, pages 47–48. 5 This condition is not satisfied in respect of a share which the directors recommending the dividend are aware is being held on trust for a person who is not an asset-locked body. 6 CICR, reg 17(4) and (5). 7 CICR, reg 10: “A relevant company must not include in its memorandum or articles any provision which purports to permit a dividend to be declared otherwise than by an ordinary or special resolution of its members”. 8 CICR, reg 17.

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b)

the total amount of all the dividends declared on shares in the relevant company for the financial year for which it is declared to exceed the maximum aggregate dividend for that financial year.

Maximum aggregate dividend cap 7.14 With effect from 1 October 2014, the dividend cap has a single element called the maximum aggregate dividend cap. This cap guarantees that 65% of the CIC’s profits are reinvested back into the company or used for the community that it was set up to serve. In real terms a CIC may pay 35% of its profits to a non-asset-locked body or individual (for example, investors holding shares if constituted under Schedule 3).

Changes to the share dividend cap 7.15 Regulation 22 of the Community Interest Company Regulations 2005 (CICR) was originally drafted to allow the Regulator9 to set a dividend cap; anecdotal evidence suggested that the rules by which CICs operate, and in particular the dividend and interest caps that were in place, affected the incentives for investors to make social investments. They were deemed to be restrictive and complex. The Regulator, with the approval of the Secretary of State, could set a new share dividend cap, aggregate dividend cap or interest cap. In March 2009, the Regulator launched a consultation, inviting views on a number of these rules. The cap previously had three elements: (a) maximum dividend per share cap, which linked dividend payments to the paid-up value of the share; (b) maximum aggregate dividend cap; and (c) carry forward – the capacity to carry over unused dividend payments for up to five years. The original legislation is detailed below10: “Maximum dividend per share 18. (1) The maximum dividend per share for a financial year is the dividend which a relevant company declares on a share when the total amount of dividend declared

9 Subject to the approval of the Secretary of State. 10 CICR, Part 6 (Restrictions on distributions and interest).

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Chapter 7  Asset Lock on that share for that year (when expressed as a percentage of the paid up value of the share) equals that share’s applicable share dividend cap. (2) The applicable share dividend cap of a share in a relevant company is the share dividend cap which had effect in relation to that share at the time that the share was issued or the company became a community interest company, whichever is the later. (3) Where the expression of the applicable dividend cap includes reference to a rate or figure determined by any person other than the company, the Regulator or the Secretary of State, the maximum dividend per share for any financial year shall be calculated by reference to that rate or figure as it had effect at the beginning of the first day of that financial year. Maximum aggregate dividend 19. The maximum aggregate dividend for a financial year of a relevant company is declared when the total amount of all dividends declared on its shares for that year, less the amount of any exempt dividends, equals (when expressed as a percentage of the relevant company’s distributable profits) the aggregate dividend cap which had effect in relation to that company on the first day of the financial year in respect of which the dividends are declared. Carrying forward of unused dividend capacity from previous financial years 20. (1) Notwithstanding regulation 17(1)(c)(i), but subject to regulation 17(1)(c) (ii), the total amount of dividends declared on a share in a relevant company for a financial year may, subject to the company’s articles, include the whole or any part of the share’s unused dividend capacity. (2) For the purposes of this regulation, a share’s unused dividend capacity is A minus B where— ●●

A is the aggregate of any sums by which, for any of the four financial years immediately preceding the financial year for which a dividend is to be declared under this regulation, the total amount of dividend declared and paid on the share for that financial year was less than the maximum dividend per share for that financial year; and

●●

B is any part of A which has already been distributed by way of a dividend declared and paid for a previous financial year.”

2014 CIC amendments 7.19 The Community Interest Company (Amendment) Regulations 2014 came into force on 1 October 2014 and removed the dividend per share cap, which was linked to the paid-up value of the share, and the capacity to carry forward unused dividend payment to future years. The decision was taken to retain the maximum aggregate dividend cap (discussed above) at the current level. This change was retrospective, effectively removing the dividend per share cap from all dividend payments prior to 1 October 2014. 202

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Performance-related interest cap (regulation 21 of CICR) 7.20 For CICs to grow, as with any company, they require access to a wide range of finance from various sources, so the legislation needed to be appropriate to allow both large and small companies to access funding. In terms of raising finance, the interest cap does not apply to conventional borrowing where, typically, the capital and interest are repaid at fixed rates or variable rates linked to indices such as the current Bank of England interest rate.

Performance-related debt 7.21 The interest cap applies to any debentures or debt vehicle issued by the company, where a performance-related rate of interest is payable and the agreement to pay interest at a performance-related rate was entered into by the company on or after the date on which it became a CIC. A debenture is a type of debt security issued by the CIC to investors which agrees to pay either a fixed or variable interest rate over the term agreed; at the end of the term, the bond reaches maturity, and the CIC repays the capital amount initially borrowed.

Performance-related interest cap 7.22 When Parliament drafted CAICE, the regulations were targeted at interest payments that are related to the performance of the CIC (for example, variable interest payments linked to the turnover or profit of the CIC). The intention of this provision is to prevent such instruments, known as “debt with equity characteristics”, being used to avoid the restrictions that are imposed on dividend-bearing shares under section 30(2) of CAICE: “‘performance-related rate’ means any rate which is linked to the company’s profits or turnover or to any item in the balance sheet of the company11; ”

11 CICR, reg 2 (Interpretation).

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Interest cap regulations 7.23 The performance-related interest cap is summarised below, and the legislation is clear that regulation 21 of CICR does not release a CIC from liability to pay any interest which accrued before the company became a CIC, or arrears of interest which if it had been paid at the time it became due would not have breached regulation 21(2): (a) A CIC is restricted to paying interest which must not exceed the applicable interest cap. (b) The interest rate applicable is the interest cap which had effect at the time when the agreement to pay interest at a performance-related rate was made. (c) Where the expression of the interest cap includes reference to a rate or figure determined by any person other than the company, the Regulator or the Secretary of State, the interest payable on any debt or debenture to which the interest cap applies must be calculated by reference to that rate or figure as it had effect at the beginning of the first day of the financial year in which the interest became due. (d) The interest cap must be expressed as a percentage of the average amount of a 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 and calculated in accordance with Schedule 4 to CICR.

Calculation of the average debt 7.24 The calculation of the average debt is described in Schedule 4 to CICR. The average amount of a debt or sum outstanding under a debenture during any 12-month period is the amount calculated by: A/B where: ●●

A is the aggregate of the amount of the debt or the sum outstanding under the debenture as at the end of each day during the 12-month period; and

●●

B is the number of days during that 12-month period.

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A excludes any sums which represent interest which has accrued on that debt or debenture within that 12-month period. Where the debt or debenture did not exist at the end of any day during the 12-month period, the amount of the debt or the sum outstanding under the debenture as at the end of that day is treated as being zero for the purposes of calculating A. If the amount of the debt or the sum outstanding under the debenture is not known as at the end of any particular date, the directors of the CIC may, for the purposes of the calculation referred to above, substitute for the debt or the sum outstanding under the debenture such amount or sum as they estimate to be the amount of the debt or the sum outstanding under the debenture as at the end of that particular date.

Worked example – Better Housing CIC 7.25 As the interest is calculated daily over a 12-month period, a key point when considering the performance-related interest cap is that the maximum interest payable reduces if the loan is repaid before the end of the term.

Better Housing CIC (10-year debenture12) 7.26 Term Debt 1 2 3 4 5 6 7 8 9 10

£50,000 £45,000 £40,000 £35,000 £30,000 £25,000 £20,000 £15,000 £10,000 £5,000

Loan Outstanding £50,000 £45,000 £46,000 £44,000 £42,000 £40,000 £38,000 £36,000 £34,000 £32,000

Maximum Interest £10,000 £9,000 £8,000 £7,000 £6,000 £5,000 £4,000 £3,000 £2,000 £1,000

EBITDA Interest 50% EBITDA £2,000 £1,000 £3,000 £1,500 £5,000 £2,500 £6,000 £3,000 £8,000 £4,000 £9,000 £4,500 £12,000 £6,000 £18,000 £9,000 £20,000 £10,000 £30,000 £15,000

12 Adapted from Office of the Regulator of Community Interest Companies: Information and guidance notes” (DBEIS, May 2016), Annex A: Worked examples of the dividend and performance related interest calculation.

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Better Housing CIC issues a £50,000 10-year bond, the company agrees to repay £5,000 at the end of each full year, and the interest payable is performance-related to 50% of the EBITDA13. We can clearly see that the interest payable for years 1 to 6 falls under the maximum allowed; however, in years 7 to 10, because of the effect of the loan reducing, the interest would be restricted to the maximum allowed under the legislation.

Redemption and reduction in capital 7.27 In addition to paying dividends, three other circumstances may arise that may circumvent the asset lock and result in the distribution of assets to shareholders. The three events are: share redemptions; share buybacks; and reducing share capital.

Redemption of shares 7.28 A share redemption occurs when a company requires shareholders to sell a percentage of their shareholdings back to the company. It should be noted that, when issued, the shares would have been specified as redeemable, or callable, shares.

Purchase of its own shares 7.29 Under the Companies Act 2006, a company may repurchase its shares from the company’s shareholders. During a repurchase or buyback, the company typically pays shareholders the market value per share for their holdings, and not the paid-up value of the shares. Share repurchases are a popular method for returning cash to shareholders and are strictly voluntary on the part of the shareholder. To prevent circumvention of the asset lock, regulation 24 of CICR allows the distribution of assets to its members by way of redemption or purchase of the company’s own shares, but only on the basis that the amount to be paid by the company in respect of any such share does not exceed the paid-up value of the share. This has the effect that any share purchase is not paid at a premium. 13 Earnings before interest, taxes, depreciation, and amortisation.

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Reduction of share capital 7.30 A reduction of share capital allows a company to reduce its issued capital without the need for each individual shareholder’s consent. Regulation 25 of CICR states that a company may not distribute assets to its members by way of a reduction of the company’s share capital unless: (a) the reduction is made by extinguishing or reducing the liability of any of the members on any of the company’s shares in respect of share capital not paid up; or (b) the amount to be paid by the company to members in paying off paid-up share capital does not exceed the paid-up value of their respective shares.

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Precedents

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Chapter 8.0  Community Interest Company Limited by Guarantee (CIC Limited by Guarantee, Schedule 1, Small Membership) The Companies Act 2006 Articles of Association of [INSERT NAME] [Community Interest Company/C.I.C. delete as applicable] INTERPRETATION 1.

Defined Terms 1.1 The interpretation of these Articles is governed by the provisions set out in the Schedule at the end of the Articles.

Article 1 Analysis The interpretation in the new model articles (NMA) appears in article 1 of those articles (see para 6B.2). COMMUNITY INTEREST COMPANY AND ASSET LOCK 2.

Community Interest Company The Company is to be a community interest company.

Article 2 Analysis Article 2 is a mandatory requirement. A CIC must state in the articles of association that it is to be a community interest company.1 A company limited by shares or a company limited by guarantee and not having a share 1 Companies (Audit, Investigations and Community Enterprise) Act 2004 (CAICE), s 32 (Articles of association).

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capital may be formed as or become a community interest company, and a company limited by guarantee and having a share capital may become a community interest company.2 In terms of conversion, the company is required to alter its articles to state that it is to be a CIC. Adaptation may be required to ensure that it conforms to the requirements of CIC legislation, and the name of the company will require alteration to include one of the CIC designations.3 For an alternative precedent which includes rules on reviewing and amending the memorandum and articles of association, see article 11 of the NMA for companies limited by guarantee in Chapter 6C (para 6C.24). 3.

Asset Lock4 3.1 The Company shall not transfer any of its assets other than for full consideration. 3.2 Provided the conditions in Article 3.3 are satisfied, Article 3.1 shall not apply to: (a) the transfer of assets to any specified asset-locked body, or (with the consent of the Regulator) to any other asset-locked body; and (b) the transfer of assets made for the benefit of the community other than by way of a transfer of assets into an asset-locked body. 3.3 The conditions are that the transfer of assets must comply with any restrictions on the transfer of assets for less than full consideration which may be set out elsewhere in the memorandum or Articles of the Company. 3.4 If the Company is wound up under the Insolvency Act 1986; and all its liabilities have been satisfied any residual assets shall be given or transferred to the asset-locked body specified in Article 3.5 below. 3.5 For the purposes of this Article 3, the following asset-locked body is specified as a potential recipient of the Company’s assets under Articles 3.2 and 3.4: Name: Charity Registration Number (if applicable): Company Registration Number (if applicable): Registered Office:

2 CAICE, s 26 (Community interest companies). 3 “Office of the Regulator of Community Interest Companies: Information and guidance notes” (DBEIS, May 2016), para 4.2. Converting an existing company to a CIC. 4 See the Regulator’s information and guidance notes, Chapter 6. See also the Regulator’s information and guidance notes, Chapter 5.

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Article 3 Analysis The asset lock is the fundamental feature of the CIC; it is designed to ensure that the company assets are specifically used for the benefit of the company. Chapter 65 of the regulator’s guidance provides further guidance. It should be noted that the provisions cannot be edited or amended.6 See regulation 23 of the Community Interest Company Regulations 2005 (CICR) and chapters 6 and 10 of the Regulator’s information and guidance notes. If the company does not specify that the remaining residual assets are to be transferred to a particular asset-locked body, an appropriate recipient will be chosen by the Regulator, in consultation with the company’s directors and members. A CIC cannot nominate itself as the asset-locked body. It also cannot nominate a non-asset-locked body. An asset-locked body is defined as a CIC or charity, a permitted society or non-UK-based equivalent. 4.

Not for profit 4.1 The Company is not established or conducted for private gain: any surplus or assets are used principally for the benefit of the community.

Article 4 Analysis Article 4 provides the ‘not for profit’ guarantee. This article does not appear in the model articles and, together with article 3, provides that the CIC operates on a genuine not-for-profit basis. The traditional private company limited by guarantee holds the ability and obligation to pay the directors. OBJECTS, POWERS AND LIMITATION OF LIABILITY 5.

Objects7



The objects of the Company are to carry on activities which benefit the community and in particular (without limitation) to:

5 Regulator’s information and guidance notes, Chapter 6: The Asset Lock. 6 CICs are also able to adopt asset-lock rules that impose more stringent requirements, provided they also include these basic provisions. 7 On the specification of the company’s objects, see the Regulator’s information and guidance notes, Chapter 5.

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Article 5 Analysis Article 5 requires the objects of the company to be restricted. For example, “to provide day care and transport facilities for the elderly and physically disadvantaged in North Essex”. If the objects are not restricted by the articles, it would follow that the company would not meet the community interest test.8 6.

Powers 6.1 To further its objects the Company may do all such lawful things as may further the Company’s objects and, in particular, but, without limitation, may borrow or raise and secure the payment of money for any purpose including for the purposes of investment or of raising funds.

Article 6 Analysis The company will have statutory powers and obligations conferred by the Companies Act 2006 and CICR. Article 6 prescribes that the main powers must be used to further the company’s objects and all actions must be lawful. It is possible to limit the powers of the company. It should be noted that any adaptation of the provisions in the articles must not fetter the statutory powers bestowed by legislation. 7.

Liability of members9



The liability of each member is limited to £1, being the amount that each member undertakes to contribute to the assets of the Company in the event of its being wound up while he or she is a member or within one year after he or she ceases to be a member, for: 7.1 payment of the Company’s debts and liabilities contracted before he or she ceases to be a member; 7.2 payment of the costs, charges and expenses of winding up; and 7.3 adjustment of the rights of the contributories among themselves.

8 Regulator’s information and guidance notes, Chapter 5. 9 On limited liability, see the Regulator’s information and guidance notes, Chapter 3. On guarantees generally, see the Regulator’s information and guidance notes, Chapter 3.2.

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Article 7 Analysis Typically, the guarantors limit any liability to £1. The members may underwrite the CIC’s activities by guaranteeing a larger sum. Article 7 provides that the members are not liable for the company’s debts, on the assumption that no fraud or illegal actions have transpired that may fetter the limited liability. DIRECTORS DIRECTORS’ POWERS AND RESPONSIBILITIES 8.

Directors’ general authority



Subject to the Articles, the Directors are responsible for the management of the Company’s business, for which purpose they may exercise all the powers of the Company. Article 8 Analysis See article 3 of the NMA in Chapter 6B (para 6B.4). Note that, although this model constitution assumes that all directors are members and all members are directors, and the directors are given wide powers, under the articles (and company law more generally) there are still some decisions which members must make as members (either in general meeting under the Companies Act 2006 (see article 28.2 below), or by written resolution in accordance with article 29 below).

9.

Members’ reserve power 9.1 The members may, by special resolution, direct the Directors to take, or refrain from taking, specific action. 9.2 No such special resolution invalidates anything which the Directors have done before the passing of the resolution.

Article 9 Analysis See article 4 of the NMA in Chapter 6B (para 6B.5). 10. Chair

The Directors may appoint one of their number to be the chair of the Directors for such term of office as they determine and may at any time remove him or her from office. 215

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Article 10 Analysis See article 12 of the NMA in Chapter 6B (para 6B.13). For an alternative precedent which includes a chairman’s powers to terminate the meeting and directors’ powers to terminate the chairman’s appointment, see article 13 of the NMA for companies limited by guarantee in Chapter 6C (para 6C.26). 11. Directors may delegate 11.1 Subject to the Articles, the Directors may delegate any of the powers which are conferred on them under the Articles or the implementation of their decisions or day to day management of the affairs of the Company: 11.1.1 to such person or committee; 11.1.2 by such means (including by power of attorney); 11.1.3 to such an extent; 11.1.4 in relation to such matters or territories; and 11.1.5 on such terms and conditions; as they think fit. 11.2 If the Directors so specify, any such delegation of this power may authorise further delegation of the Directors’ powers by any person to whom they are delegated. 11.3 The Directors may revoke any delegation in whole or part, or alter its terms and conditions. Article 11 Analysis See article 5 of the NMA in Chapter 6B (para 6B.6). DECISION-MAKING BY DIRECTORS 12. Directors to take decisions collectively

Any decision of the Directors must be either a majority decision at a meeting or a decision taken in accordance with Article 18.



In the event of the Company having only one Director, a majority decision is made when that single Director makes a decision.

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Article 12 Analysis See article 7 of the NMA in Chapter 6B (para 6B.8). 13. Calling a Directors’ meeting 13.1 Two Directors may (and the Secretary, if any, must at the request of two Directors) call a Directors’ meeting. 13.2 A Directors’ meeting must be called by at least seven Clear Days’ notice unless either: 13.2.1 all the Directors agree; or 13.2.2 urgent circumstances require shorter notice. 13.3 Notice of Directors’ meetings must be given to each Director. 13.4 Every notice calling a Directors’ meeting must specify: 13.4.1 the place, day and time of the meeting; and 13.4.2 if it is anticipated that Directors participating in the meeting will not be in the same place, how it is proposed that they should communicate with each other during the meeting. 13.5 Notice of Directors’ meetings need not be in Writing. 13.6 Notice of Directors’ meetings may be sent by Electronic Means to an Address provided by the Director for the purpose. Article 13 Analysis Article 13.1 requires two directors to call a meeting, as opposed to “any” director in the model articles.10 See article 9 of the NMA in Chapter 6B (para 6B.10). For an alternative precedent which includes extended rights for directors to waive entitlement, see article 10 of the NMA for companies limited by guarantee in Chapter 6C (para 6C.23). 14. Participation in Directors’ meetings 14.1 Subject to the Articles, Directors participate in a Directors’ meeting, or part of a Directors’ meeting, when: 14.1.1 the meeting has been called and takes place in accordance with the Articles; and 10 Model articles for private companies limited by guarantee, Sch 2.

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14.1.2 they can each communicate to the others any information or opinions they have on any particular item of the business of the meeting. 14.2 In determining whether Directors are participating in a Directors’ meeting, it is irrelevant where any Director is or how they communicate with each other. 14.3 If all the Directors participating in a meeting are not in the same place, they may decide that the meeting is to be treated as taking place wherever any of them is. Article 14 Analysis See article 10 of the NMA in Chapter 6B (para 6B.11). 15. Quorum for Directors’ meetings 15.1 At a Directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting. 15.2 The quorum for Directors’ meetings may be fixed from time to time by a decision of the Directors, but it must never be less than two, and unless otherwise fixed it is [two]. 15.3 If the total number of Directors for the time being is less than the quorum required, the Directors must not take any decision other than a decision: 15.3.1 to appoint further Directors; or 15.3.2 to call a general meeting so as to enable the members to appoint further Directors. Article 15 Analysis See article 11 of the NMA in Chapter 6B (para 6B.12). 16. Chairing of Directors’ meetings

The Chair, if any, or in his or her absence another Director nominated by the Directors present shall preside as chair of each Directors’ meeting. Article 16 Analysis See article 12 of the NMA in Chapter 6B (para 6B.13).

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17. Decision-making at meetings 17.1 Questions arising at a Directors’ meeting shall be decided by a majority of votes. 17.2 In all proceedings of Directors each Director must not have more than one vote. 17.3 In case of an equality of votes, the Chair shall have a second or casting vote. Article 17 Analysis See article 12 of the NMA in Chapter 6B (para 6B.13). 18. Decisions without a meeting 18.1 The Directors may take a unanimous decision without a Directors’ meeting in accordance with this Article by indicating to each other by any means, including without limitation by Electronic Means, that they share a common view on a matter. Such a decision may, but need not, take the form of a resolution in Writing, copies of which have been signed by each Director or to which each Director has otherwise indicated agreement in Writing. 18.2 A decision which is made in accordance with Article 18.1 shall be as valid and effectual as if it had been passed at a meeting duly convened and held, provided the following conditions are complied with: 18.2.1 approval from each Director must be received by one person being either such person as all the Directors have nominated in advance for that purpose or such other person as volunteers if necessary (“the Recipient”), which person may, for the avoidance of doubt, be one of the Directors; 18.2.2 following receipt of responses from all of the Directors, the Recipient must communicate to all of the Directors by any means whether the resolution has been formally approved by the Directors in accordance with this Article 18.2; 18.2.3 the date of the decision shall be the date of the communication from the Recipient confirming formal approval; 18.2.4 the Recipient must prepare a minute of the decision in accordance with Article 32. Article 18 Analysis See article 8 of the NMA in Chapter 6B (para 6B.9). 219

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19. Conflicts of interest 19.1 Whenever a Director finds himself or herself in a situation that is reasonably likely to give rise to a Conflict of Interest, he or she must declare his or her interest to the Directors unless, or except to the extent that, the other Directors are or ought reasonably to be aware of it already. 19.2 If any question arises as to whether a Director has a Conflict of Interest, the question shall be decided by a majority decision of the other Directors. 19.3 Whenever a matter is to be discussed at a meeting or decided in accordance with Article 18 and a Director has a Conflict of Interest in respect of that matter then, subject to Article 20, he or she must: 19.3.1 remain only for such part of the meeting as in the view of the other Directors is necessary to inform the debate; 19.3.2 not be counted in the quorum for that part of the meeting; and 19.3.3 withdraw during the vote and have no vote on the matter. 19.4 When a Director has a Conflict of Interest which he or she has declared to the Directors, he or she shall not be in breach of his or her duties to the Company by withholding confidential information from the Company if to disclose it would result in a breach of any other duty or obligation of confidence owed by him or her. Article 19 Analysis See articles 14 and 15 of the NMA in Chapter 6B (paras 6B.15 and 6B16). For an alternative precedent which includes extended rules on the conflicted director’s rights to vote and the company’s right of authorisation, see article 15 of the NMA for companies limited by guarantee in Chapter 6C (para 6C.28). 20. Directors’ power to authorise a conflict of interest 20.1 The Directors have power to authorise a Director to be in a position of Conflict of Interest provided: 20.1.1 in relation to the decision to authorise a Conflict of Interest, the conflicted Director must comply with Article 19.3;

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20.1.2 in authorising a Conflict of Interest, the Directors can decide the manner in which the Conflict of Interest may be dealt with and, for the avoidance of doubt, they can decide that the Director with a Conflict of Interest can participate in a vote on the matter and can be counted in the quorum; 20.1.3 the decision to authorise a Conflict of Interest can impose such terms as the Directors think fit and is subject always to their right to vary or terminate the authorisation. 20.2 If a matter, or office, employment or position, has been authorised by the Directors in accordance with Article 20.1 then, even if he or she has been authorised to remain at the meeting by the other Directors, the Director may absent himself or herself from meetings of the Directors at which anything relating to that matter, or that office, employment or position, will or may be discussed. 20.3 A Director shall not be accountable to the Company for any benefit which he or she derives from any matter, or from any office, employment or position, which has been authorised by the Directors in accordance with Article 20.1 (subject to any limits or conditions to which such approval was subject). Article 20 Analysis See articles 14 and 15 of the NMA in Chapter 6B (paras 6B.15 and 6B16). For an alternative precedent which includes extended rules on the conflicted director’s rights to vote and the company’s right of authorisation, see articles 15 and 16 of the NMA for companies limited by guarantee in Chapter 6C (para 6C.28 and para 6C.29). 21. Register of Directors’ interests

The Directors shall cause a register of Directors’ interests to be kept. A Director must declare the nature and extent of any interest, direct or indirect, which he or she has in a proposed transaction or arrangement with the Company or in any transaction or arrangement entered into by the Company which has not previously been declared. Article 21 Analysis See articles 14 and 15 of the NMA in Chapter 6B (paras 6B.15 and 6B16).

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APPOINTMENT AND RETIREMENT OF DIRECTORS Methods of appointing Directors 21.1 Those persons notified to the Registrar of Companies as the first Directors of the Company shall be the first Directors. 21.2 Any person who is willing to act as a Director, and is permitted by law to do so, may be appointed to be a Director by a decision of the Directors. Article 21.1 and 21.2 Analysis See article 17 of the NMA in Chapter 6B (para 6B.18). 22. Termination of Director’s appointment

A person ceases to be a Director as soon as: (a) that person ceases to be a Director by virtue of any provision of the Companies Act 2006, or is prohibited from being a Director by law; (b) a bankruptcy order is made against that person, or an order is made against that person in individual insolvency proceedings in a jurisdiction other than England and Wales or Northern Ireland which have an effect similar to that of bankruptcy; (c) a composition is made with that person’s creditors generally in satisfaction of that person’s debts; (d) notification is received by the Company from the Director that the Director is resigning from office, and such resignation has taken effect in accordance with its terms (but only if at least two Directors will remain in office when such resignation has taken effect); or (e) the Director fails to attend three consecutive meetings of the Directors and the Directors resolve that the Director be removed for this reason. (f)

the Director ceases to be a member.

Article 22 Analysis See article 18 of the NMA in Chapter 6B (para 6B.19). 23. Directors’ remuneration 23.1 Directors may undertake any services for the Company that the Directors decide. 222

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23.2 Directors are entitled to such remuneration as the Directors determine: (a) for their services to the Company as Directors; and (b) for any other service which they undertake for the Company. 23.3 Subject to the Articles, a Director’s remuneration may: (a) take any form; and (b) include any arrangements in connection with the payment of a pension, allowance or gratuity, or any death, sickness or disability benefits, to or in respect of that director. 23.4 Unless the Directors decide otherwise, Directors’ remuneration accrues from day to day. 23.5 Unless the Directors decide otherwise, Directors are not accountable to the Company for any remuneration which they receive as Directors or other officers or employees of the Company’s subsidiaries or of any other body corporate in which the Company is interested.

Article 23 Analysis A CIC may provide remuneration to its directors. The central disparity, in terms of a private company limited by guarantee, incorporated under the Companies Act 2006 and using the model articles,11 is that the directors have no restrictions or rules to abide by. The Regulator12 provides the following principles in relation to directors’ remuneration:13 ●●

Directors may be paid for their services.

●●

Directors’ remuneration should never be more than is reasonable.14

See further analysis under article 19 of the NMA in Chapter 6B (para 6B.20). 24. Directors’ expenses 24.1 The Company may pay any reasonable expenses which the Directors properly incur in connection with their attendance at: (a) meetings of Directors or committees of Directors; 11 12 13 14

Model articles for private companies limited by guarantee, Sch 2. Office of the Regulator of Community Interest Companies. Regulator’s information and guidance notes, 9.3 (Directors’ remuneration). “Reasonable – having regard to the contribution which they make to the success of the company and the benefits it provides for the community”: Regulator’s information and guidance notes, 9.3.6 (What is “reasonable” remuneration).

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(b) general meetings; or (c) separate meetings of any class of members or of the holders of any debentures of the Company,

or otherwise in connection with the exercise of their powers and the discharge of their responsibilities in relation to the Company.

Article 24 Analysis See article 20 of the NMA in Chapter 6B (para 6B.21). MEMBERS BECOMING AND CEASING TO BE A MEMBER 25. Becoming a member 25.1 The subscribers to the Memorandum are the first members of the Company. 25.2 Such other persons as are admitted to membership in accordance with the Articles shall be members of the Company. 25.3 Each member of the company shall be a Director. 25.4 No person shall be admitted a member of the Company unless he or she is approved by the Directors. 25.5 Every person who wishes to become a member shall deliver to the company an application for membership in such form (and containing such information) as the Directors require and executed by him or her. Article 25 Analysis There is no corresponding article in the NMA for private companies limited by shares. The article is adapted from the model articles for private companies limited by guarantee: Schedule 2, articles 21 and 22. For an alternative precedent which includes extended rules on membership and fees payable, see article 25 of the NMA for companies limited by guarantee in Chapter 6C (para 6C.38). For an alternative precedent which includes members’ code of conduct rules, see paragraph 6C.13.

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26. Termination of membership 26.1 Membership is not transferable to anyone else. 26.2 Membership is terminated if: 26.2.1 the member dies or ceases to exist; 26.2.2 otherwise in accordance with the Articles; or 26.2.3 a member ceases to be a Director. Article 26 Analysis There is no corresponding article in the NMA for private companies limited by shares. The article is adapted from the model articles for private companies limited by guarantee: Schedule 2, articles 21 and 22. It is good practice to include circumstances when membership may be terminated immediately (article 26.2.2) – for example, gross misconduct or theft. In addition, bad leaver precedents could be drafted to allow for the member appealing the decision. For an alternative precedent which includes extended rules on membership and simple bad leaver provisions, see article 26 of the NMA for companies limited by guarantee in Chapter 6C (para 6C.39). For a bespoke precedent that allows powers to represent the membership when authorised by the directors, see article 5 of the NMA for companies limited by guarantee in Chapter 6C (para 6C.18). If authorised, the members may make representations to local and central governmental bodies and institutions regarding the reform, development and implementation of appropriate policies. DECISION MAKING BY MEMBERS 27. Members’ meetings 27.1 The Directors may call a general meeting at any time. 27.2 General meetings must be held in accordance with the provisions regarding such meetings in the Companies Acts. 27.3 A person who is not a member of the Company shall not have any right to vote at a general meeting of the Company; but this is without prejudice to any right to vote on a resolution affecting the rights attached to a class of the Company’s debentures. 27.4 Article 28.3 shall not prevent a person who is a proxy for a member or a duly authorised representative of a member from voting at a general meeting of the Company.

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Article 27 Analysis See article 9 of the NMA for companies limited by guarantee in Chapter 6C (para 6C.22). 28. Written resolutions 28.1 Subject to Article 29.3, a written resolution of the Company passed in accordance with this Article 29 shall have effect as if passed by the Company in general meeting: 28.1.1 A written resolution is passed as an ordinary resolution if it is passed by a simple majority of the total voting rights of eligible members. 28.1.2 A written resolution is passed as a special resolution if it is passed by members representing not less than 75% of the total voting rights of eligible members. A written resolution is not a special resolution unless it states that it was proposed as a special resolution. 28.2 In relation to a resolution proposed as a written resolution of the Company the eligible members are the members who would have been entitled to vote on the resolution on the circulation date of the resolution. 28.3 A members’ resolution under the Companies Acts removing a Director or an auditor before the expiration of his or her term of office may not be passed as a written resolution. 28.4 A copy of the written resolution must be sent to every member together with a statement informing the member how to signify their agreement to the resolution and the date by which the resolution must be passed if it is not to lapse. Communications in relation to written notices shall be sent to the Company’s auditors in accordance with the Companies Acts. 28.5 A member signifies their agreement to a proposed written resolution when the Company receives from him or her an authenticated Document identifying the resolution to which it relates and indicating his or her agreement to the resolution. 28.5.1 If the Document is sent to the Company in Hard Copy Form, it is authenticated if it bears the member’s signature. 28.5.2 If the Document is sent to the Company by Electronic Means, it is authenticated [if it bears the member’s signature] or [if the identity of the member is confirmed in a manner agreed by the Directors] or [if it is accompanied by a statement of the identity of the member and the Company has no reason to doubt the truth of that statement] or [if 226

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it is from an email Address notified by the member to the Company for the purposes of receiving Documents or information by Electronic Means]. 28.6 A written resolution is passed when the required majority of eligible members have signified their agreement to it. 28.7 A proposed written resolution lapses if it is not passed within 28 days beginning with the circulation date. Article 28 Analysis See article 45 of the NMA for companies limited by guarantee in Chapter 6C (para 6C.58).

ADMINISTRATIVE ARRANGEMENTS AND MISCELLANEOUS 29. Means of communication to be used 29.1 Subject to the Articles, anything sent or supplied by or to the Company under the Articles may be sent or supplied in any way in which the Companies Act 2006 provides for Documents or information which are authorised or required by any provision of that Act to be sent or supplied by or to the Company. 29.2 Subject to the Articles, any notice or Document to be sent or supplied to a Director in connection with the taking of decisions by Directors may also be sent or supplied by the means by which that Director has asked to be sent or supplied with such notices or Documents for the time being. 29.3 A Director may agree with the Company that notices or Documents sent to that Director in a particular way are to be deemed to have been received within an agreed time of their being sent, and for the agreed time to be less than 48 hours. Article 29 Analysis See article 48 of the NMA in Chapter 6B (para 6B.49). 30. Irregularities

The proceedings at any meeting or on the taking of any poll or the passing of a written resolution or the making of any decision shall not be invalidated by reason of any accidental informality or irregularity (including any accidental omission to give or any non-receipt of notice)

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or any want of qualification in any of the persons present or voting or by reason of any business being considered which is not referred to in the notice unless a provision of the Companies Acts specifies that such informality, irregularity or want of qualification shall invalidate it. Article 30 Analysis This article does not appear in any of the new model articles. For an alternative simplified precedent, see paragraph 6C.8 (Boiler plate clauses). 31. Minutes 31.1 The Directors must cause minutes to be made in books kept for the purpose: 31.1.1 of all appointments of officers made by the Directors; 31.1.2 of all resolutions of the Company and of the Directors (including, without limitation, decisions of the Directors made without a meeting); and 31.1.3 of all proceedings at meetings of the Company and of the Directors, and of committees of Directors, including the names of the Directors present at each such meeting;

and any such minute, if purported to be signed (or in the case of minutes of Directors’ meetings signed or authenticated) by the chair of the meeting at which the proceedings were had, or by the chair of the next succeeding meeting, shall, as against any member or Director of the Company, be sufficient evidence of the proceedings.

31.2 The minutes must be kept for at least ten years from the date of the meeting, resolution or decision. Article 31 Analysis This article restates section 24815 detailing the company’s requirements to cause minutes to be recorded and kept for a period of no less than 10 years. It should be noted that failure to record minutes is a criminal offence. This article does not appear in any versions of the new model articles.

15 Companies Act 2006, s 248 (Minutes of directors’ meetings).

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32. Records and accounts

The Directors shall comply with the requirements of the Companies Acts as to maintaining a members’ register, keeping financial records, the audit or examination of accounts and the preparation and transmission to the Registrar of Companies and the Regulator of: 32.1 annual reports; 32.2 annual returns; and 32.3 annual statements of account. 32.4 Except as provided by law or authorised by the Directors or an ordinary resolution of the Company, no person is entitled to inspect any of the Company’s accounting or other records or Documents merely by virtue of being a member. Article 32 Analysis Except as provided by law or authorised by the directors or an ordinary resolution of the company, no person is entitled to inspect any of the company’s accounting or other records or documents merely by virtue of being a member. For an alternative precedent which states that members have no rights to inspect accounts and other records, see article 1 of the NMA for companies limited by guarantee in Chapter 6C (para 6C.14).

33. Indemnity 33.1 Subject to Article 34.2, a relevant Director of the Company or an associated company may be indemnified out of the Company’s assets against: (a) any liability incurred by that Director in connection with any negligence, default, breach of duty or breach of trust in relation to the Company or an associated company; (b) any liability incurred by that Director in connection with the activities of the Company or an associated company in its capacity as a trustee of an occupational pension scheme (as defined in section 235(6) of the Companies Act 2006); and (c) any other liability incurred by that Director as an officer of the Company or an associated company. 33.2 This Article does not authorise any indemnity which would be prohibited or rendered void by any provision of the Companies Acts or by any other provision of law.

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33.3 In this Article: (a) companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate; and (b) a “relevant Director” means any Director or former Director of the Company or an associated company. 34. Insurance 34.1 The Directors may decide to purchase and maintain insurance, at the expense of the Company, for the benefit of any relevant Director in respect of any relevant loss. 34.2 In this Article: (a) a “relevant Director” means any Director or former Director of the Company or an associated company; (b) a “relevant loss” means any loss or liability which has been or may be incurred by a relevant Director in connection with that Director’s duties or powers in relation to the Company, any associated company or any pension fund or employees’ share scheme of the company or associated company; and (c) companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate. Article 33 and 34 Analysis See articles 52 and 53 of the NMA in Chapter 6B (paras 6B.53 and 6B.54). For an alternative precedent simplifying and combining articles 33 and 34, see article 40 of the NMA for companies limited by guarantee in Chapter 6C (para 6C.53). 35. Exclusion of model articles

The relevant model articles for a company limited by guarantee are hereby expressly excluded. Article 35 Analysis In order to explicitly state the exclusion, it is good practice to provide the provision at the beginning of the document and specifically refer to the model articles regulations. It should be noted, for companies incorporated under previous Companies Acts, that the relevant articles should be expressly excluded.

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There is provision for an alternative precedent, as follows: “The model articles for private companies limited by guarantee contained or incorporated in Schedule 1 to the Companies (Model Articles) Regulations 2008, SI 2008/3229, as amended prior to the date of adoption of these articles (the ‘Model Articles’) shall not apply to the Company, save insofar as they are varied or excluded by, or are inconsistent with, the following articles.”

For an alternative precedent which includes reference to the Companies Act 2006 (which is good practice), see article 2 of the NMA for companies limited by guarantee in Chapter 6C (para 6C.15).

SCHEDULE INTERPRETATION Defined terms 1.

In the Articles, unless the context requires otherwise, the following terms shall have the following meanings:

Term 1.1 “Address” 1.2 1.3

1.4

1.5 1.6

Meaning includes a number or address used for the purposes of sending or receiving Documents by Electronic Means; “Articles” the Company’s articles of association; “asset-locked body” means (i) a community interest company, a charity16 or a Permitted Society; or (ii) a body established outside the United Kingdom that is equivalent to any of those; “bankruptcy” includes individual insolvency proceedings in a jurisdiction other than England and Wales or Northern Ireland which have an effect similar to that of bankruptcy; “Chair” has the meaning given in Article 10; “Circulation Date” in relation to a written resolution, has the meaning given to it in the Companies Acts;

16 Section 1(1) of the Charities Act 2006 defines a “charity” as an institution which “is established for charitable purposes only, and falls to be subject to the control of the High Court in the exercise of its jurisdiction with respect to charities”.

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Term 1.7 “Clear Days”

1.8

1.9 1.10 1.11

1.12 1.13 1.14 1.15 1.16 1.17 1.18

Meaning in relation to the period of a notice, that period excluding the day when the notice is given or deemed to be given and the day for which it is given or on which it is to take effect; “community” is to be construed in accordance with accordance with Section 35(5) of the Company’s (Audit) Investigations and Community Enterprise) Act 2004; “Companies Acts” means the Companies Acts (as defined in Section 2 of the Companies Act 2006), in so far as they apply to the Company; “Company” [  ] [Community Interest Company/C.I.C.]; “Conflict of any direct or indirect interest of a Director Interest” (whether personal, by virtue of a duty of loyalty to another organisation or otherwise) that conflicts, or might conflict with the interests of the Company; “Director” a director of the Company, and includes any person occupying the position of director, by whatever name called; “Document” includes, unless otherwise indicated, any document sent or supplied in Electronic Form; “Electronic Form” have the meanings respectively given to and “Electronic them in Section 1168 of the Companies Means” Act 2006; “Hard Copy Form” has the meaning given to it in the Companies Act 2006; “Memorandum” the Company’s memorandum of association; “participate” in relation to a Directors’ meeting, has the meaning given in Article 14; “Permitted “Registered Society” means – Registered Society” (a) a registered society within the meaning given by section 1(1) of the Co-operative and Community Benefit Societies Act 2014; or (b) a society registered or deemed to be registered under the Industrial and Provident Societies Act (Northern Ireland) 1969;” 232

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Term 1.19 “the Regulator” 1.20 “Secretary” 1.21 “specified” 1.22 “subsidiary” 1.23 “transfer”

1.24 “Writing”

2.

Meaning means the Regulator of Community Interest Companies; the secretary of the Company (if any); means specified in the articles of association of the Company for the purposes of this paragraph; has the meaning given in section 1159 of the Companies Act 2006; includes every description of disposition, payment, release or distribution, and the creation or extinction of an estate or interest in, or right over, any property; and the representation or reproduction of words, symbols or other information in a visible form by any method or combination of methods, whether sent or supplied in Electronic Form or otherwise.

Subject to clause 3 of this Schedule, any reference in the Articles to an enactment includes a reference to that enactment as re-enacted or amended from time to time and to any subordinate legislation made under it.

3. Unless the context otherwise requires, other words or expressions contained in these Articles bear the same meaning as in the Companies Acts as in force on the date when these Articles become binding on the Company.

233

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Chapter 8.1  Community Interest Company Limited by Guarantee (CIC Limited by Guarantee, Schedule 1, Large Membership) The Companies Act 2006 Articles of Association of [INSERT NAME] [Community Interest Company/C.I.C. delete as applicable] INTERPRETATION 1.

Defined Terms



The interpretation of these Articles is governed by the provisions set out in the Schedule at end of the Articles. Article 1 Analysis The interpretation in the new model articles (NMA) appears in article 1 of those articles (see para 6B.2).

COMMUNITY AND INTEREST COMPANY AND ASSET LOCK 2.

Community Interest Company



The Company is to be a community interest company. Article 2 Analysis See article 2 in Chapter 8.0.

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3.

Asset Lock1 3.1 The Company shall not transfer any of its assets other than for full consideration. 3.2 Provided the conditions in Article 3.3 are satisfied, Article 3.1 shall not apply to: (a) the transfer of assets to any specified asset-locked body, or (with the consent of the Regulator) to any other asset-locked body; and (b) the transfer of assets made for the benefit of the community other than by way of a transfer of assets into an asset-locked body. 3.3 The conditions are that the transfer of assets must comply with any restrictions on the transfer of assets for less than full consideration which may be set out elsewhere in the Memorandum or Articles of the Company. 3.4 If: (a) the Company is wound up under the Insolvency Act 1986; and (b) all its liabilities have been satisfied,

any residual assets shall be given or transferred to the asset-locked body specified in Article 3.5 below.

3.5 For the purposes of this Article 3, the following asset-locked body is specified as a potential recipient of the Company’s assets under Articles 3.2 and 3.4:

Name: [..........................................................]



(Please note that a community interest company cannot nominate itself as the asset locked body. It also cannot nominate a non-asset locked body. An asset locked body is defined as a CIC or charity, a permitted society or non-UK based equivalent.)



Charity Registration Number (if applicable): [........................]



Company Registration Number (if applicable): [.....................]



Registered Office: [................................................................]2

1 See “Office of the Regulator of Community Interest Companies: Information and guidance notes” (DBEIS, May 2016), Chapter 6. Inclusion of the provisions contained in articles 3.1 to 3.3 is mandatory, reflecting Community Interest Company Regulations 2005 (CICR), Sch 1, para 1(1) to (3). 2 See CICR, reg 23 and the Regulator’s information and guidance notes, Chapters 6 and 10. If the company does not specify that the remaining residual assets are to be transferred to a particular assetlocked body, an appropriate recipient will be chosen by the Regulator, in consultation with the company’s directors and members.

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Article 3 Analysis See article 3 in Chapter 8.0. 4.

Not for profit



The Company is not established or conducted for private gain: any surplus or assets are used principally for the benefit of the community. Article 4 Analysis See article 4 in Chapter 8.0.

OBJECTS, POWERS AND LIMITATION OF LIABILITY 5.

Objects3



The objects of the Company are to carry on activities which benefit the community and in particular (without limitation) to [    ]. Article 5 Analysis See article 5 in Chapter 8.0.

6.

Powers



To further its objects the Company may do all such lawful things as may further the Company’s objects and, in particular, but, without limitation, may borrow or raise and secure the payment of money for any purpose including for the purposes of investment or of raising funds. Article 6 Analysis See article 6 in Chapter 8.0.

7.

Liability of members4



The liability of each member is limited to £1, being the amount that each member undertakes to contribute to the assets of the Company in

3 On the specification of the company’s objects, see the Regulator’s information and guidance notes, Chapter 5. 4 On limited liability, see the Regulator’s information and guidance notes, Chapter 3. On guarantees generally, see the Regulator’s information and guidance notes, Chapter 3.2.

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the event of its being wound up while he or she is a member or within one year after he or she ceases to be a member, for: 7.1 payment of the Company’s debts and liabilities contracted before he or she ceases to be a member; 7.2 payment of the costs, charges and expenses of winding up; and 7.3 adjustment of the rights of the contributories among themselves. Article 7 Analysis See article 7 in Chapter 8.0. DIRECTORS DIRECTORS’ POWERS AND RESPONSIBILITIES 8.

Directors’ general authority



Subject to the Articles, the Directors are responsible for the management of the Company’s business, for which purpose they may exercise all the powers of the Company. Article 8 Analysis See article 8 in Chapter 8.0.

9.

Members’ reserve power 9.1 The members may, by special resolution, direct the Directors to take, or refrain from taking, specific action. 9.2 No such special resolution invalidates anything which the Directors have done before the passing of the resolution.

Article 9 Analysis See article 9 in Chapter 8.0. 10. Chair

The Directors may appoint one of their number to be the chair of the Directors for such term of office as they determine and may at any time remove him or her from office.

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Article 10 Analysis See article 10 in Chapter 8.0. 11. Directors may delegate5 11.1 Subject to the Articles, the Directors may delegate any of the powers which are conferred on them under the Articles: (a) to such person or committee; (b) by such means (including by power of attorney); (c) to such an extent; (d) in relation to such matters or territories; and (e) on such terms and conditions; (f)

as they think fit.

11.2 If the Directors so specify, any such delegation may authorise further delegation of the Directors’ powers by any person to whom they are delegated. 11.3 The Directors may revoke any delegation in whole or part, or alter its terms and conditions. Article 11 Analysis See article 11 in Chapter 8.0. 12. Committees 12.1 Committees to which the Directors delegate any of their powers must follow procedures which are based as far as they are applicable on those provisions of the Articles which govern the taking of decisions by Directors. 12.2 The Directors may make rules of procedure for all or any committees, which prevail over rules derived from the Articles if they are not consistent with them. 5 Articles 11 and 12 allow the directors to delegate any of their functions. Delegation may take the form of, for instance, the directors giving a managing director general authority to run the company’s dayto-day business, or responsibility for specific matters being delegated to particular directors (eg financial matters to a finance director); or it may be equally appropriate to delegate matters to persons other than directors. In all cases, it is important to remember that delegation does not absolve directors of their general duties towards the company and their overall responsibility for its management. This means, amongst other things, that directors must be satisfied that those to whom responsibilities are delegated are competent to carry them out.

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Article 12 Analysis See article 5 of the NMA in Chapter 6B (para 6B.6). DECISION-MAKING BY DIRECTORS 13. Directors to take decisions collectively6

Any decision of the Directors must be either a majority decision at a meeting or a decision taken in accordance with Article 19. Article 13 Analysis See article 12 in Chapter 8.0.

14. Calling a Directors’ meeting 14.1 Two Directors may (and the Secretary, if any, must at the request of two Directors) call a Directors’ meeting. 14.2 A Directors’ meeting must be called by at least seven Clear Days’ notice unless either: (a) all the Directors agree; or (b) urgent circumstances require shorter notice. 14.3 Notice of Directors’ meetings must be given to each Director. 14.4 Every notice calling a Directors’ meeting must specify: (a) the place, day and time of the meeting; and (b) if it is anticipated that Directors participating in the meeting will not be in the same place, how it is proposed that they should communicate with each other during the meeting. 14.5 Notice of Directors’ meetings need not be in Writing. 14.6 Notice of Directors’ meetings may be sent by Electronic Means to an Address provided by the Director for the purpose. Article 14 Analysis See article 13 in Chapter 8.0.

6 Article 13 states that the directors must make decisions by majority at a meeting in accordance with article 15; or unanimously if taken in accordance with article 19.

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15. Participation in Directors’ meetings 15.1 Subject to the Articles, Directors participate in a Directors’ meeting, or part of a Directors’ meeting, when: (a) the meeting has been called and takes place in accordance with the Articles; and (b) they can each communicate to the others any information or opinions they have on any particular item of the business of the meeting. 15.2 In determining whether Directors are participating in a Directors’ meeting, it is irrelevant where any Director is or how they communicate with each other.7 15.3 If all the Directors participating in a meeting are not in the same place, they may decide that the meeting is to be treated as taking place wherever any of them is. Article 15 Analysis See article 14 in Chapter 8.0. 16. Quorum for Directors’ meetings8 16.1 At a Directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting. 16.2 The quorum for Directors’ meetings may be fixed from time to time by a decision of the Directors, but it must never be less than two, and unless otherwise fixed it is [two]. 16.3 If the total number of Directors for the time being is less than the quorum required, the Directors must not take any decision other than a decision: (a) to appoint further Directors; or (b) to call a general meeting so as to enable the members to appoint further Directors.

7 Article 15.2 is designed to facilitate the taking of decisions by the directors communicating via telephone or video conference calls. Note the requirement to keep a written record of meetings and decisions (article 48). 8 The quorum may be fixed in absolute terms (eg “two Directors”) or as a proportion of the total number of directors (eg “one third of the total number of Directors”). You may even wish to stipulate that particular named directors, or directors representing particular stakeholder interests, must be present to constitute a quorum. In any event, it is recommended that the quorum should never be less than half of the total number of directors.

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Article 16 Analysis See article 11 of the NMA in Chapter 6B (para 6B.12). 17. Chairing of Directors’ meetings

The Chair, if any, or in his or her absence another Director nominated by the Directors present shall preside as chair of each Directors’ meeting.

Article 17 Analysis See article 16 in Chapter 8.0. 18. Decision making at a meeting9 18.1 Questions arising at a Directors’ meeting shall be decided by a majority of votes. 18.2 In all proceedings of Directors each Director must not have more than one vote.10 18.3 In case of an equality of votes, the Chair shall have a second or casting vote.

Article 18 Analysis See article 17 in Chapter 8.0. 19. Decisions without a meeting11 19.1 The Directors may take a unanimous decision without a Directors’ meeting by indicating to each other by any means, including without limitation by Electronic Means, that they share a common view on a matter. Such a decision may, but need not, take the form of a resolution in Writing, copies of which have been signed by each Director or to which each Director has otherwise indicated agreement in Writing.

9 Article 18 reflects CICR, Sch 1, para 4, which is required to be included in the articles of all CICs. 10 You may wish to include a provision which gives the chair of the board a casting vote. This will enable the directors to resolve any deadlock at board level. 11 Article 19 is designed to facilitate the taking of decisions by directors following discussions in the form of, for example, email exchanges copied to all the directors. Note the requirements as to recording the decision in articles 19.2 and 48.

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19.2 A decision which is made in accordance with Article 19.1 shall be as valid and effectual as if it had been passed at a meeting duly convened and held, provided the following conditions are complied with: (a) approval from each Director must be received by one person being either such person as all the Directors have nominated in advance for that purpose or such other person as volunteers if necessary (“the Recipient”), which person may, for the avoidance of doubt, be one of the Directors; (b) following receipt of responses from all of the Directors, the Recipient must communicate to all of the Directors by any means whether the resolution has been formally approved by the Directors in accordance with this Article 19.2; (c) the date of the decision shall be the date of the communication from the Recipient confirming formal approval; (d) the Recipient must prepare a minute of the decision in accordance with Article 48. Article 19 Analysis See article 18 in Chapter 8.0. 20. Conflicts of interest12 20.1 Whenever a Director finds himself or herself in a situation that is reasonably likely to give rise to a Conflict of Interest, he or she must declare his or her interest to the Directors unless, or except to the extent that, the other Directors are or ought reasonably to be aware of it already. 20.2 If any question arises as to whether a Director has a Conflict of Interest, the question shall be decided by a majority decision of the other Directors. 20.3 Whenever a matter is to be discussed at a meeting or decided in accordance with Article 19 and a Director has a Conflict of Interest in respect of that matter then, subject to Article 21, he or she must: (a) remain only for such part of the meeting as in the view of the other Directors is necessary to inform the debate; (b) not be counted in the quorum for that part of the meeting; and (c) withdraw during the vote and have no vote on the matter. 12 The provisions in articles 20 and 21 reflect the position under the Companies Act 2006. However, it is recommended that, as a matter of good practice, all actual and potential conflicts of interest are disclosed in writing or at a meeting, as the case may be.

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20.4 When a Director has a Conflict of Interest which he or she has declared to the Directors, he or she shall not be in breach of his or her duties to the Company by withholding confidential information from the Company if to disclose it would result in a breach of any other duty or obligation of confidence owed by him or her. 21. Directors’ power to authorise a conflict of interest 21.1 The Directors have power to authorise a Director to be in a position of Conflict of Interest provided: (a) in relation to the decision to authorise a Conflict of Interest, the conflicted Director must comply with Article 20.3; (b) in authorising a Conflict of Interest, the Directors can decide the manner in which the Conflict of Interest may be dealt with and, for the avoidance of doubt, they can decide that the Director with a Conflict of Interest can participate in a vote on the matter and can be counted in the quorum; (c) the decision to authorise a Conflict of Interest can impose such terms as the Directors think fit and is subject always to their right to vary or terminate the authorisation; and 21.2 If a matter, or office, employment or position, has been authorised by the Directors in accordance with Article 21.1 then, even if he or she has been authorised to remain at the meeting by the other Directors, the Director may absent himself or herself from meetings of the Directors at which anything relating to that matter, or that office, employment or position, will or may be discussed. 21.3 A Director shall not be accountable to the Company for any benefit which he or she derives from any matter, or from any office, employment or position, which has been authorised by the Directors in accordance with Article 21.1 (subject to any limits or conditions to which such approval was subject). 22. Register of Directors’ interests

The Directors shall cause a register of Directors’ interests to be kept. A Director must declare the nature and extent of any interest, direct or indirect, which he or she has in a proposed transaction or arrangement with the Company or in any transaction or arrangement entered into by the Company which has not previously been declared. Article 20–22 Analysis See articles 14 and 15 of the NMA in Chapter 6B (paras 6B.15 and 6B.16).

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APPOINTMENT AND RETIREMENT OF DIRECTORS13 23. Methods of appointing directors 23.1 Those persons notified to the Registrar of Companies as the first Directors of the Company shall be the first Directors. 23.2 Any person who is willing to act as a Director, and is permitted by law to do so, may be appointed to be a Director: (a) by ordinary resolution; or (b) by a decision of the Directors. 23.3 In any case where, as a result of death, the Company has no members and no Directors, the personal representatives of the last member to have died have the right, by notice in writing, to appoint a person to be a member. 23.4 For the purposes of Article 23.3, where two or more members die in circumstances rendering it uncertain who was the last to die, a younger member is deemed to have survived an older member. Article 23 Analysis See article 17 of the NMA in Chapter 6B (para 6B.18). 24. Termination of Director’s appointment14

A person ceases to be a Director as soon as: (a) that person ceases to be a Director by virtue of any provision of the Companies Acts, or is prohibited from being a Director by law; (b) a bankruptcy order is made against that person, or an order is made against that person in individual insolvency proceedings in a jurisdiction other than England and Wales or Northern Ireland which have an effect similar to that of bankruptcy; (c) a composition is made with that person’s creditors generally in satisfaction of that person’s debts;

13 Private companies are obliged to have at least one director. Provisions can be inserted into the articles providing for a minimum number of directors. Where the company has just one director, that director must be a natural person. You may wish to consider whether provision should also be made for a maximum number of directors (eg “and the total number of Directors in office at any one time shall not exceed four”). While it is often important to ensure proper representation of a number of different groups on a board of directors, very large boards can become unwieldy and a maximum number of directors provision may help to guard against this. 14 The board of directors cannot remove a director other than in accordance with the provisions in article 24 and the Companies Act 2006.

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(d) notification is received by the Company from the Director that the Director is resigning from office, and such resignation has taken effect in accordance with its terms (but only if at least two Directors will remain in office when such resignation has taken effect); (e) the Director fails to attend three consecutive meetings of the Directors and the Directors resolve that the Director be removed for this reason; or (f)

at a general meeting of the Company, a resolution is passed that the Director be removed from office, provided the meeting has invited the views of the Director concerned and considered the matter in the light of such views.

Article 24 Analysis See article 18 of the NMA in Chapter 6B (para 6B.19). 25. Directors’ remuneration15 25.1 Directors may undertake any services for the Company that the Directors decide. 25.2 Directors are entitled to such remuneration as the Directors determine: (a) for their services to the Company as Directors; and (b) for any other service which they undertake for the Company. 25.3 Subject to the Articles, a Director’s remuneration may: (a) take any form; and (b) include any arrangements in connection with the payment of a pension, allowance or gratuity, or any death, sickness or disability benefits, to or in respect of that director. 25.4 Unless the Directors decide otherwise, Directors’ remuneration accrues from day to day. 25.5 Unless the Directors decide otherwise, Directors are not accountable to the Company for any remuneration which they receive as Directors or other officers or employees of the Company’s subsidiaries or of any other body corporate in which the Company is interested.

15 See the guidance on directors’ remuneration in the Regulator’s information and guidance notes, Chapter 9.

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Article 25 Analysis See article 23 in Chapter 8.0. 26. Directors’ expenses

The Company may pay any reasonable expenses which the Directors properly incur in connection with their attendance at: (a) meetings of Directors or committees of Directors; (b) general meetings; or (c) separate meetings of any class of members or of the holders of any debentures of the Company,



or otherwise in connection with the exercise of their powers and the discharge of their responsibilities in relation to the Company. Article 26 Analysis See article 20 of the NMA in Chapter 6B (para 6B.21).

MEMBERS16 BECOMING AND CEASING TO BE A MEMBER17 27. Becoming a member18 27.1 The subscribers to the Memorandum are the first members of the Company. 27.2 Such other persons as are admitted to membership in accordance with the Articles shall be members of the Company. 27.3 No person shall be admitted a member of the Company unless he or she is approved by the Directors.

16 See Companies Act 2006, s 112. A company’s members are (i) the subscribers to its memorandum; and (ii) every other person who agrees to become a member of the company and whose name is entered in its register of members. 17 There is no need for all those who wish to become members to subscribe to the memorandum on incorporation; they can become members and be entered in the register of members after the company has been formed. 18 Inclusion of the provisions in article 27 (reflecting CICR, Sch 1, para 2(1)–(4)) is mandatory. Directors should ensure that the information to be included on an application form includes all the information which will be required to fill in Companies House Form 288a on the appointment of the new member as a director (see www.companieshouse.gov.uk/forms/generalForms/288A.pdf).

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27.4 Every person who wishes to become a member shall deliver to the Company an application for membership in such form (and containing such information) as the Directors require and executed by him or her. 28. Termination of membership19 28.1 Membership is not transferable to anyone else. 28.2 Membership is terminated if: (a) the member dies or ceases to exist; (b) otherwise in accordance with the Articles; or (c) at a meeting of the Directors at which at least half of the Directors are present, a resolution is passed resolving that the member be expelled on the ground that his or her continued membership is harmful to or is likely to become harmful to the interests of the Company. Such a resolution may not be passed unless the member has been given at least 14 Clear Days’ notice that the resolution is to be proposed, specifying the circumstances alleged to justify expulsion, and has been afforded a reasonable opportunity of being heard by or of making written representations to the Directors. A member expelled by such a resolution will nevertheless remain liable to pay to the Company any subscription or other sum owed by him or her. Article 27 and 28 Analysis See articles 25 and 26 in Chapter 8.0. ORGANISATION OF GENERAL MEETINGS20 29. General meetings 29.1 The Directors may call a general meeting at any time. 29.2 The Directors must call a general meeting if required to do so by the members under the Companies Acts.21 19 Inclusion of the provisions of articles 28.1 and 28.2.1–28.2.2 (reflecting CICR, Sch 1, para 2(5) and (6)) is mandatory. 20 The Companies Act 2006 has removed the need for private companies to hold annual general meetings and therefore these articles follow suit; however, if you wish, you can insert an additional provision which obliges the company to hold annual general meetings. 21 Article 29.2 provides that general meetings must be held in accordance with the provisions of the Companies Act 2006.You must specify how many members are required to be present to hold a valid general meeting. The quorum may be fixed in absolute terms (eg “four Members”) or as a proportion of the total number of members (eg “three quarters of the Members from time to time”). You may

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30. Length of notice

All general meetings must be called by either: 30.1 at least 14 Clear Days’ notice; or 30.2 shorter notice if it is so agreed by [a majority of the members having a right to attend and vote at that meeting. Any such majority must together represent at least [90%] of the total voting rights at that meeting of all the members].

31. Contents of notice 31.1 Every notice calling a general meeting must specify the place, day and time of the meeting, whether it is a general or an annual general meeting, and the general nature of the business to be transacted. 31.2 If a special resolution is to be proposed, the notice must include the proposed resolution and specify that it is proposed as a special resolution. 31.3 In every notice calling a meeting of the Company there must appear with reasonable prominence a statement informing the member of his or her rights to appoint another person as his or her proxy at a general meeting. 32. Service of notice

Notice of general meetings must be given to every member, to the Directors and to the auditors of the Company.

33. Attendance and speaking at general meetings 33.1 A person is able to exercise the right to speak at a general meeting when that person is in a position to communicate to all those attending the meeting, during the meeting, any information or opinions which that person has on the business of the meeting. 33.2 A person is able to exercise the right to vote at a general meeting when: (a) that person is able to vote, during the meeting, on resolutions put to the vote at the meeting; and (b) that person’s vote can be taken into account in determining whether or not such resolutions are passed at the same time as the votes of all the other persons attending the meeting. 33.3 The Directors may make whatever arrangements they consider appropriate to enable those attending a general meeting to exercise their rights to speak or vote at it. even wish to stipulate that particular named members, or members representing particular stakeholder interests, must be present to constitute a quorum. In any event, it is recommended that the quorum should never be less than half of the total number of members.

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33.4 In determining attendance at a general meeting, it is immaterial whether any two or more members attending it are in the same place as each other. 33.5 Two or more persons who are not in the same place as each other attend a general meeting if their circumstances are such that if they have (or were to have) rights to speak and vote at that meeting, they are (or would be) able to exercise them. Article 29–33 Analysis See articles 9–10 of the NMA in Chapter 6B (paras 6B.10–6B.11). 34. Quorum for general meetings 34.1 No business (other than the appointment of the chair of the meeting) may be transacted at any general meeting unless a quorum is present. 34.2 Two persons entitled to vote on the business to be transacted (each being a member, a proxy for a member or a duly Authorised Representative of a member); or 10% of the total membership (represented in person or by proxy), whichever is greater, shall be a quorum. 34.3 If a quorum is not present within half an hour from the time appointed for the meeting, the meeting shall stand adjourned to the same day in the next week at the same time and place, or to such time and place as the Directors may determine, and if at the adjourned meeting a quorum is not present within half an hour from the time appointed for the meeting those present and entitled to vote shall be a quorum. Article 34 Analysis See article 11 of the NMA in Chapter 6B (para 6B.12). 35. Chairing general meetings 35.1 The Chair (if any) or in his or her absence some other Director nominated by the Directors will preside as chair of every general meeting. 35.2 If neither the Chair nor such other Director nominated in accordance with Article 35.1 (if any) is present within fifteen minutes after the time appointed for holding the meeting and willing to act, the Directors present shall elect one of their number 250

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to chair the meeting and, if there is only one Director present and willing to act, he or she shall be chair of the meeting. 35.3 If no Director is willing to act as chair of the meeting, or if no Director is present within fifteen minutes after the time appointed for holding the meeting, the members present in person or by proxy and entitled to vote must choose one of their number to be chair of the meeting, save that a proxy holder who is not a member entitled to vote shall not be entitled to be appointed chair of the meeting. Article 35 Analysis See article 12 of the NMA in Chapter 6B (para 6B.13). 36. Attendance and speaking by Directors and non-members 36.1 A Director may, even if not a member, attend and speak at any general meeting. 36.2 The chair of the meeting may permit other persons who are not members of the Company to attend and speak at a general meeting. Article 36 Analysis See article 40 of the NMA in Chapter 6B (para 6B.41). 37. Adjournment 37.1 The chair of the meeting may adjourn a general meeting at which a quorum is present if: (a) the meeting consents to an adjournment; or (b) it appears to the chair of the meeting that an adjournment is necessary to protect the safety of any person attending the meeting or ensure that the business of the meeting is conducted in an orderly manner. 37.2 The chair of the meeting must adjourn a general meeting if directed to do so by the meeting. 37.3 When adjourning a general meeting, the chair of the meeting must: (a) either specify the time and place to which it is adjourned or state that it is to continue at a time and place to be fixed by the Directors; and 251

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(b) have regard to any directions as to the time and place of any adjournment which have been given by the meeting. 37.4 If the continuation of an adjourned meeting is to take place more than 14 days after it was adjourned, the Company must give at least seven Clear Days’ notice of it: (a) to the same persons to whom notice of the Company’s general meetings is required to be given; and (b) containing the same information which such notice is required to contain. 37.5 No business may be transacted at an adjourned general meeting which could not properly have been transacted at the meeting if the adjournment had not taken place. Article 37 Analysis See article 41 of the NMA in Chapter 6B (para 6B.42). VOTING AT GENERAL MEETINGS 38. Voting: general 38.1 A resolution put to the vote of a general meeting must be decided on a show of hands unless a poll is duly demanded in accordance with the Articles. 38.2 A person who is not a member of the Company shall not have any right to vote at a general meeting of the Company; but this is without prejudice to any right to vote on a resolution affecting the rights attached to a class of the Company’s debentures.22 38.3 Article 38.2 shall not prevent a person who is a proxy for a member or a duly Authorised Representative from voting at a general meeting of the Company. 39. Votes 39.1 On a vote on a resolution on a show of hands at a meeting every person present in person (whether a member, proxy or Authorised Representative of a member) and entitled to vote shall have a maximum of one vote. 39.2 On a vote on a resolution on a poll at a meeting every member present in person or by proxy or Authorised Representative shall have one vote. 22 Inclusion of article 38.2 (reflecting paragraph 3(1) of Schedule 1 to the Regulations) is mandatory.

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39.3 In the case of an equality of votes, whether on a show of hands or on a poll, the chair of the meeting shall not be entitled to a casting vote in addition to any other vote he or she may have. 39.4 No member shall be entitled to vote at any general meeting unless all monies presently payable by him, her or it to the Company have been paid. 39.5 The following provisions apply to any organisation that is a member (“a Member Organisation”): (a) a Member Organisation may nominate any individual to act as its representative (“an Authorised Representative”) at any meeting of the Company; (b) the Member Organisation must give notice in Writing to the Company of the name of its Authorised Representative. The Authorised Representative will not be entitled to represent the Member Organisation at any meeting of the Company unless such notice has been received by the Company. The Authorised Representative may continue to represent the Member Organisation until notice in Writing is received by the Company to the contrary; (c) a Member Organisation may appoint an Authorised Representative to represent it at a particular meeting of the Company or at all meetings of the Company until notice in Writing to the contrary is received by the Company; (d) any notice in Writing received by the Company shall be conclusive evidence of the Authorised Representative’s authority to represent the Member Organisation or that his or her authority has been revoked.The Company shall not be required to consider whether the Authorised Representative has been properly appointed by the Member Organisation; (e) an individual appointed by a Member Organisation to act as its Authorised Representative is entitled to exercise (on behalf of the Member Organisation) the same powers as the Member Organisation could exercise if it were an individual member; (f) on a vote on a resolution at a meeting of the Company, the Authorised Representative has the same voting rights as the Member Organisation would be entitled to if it was an individual member present in person at the meeting; and (g) the power to appoint an Authorised Representative under this Article 39.5 is without prejudice to any rights which the Member Organisation has under the Companies Acts and the Articles to appoint a proxy or a corporate representative.

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Article 38 and 39 Analysis See article 42 of the NMA in Chapter 6B (para 6B.43). 40. Poll votes 40.1 A poll on a resolution may be demanded: (a) in advance of the general meeting where it is to be put to the vote; or (b) at a general meeting, either before a show of hands on that resolution or immediately after the result of a show of hands on that resolution is declared. 40.2 A poll may be demanded by: (a) the chair of the meeting; (b) the Directors; (c) two or more persons having the right to vote on the resolution; (d) any person, who, by virtue of being appointed proxy for one or more members having the right to vote at the meeting, holds two or more votes; or (e) a person or persons representing not less than one tenth of the total voting rights of all the members having the right to vote on the resolution. 40.3 A demand for a poll may be withdrawn if: (a) the poll has not yet been taken; and (b) the chair of the meeting consents to the withdrawal. 40.4 Polls must be taken immediately and in such manner as the chair of the meeting directs. Article 40 Analysis See article 44 of the NMA in Chapter 6B (para 6B.45). 41. Errors and disputes 41.1 No objection may be raised to the qualification of any person voting at a general meeting except at the meeting or adjourned meeting at which the vote objected to is tendered, and every vote not disallowed at the meeting is valid. 41.2 Any such objection must be referred to the chair of the meeting whose decision is final. 254

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Article 41 Analysis See article 43 of the NMA in Chapter 6B (para 6B.44). 42. Content of proxy notices 42.1 Proxies may only validly be appointed by a notice in writing (a “Proxy Notice”) which: (a) states the name and address of the member appointing the proxy; (b) identifies the person appointed to be that member’s proxy and the general meeting in relation to which that person is appointed; (c) is signed by or on behalf of the member appointing the proxy, or is authenticated in such manner as the directors may determine; and (d) is delivered to the Company in accordance with the Articles and any instructions contained in the notice of the general meeting to which they relate. 42.2 The Company may require Proxy Notices to be delivered in a particular form, and may specify different forms for different purposes. 42.3 Proxy Notices may specify how the proxy appointed under them is to vote (or that the proxy is to abstain from voting) on one or more resolutions. 42.4 Unless a Proxy Notice indicates otherwise, it must be treated as: (a) allowing the person appointed under it as a proxy discretion as to how to vote on any ancillary or procedural resolutions put to the meeting; and (b) appointing that person as a proxy in relation to any adjournment of the general meeting to which it relates as well as the meeting itself. Article 42 Analysis See article 45 of the NMA in Chapter 6B (para 6B.46). 43. Delivery of proxy notices 43.1 A person who is entitled to attend, speak or vote (either on a show of hands or on a poll) at a general meeting remains so entitled in 255

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respect of that meeting or any adjournment of it, even though a valid Proxy Notice has been delivered to the Company by or on behalf of that person. 43.2 An appointment under a Proxy Notice may be revoked by delivering to the Company a notice in Writing given by or on behalf of the person by whom or on whose behalf the Proxy Notice was given. 43.3 A notice revoking the appointment of a proxy only takes effect if it is delivered before the start of the meeting or adjourned meeting to which it relates. Article 43 Analysis See article 46 of the NMA in Chapter 6B (para 6B.47). 44. Amendments to resolutions 44.1 An ordinary resolution to be proposed at a general meeting may be amended by ordinary resolution if: (a) notice of the proposed amendment is given to the Company in Writing by a person entitled to vote at the general meeting at which it is to be proposed not less than 48 hours before the meeting is to take place (or such later time as the chair of the meeting may determine); and (b) the proposed amendment does not, in the reasonable opinion of the chair of the meeting, materially alter the scope of the resolution. 44.2 A special resolution to be proposed at a general meeting may be amended by ordinary resolution, if: (a) the chair of the meeting proposes the amendment at the general meeting at which the resolution is to be proposed; and (b) the amendment does not go beyond what is necessary to correct a grammatical or other non-substantive error in the resolution. 44.3 If the chair of the meeting, acting in good faith, wrongly decides that an amendment to a resolution is out of order, the chair’s error does not invalidate the vote on that resolution. Article 44 Analysis See article 47 of the NMA in Chapter 6B (para 6B.48). 256

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WRITTEN RESOLUTIONS 45. Written resolutions 45.1 Subject to Article 45.3, a written resolution of the Company passed in accordance with this Article 45 shall have effect as if passed by the Company in general meeting: (a) A written resolution is passed as an ordinary resolution if it is passed by a simple majority of the total voting rights of eligible members. (b) A written resolution is passed as a special resolution if it is passed by members representing not less than 75% of the total voting rights of eligible members. A written resolution is not a special resolution unless it states that it was proposed as a special resolution. 45.2 In relation to a resolution proposed as a written resolution of the Company the eligible members are the members who would have been entitled to vote on the resolution on the circulation date of the resolution. 45.3 A members’ resolution under the Companies Acts removing a Director or an auditor before the expiration of his or her term of office may not be passed as a written resolution. 45.4 A copy of the written resolution must be sent to every member together with a statement informing the member how to signify their agreement to the resolution and the date by which the resolution must be passed if it is not to lapse. Communications in relation to written notices shall be sent to the Company’s auditors in accordance with the Companies Acts. 45.5 A member signifies their agreement to a proposed written resolution when the Company receives from him or her an authenticated Document identifying the resolution to which it relates and indicating his or her agreement to the resolution: (a) If the Document is sent to the Company in Hard Copy Form, it is authenticated if it bears the member’s signature. (b) If the Document is sent to the Company by Electronic Means, it is authenticated [if it bears the member’s signature] or [if the identity of the member is confirmed in a manner agreed by the Directors] or [if it is accompanied by a statement of the identity of the member and the Company has no reason to doubt the truth of that statement] or [if it is from an email Address notified by the member to the Company for the purposes of receiving Documents or information by Electronic Means].

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45.6 A written resolution is passed when the required majority of eligible members have signified their agreement to it. 45.7 A proposed written resolution lapses if it is not passed within 28 days beginning with the circulation date. Article 45 Analysis Article 45 does not appear in any versions of the new model articles under the Companies Act 2006.The provisions outline the requirements of section 288 of the Companies Act 2006 (as detailed in article 45.1) to pass a written resolution. A written resolution, which may take the form of an ordinary or special resolution, is proposed and passed in writing, as opposed to a more traditional general meeting where each member votes. All decisions in a private limited company can be dealt with by written resolution, with the exception of the removal of a director, as stipulated by article 45.3 which provides that a written resolution may not be passed to remove a director before the expiration of his period of office. Article 45.7 reiterates section 297 of the Companies Act 2006: if a proposed written resolution is not passed within 28 days beginning with the circulation date, it will lapse. ADMINISTRATIVE ARRANGEMENTS AND MISCELLANEOUS 46. Means of communication to be used 46.1 Subject to the Articles, anything sent or supplied by or to the Company under the Articles may be sent or supplied in any way in which the Companies Act 2006 provides for Documents or information which are authorised or required by any provision of that Act to be sent or supplied by or to the Company. 46.2 Subject to the Articles, any notice or Document to be sent or supplied to a Director in connection with the taking of decisions by Directors may also be sent or supplied by the means by which that Director has asked to be sent or supplied with such notices or Documents for the time being. 46.3 A Director may agree with the Company that notices or Documents sent to that Director in a particular way are to be deemed to have been received within an agreed time of their being sent, and for the agreed time to be less than 48 hours. Article 46 Analysis See article 48 of the NMA in Chapter 6B (para 6B.49).

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47. Irregularities

The proceedings at any meeting or on the taking of any poll or the passing of a written resolution or the making of any decision shall not be invalidated by reason of any accidental informality or irregularity (including any accidental omission to give or any non-receipt of notice) or any want of qualification in any of the persons present or voting or by reason of any business being considered which is not referred to in the notice unless a provision of the Companies Acts specifies that such informality, irregularity or want of qualification shall invalidate it. Article 47 Analysis This article does not appear in any of the new model articles; see para 6C.8 (Boiler plate clauses).

48. Minutes 48.1 The Directors must cause minutes to be made in books kept for the purpose: (a) of all appointments of officers made by the Directors; (b) of all resolutions of the Company and of the Directors; and (c) of all proceedings at meetings of the Company and of the Directors, and of committees of Directors, including the names of the Directors present at each such meeting;

and any such minute, if purported to be signed (or in the case of minutes of Directors’ meetings signed or authenticated) by the chair of the meeting at which the proceedings were had, or by the chair of the next succeeding meeting, shall, as against any member or Director of the Company, be sufficient evidence of the proceedings.

48.2 The minutes must be kept for at least ten years from the date of the meeting, resolution or decision. Article 48 Analysis This article restates section 24823 detailing the company’s requirements to cause minutes to be recorded and kept for a period of no less than 10 years. It should be noted that failure to record minutes is a criminal offence. This article does not appear in any versions of the new model articles.

23 Companies Act 2006, s 248 (Minutes of directors’ meetings).

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49. Records and accounts24

The Directors shall comply with the requirements of the Companies Acts as to maintaining a members’ register, keeping financial records, the audit or examination of accounts and the preparation and transmission to the Registrar of Companies and the Regulator of: 49.1 annual reports; 49.2 annual returns; and 49.3 annual statements of account. Article 49 Analysis Article 49 provides an overview of section 386 of the Companies Act 2006 which states that any company must keep adequate accounting records. This article does not appear in any versions of the new model articles.

50. Indemnity 50.1 Subject to Article 50.2, a relevant Director of the Company or an associated company may be indemnified out of the Company’s assets against: (a) any liability incurred by that Director in connection with any negligence, default, breach of duty or breach of trust in relation to the Company or an associated company; (b) any liability incurred by that Director in connection with the activities of the Company or an associated company in its capacity as a trustee of an occupational pension scheme (as defined in section 235(6) of the Companies Act 2006); and (c) any other liability incurred by that Director as an officer of the Company or an associated company. 50.2 This Article does not authorise any indemnity which would be prohibited or rendered void by any provision of the Companies Acts or by any other provision of law. 50.3 In this Article: (a) companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate; and (b) a “relevant Director” means any Director or former Director of the Company or an associated company. 24 See the Companies House guidance booklet, “Accounts and Accounting Reference Dates” (available online at www.companies-house.gov.uk/about/gbhtml/gba3.shtml). On the annual CIC report, see the Regulator’s information and guidance notes, Chapter 8.

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51. Insurance 51.1 The Directors may decide to purchase and maintain insurance, at the expense of the Company, for the benefit of any relevant Director in respect of any relevant loss. 51.2 In this Article: (a) a “relevant Director” means any Director or former Director of the Company or an associated company; (b) a “relevant loss” means any loss or liability which has been or may be incurred by a relevant Director in connection with that Director’s duties or powers in relation to the Company, any associated company or any pension fund or employees’ share scheme of the company or associated company; and (c) companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate. Article 50 and 51 Analysis See articles 52 and 53 of the NMA in Chapter 6B (paras 6B.51 and 6B.52). 52. Exclusion of model articles

The relevant model articles for a company limited by guarantee are hereby expressly excluded. Article 52 Analysis In order to explicitly state the exclusion, it is good practice to provide the provision at the beginning of the document and specifically refer to the model articles regulations. It should be noted, for companies incorporated under previous Companies Acts, that the relevant articles should be expressly excluded. There is provision for an alternative precedent, as follows: “The model articles for private companies limited by guarantee contained or incorporated in Schedule 1 to the Companies (Model Articles) Regulations 2008, SI 2008/3229, as amended prior to the date of adoption of these articles (the ‘Model Articles’) shall not apply to the Company, save insofar as they are varied or excluded by, or are inconsistent with, the following articles.”

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SCHEDULE INTERPRETATION Defined terms 1.

In the Articles, unless the context requires otherwise, the following terms shall have the following meanings:

Term 1.1 “Address” 1.2 1.3

“Articles” “Authorised Representative”

1.4

“asset-locked body”

1.5

“bankruptcy”

1.6 1.7 1.8

“Chair” “chairman of the meeting” “Circulation Date”

1.9

“Clear Days”

Meaning includes a number or address used for the purposes of sending or receiving Documents by Electronic Means; the Company’s articles of association; means any individual nominated by a Member Organisation to act as its representative at any meeting of the Company in accordance with Article 39; means (i) a community interest company, a charity25 or a Permitted Society; or (ii) a body established outside the United Kingdom that is equivalent to any of those; includes individual insolvency proceedings in a jurisdiction other than England and Wales or Northern Ireland which have an effect similar to that of bankruptcy; has the meaning given in Article 10; has the meaning given in Article 35; in relation to a written resolution, has the meaning given to it in the Companies Acts; in relation to the period of a notice, that period excluding the day when the notice is given or deemed to be given and the day for which it is given or on which it is to take effect;

25 Charities Act 2006, s 1(1) defines a “charity” as an institution which “is established for charitable purposes only, and falls to be subject to the control of the High Court in the exercise of its jurisdiction with respect to charities”.

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Term 1.10 “community”

1.11 “Companies Acts” 1.12 “Company” 1.13 “Conflict of Interest”

1.14 “Director” 1.15 “Document” 1.16 “Electronic Form” and “Electronic Means” 1.17 “Hard Copy Form” 1.18 “Memorandum” 1.19 “paid” 1.20 “participate” 1.21 “Permitted Registered Society”

Meaning is to be construed in accordance with accordance with Section 35(5) of the Company’s (Audit) Investigations and Community Enterprise) Act 2004; means the Companies Acts (as defined in Section 2 of the Companies Act 2006), in so far as they apply to the Company; [  ] [Community Interest Company/C.I.C.]; any direct or indirect interest of a Director (whether personal, by virtue of a duty of loyalty to another organisation or otherwise) that conflicts, or might conflict with the interests of the Company; a director of the Company, and includes any person occupying the position of director, by whatever name called; includes, unless otherwise indicated, any Document sent or supplied in Electronic Form; have the meanings respectively given to them in Section 1168 of the Companies Act 2006; has the meaning given to it in the Companies Act 2006; the Company’s memorandum of association; means paid or credited as paid; in relation to a Directors’ meeting, has the meaning given in Article 15; “registered society” means – a.

a registered society within the meaning given by section 1(1) of the Co-operative and Community Benefit Societies Act 2014; or

b.

1.22 “Proxy Notice”

a society registered or deemed to be registered under the Industrial and provident Societies Act (Northern Ireland) 1969;” has the meaning given in Article 42;

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Term 1.23 “the Regulator” 1.24 “Secretary” 1.25 “specified” 1.26 “subsidiary” 1.27 “transfer”

1.28 “Writing”

2.

Meaning means the Regulator of Community Interest Companies; the secretary of the Company (if any); means specified in the articles of association of the Company for the purposes of this paragraph; has the meaning given in section 1159 of the Companies Act 2006; includes every description of disposition, payment, release or distribution, and the creation or extinction of an estate or interest in, or right over, any property; and the representation or reproduction of words, symbols or other information in a visible form by any method or combination of methods, whether sent or supplied in Electronic Form or otherwise.

Subject to clause 3 of this Schedule, any reference in the Articles to an enactment includes a reference to that enactment as re-enacted or amended from time to time and to any subordinate legislation made under it.

3. Unless the context otherwise requires, other words or expressions contained in these Articles bear the same meaning as in the Companies Act 2006 as in force on the date when the Articles become binding on the Company.

264

Chapter 8.2  Community Interest Company Limited by Shares (CIC Limited by Shares, Schedule 2, Small Membership) The Companies Act 2006 Articles of Association of [INSERT NAME] [Community Interest Company/C.I.C. delete as applicable] INTERPRETATION 1.

Defined terms



The interpretation of these Articles is governed by the provisions set out in the Schedule to the Articles.

COMMUNITY INTEREST COMPANY AND ASSET LOCK 2.

Community Interest Company



The Company shall be a community interest company.

3.

Asset Lock1 3.1 The Company shall not transfer any of its assets other than for full consideration. 3.2 Provided the conditions in Article 3.3 are satisfied, Article 3.1 shall not apply to: (a) the transfer of assets to any specified asset-locked body, or (with the consent of the Regulator) to any other asset-locked body; and

1 See “Office of the Regulator of Community Interest Companies: Information and guidance notes” (DBEIS, May 2016), Chapter 6. Inclusion of the provisions contained in articles 3.1 to 3.3 (reflecting Community Interest Company Regulations 2005 (CICR), Sch 2, para 1(1) to (3)) is mandatory.

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(b) the transfer of assets made for the benefit of the community other than by way of a transfer of assets into an asset-locked body. 3.3 The conditions are that the transfer of assets must comply with any restrictions on the transfer of assets for less than full consideration which may be set out elsewhere in the Memorandum or Articles of the Company. 3.4 If: 3.4.1 the Company is wound up under the Insolvency Act 1986; and 3.4.2 all its liabilities have been satisfied

any residual assets shall be given or transferred to the asset-locked body specified in Article 3.5 below2.

3.5 For the purposes of this Article 3, the following asset-locked body is specified as a potential recipient of the Company’s assets under Articles 3.2 and 3.4: Name: [......................................................]

(Please note that a community interest company cannot nominate itself as the asset locked body. It also cannot nominate a non-asset locked body. An asset locked body is defined as a CIC or charity, a permitted society or non-UK based equivalent.) Charity Registration Number (if applicable): [.......................] Company Registration Number (if applicable): [....................] Registered Office: [.................................................................]3

4.

Not for profit



The Company is not established or conducted for private gain: any surplus or assets are used principally for the benefit of the community.

2 When a CIC is wound up, its “residual assets” are any property remaining after satisfaction of the company’s liabilities under the Insolvency Act 1986. CICR permit shareholders to be paid back, out of the residual assets, the nominal value of their shares. Anything left over after this process is classed as “remaining residual assets” and must be paid to a specified asset-locked body (or, if no such body is specified, to an asset-locked body chosen by the Regulator in consultation with the company). 3 See CICR, reg 23 and the Regulator’s information and guidance notes, Chapters 6 and 10.3. If the company does not specify that the remaining residual assets are to be transferred to a particular asset-locked body, an appropriate recipient will be chosen by the Regulator, in consultation with the company’s directors and members.

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OBJECTS, POWERS AND LIMITATION OF LIABILITY 5.

Objects4



The objects of the Company are to carry on activities which benefit the community and in particular (without limitation) to [ ].

6.

Powers



To further its objects the Company may do all such lawful things as may further the Company’s objects and, in particular, but, without limitation, may borrow or raise and secure the payment of money for any purpose including for the purposes of investment or of raising funds.

7.

Liability of shareholders5



The liability of the shareholders is limited to the amount, if any, unpaid on the shares held by them.

DIRECTORS DIRECTORS’ POWERS AND RESPONSIBILITIES6 8.

Directors’ general authority



Subject to the Articles, the Directors are responsible for the management of the Company’s business, for which purpose they may exercise all the powers of the Company.

9.

Shareholders’ reserve power 9.1 The shareholders may, by special resolution, direct the Directors to take, or refrain from taking, specific action. 9.2 No such special resolution invalidates anything which the Directors have done before the passing of the resolution.

10. Chair

The Directors may appoint one of their number to be the chair of the Directors for such term of office as they may determine and may at any time remove him or her from office.

4 On the specification of the company’s objects, see the Regulator’s information and guidance notes, Chapter 5. 5 On limited liability and share capital generally, see the Regulator’s information and guidance notes, Chapter 3. 6 Note that, although this model constitution assumes that all directors are issued shares and the directors are given wide powers, under the articles (and company law more generally) there are still some decisions which shareholders must make as shareholders (either in general meeting under the Companies Act 2006 (article 43), or by written resolution in accordance with article 44). [See, in general, the Companies House guidance booklet, “Resolutions” (available online at www.companieshouse.gov.uk/ about/gbhtml/gba7.shtml).]

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Article 10 Analysis See article 12 of the NMA in Chapter 6B (para 6B.13). 11. Directors may delegate7 11.1 Subject to the Articles, the Directors may delegate any of the powers which are conferred on them under the Articles or the implementation of their decisions or day to day management of the affairs of the Company: (a) to such person or committee; (b) by such means (including by power of attorney); (c) to such an extent; (d) in relation to such matters or territories; and (e) on such terms and conditions,

as they think fit.

11.2 If the Directors so specify, any such delegation may authorise further delegation of the Directors’ powers by any person to whom they are delegated. 11.3 The Directors may revoke any delegation in whole or part, or alter its terms and conditions. Article 11 Analysis See article 5 of the NMA in Chapter 6B (para 6B.6). DECISION-MAKING BY DIRECTORS 12. Directors to take decisions collectively8

Any decision of the Directors must be either a majority decision at a meeting or a decision taken in accordance with Article Error! Reference

7 Article 11 permits the directors to delegate any of their functions. Delegation may take the form of, for instance, the directors giving a managing director general authority to run the company’s day-today business, or responsibility for specific matters being delegated to particular directors (eg financial matters to a finance director); or it may be equally appropriate to delegate matters to persons other than directors. In all cases, it is important to remember that delegation does not absolve directors of their general duties towards the company and their overall responsibility for its management.This means that, amongst other things, directors must be satisfied that those to whom responsibilities are delegated are competent to carry them out. 8 Article 12 states that the directors must make decisions by majority at a meeting subject to article 14; or unanimously if taken in accordance with article 18.

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source not found.. In the event of the Company being a single director company, a majority decision is made when that single Director makes a decision. Article 12 Analysis See article 7 of the NMA in Chapter 6B (para 6B.8). 13. Calling a Directors’ meeting 13.1 Two Directors may (and the Secretary, if any, must at the request of two Directors) call a Directors’ meeting. 13.2 A Directors’ meeting must be called by at least seven Clear Days’ notice unless either: 13.2.1 all the Directors agree; or 13.2.2 urgent circumstances require shorter notice. 13.3 Notice of Directors’ meetings must be given to each Director. 13.4 Every notice calling a Directors’ meeting must specify: 13.4.1 the place, day and time of the meeting; and 13.4.2 if it is anticipated that Directors participating in the meeting will not be in the same place, how it is proposed that they should communicate with each other during the meeting. 13.5 Notice of Directors’ meetings need not be in Writing. 13.6 Notice of Directors’ meetings may be sent by Electronic Means to an Address provided by the Director for the purpose. Article 13 Analysis See article 9 of the NMA in Chapter 6B (para 6B.10). 14. Participation in Directors’ meetings 14.1 Subject to the Articles, Directors participate in a Directors’ meeting, or part of a Directors’ meeting, when: 14.1.1 the meeting has been called and takes place in accordance with the Articles; and 14.1.2 they can each communicate to the others any information or opinions they have on any particular item of the business of the meeting. 269

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14.2 In determining whether Directors are participating in a Directors’ meeting, it is irrelevant where any Director is or how they communicate with each other9. 14.3 If all the Directors participating in a meeting are not in the same place, they may decide that the meeting is to be treated as taking place wherever any of them is. Article 14 Analysis See article 10 of the NMA in Chapter 6B (para 6B.11). 15. Quorum for Directors’ meetings10 15.1 At a Directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting. 15.2 The quorum for Directors’ meetings may be fixed from time to time by a decision of the Directors, but it must never be less than two, and unless otherwise fixed it is [two]. 15.3 If the total number of Directors for the time being is less than the quorum required, the Directors must not take any decision other than a decision: 15.3.1 to appoint further Directors; or 15.3.2 to call a general meeting so as to enable the shareholders to appoint further Directors. Article 15 Analysis See article 11 of the NMA in Chapter 6B (para 6B.12). 16. Chairing of Directors’ meetings

The Chair, if any, or in his or her absence another Director nominated by the Directors present shall preside as chair of each Directors’ meeting. Article 16 Analysis See article 12 of the NMA in Chapter 6B (para 6B.13).

9 Article 14.2 is designed to facilitate the taking of decisions by the directors via telephone or video conference calls. Note the requirement to keep a written record of meetings and decisions (article 47). 10 The quorum may be fixed in absolute terms (eg “two Directors”) or as a proportion of the total number of directors (eg “one third of the total number of Directors”). You may even wish to stipulate that particular named directors, or directors representing particular stakeholder interests, must be present to constitute a quorum.

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17. Voting11 17.1 Questions arising at a Directors’ meeting shall be decided by a majority of votes. 17.2 In all proceedings of Directors each Director must not have more than one vote12. 17.3 In case of an equality of votes, the Chair shall have a second or casting vote. Article 17 Analysis See article 12 of the NMA in Chapter 6B (para 6B.13). 18. Decisions without a meeting13 18.1 The Directors may take a unanimous decision without a Directors’ meeting by indicating to each other by any means, including without limitation by Electronic Means, that they share a common view on a matter. Such a decision may, but need not, take the form of a resolution in Writing, copies of which have been signed by each Director or to which each Director has otherwise indicated agreement in Writing. 18.2 A decision which is made in accordance with Article Error! Reference source not found. shall be as valid and effectual as if it had been passed at a meeting duly convened and held, provided the following conditions are complied with: 18.2.1 approval from each Director must be received by one person being either such person as all the Directors have nominated in advance for that purpose or such other person as volunteers if necessary (“the Recipient”), which person may, for the avoidance of doubt, be one of the Directors; 18.2.2 following receipt of responses from all of the Directors, the Recipient must communicate to all of the Directors by any means whether the resolution has been formally approved by the Directors in accordance with this Article Error! Reference source not found.;

11 Article 17 reflects CICR, Sch 1, para 4, which is required to be included in the articles of all CICs limited by shares. 12 You may wish to include a provision which gives the chair of the board a casting vote. This will enable the directors to resolve any deadlock at board level. 13 Article 18 is designed to facilitate the taking of decisions by directors following discussions in the form of, for example, email exchanges copied to all the directors. Note the requirements as to recording the decision in articles 18.2 and 47.

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18.2.3 the date of the decision shall be the date of the communication from the Recipient confirming formal approval; 18.2.4 the Recipient must prepare a minute of the decision in accordance with Article 47. Article 18 Analysis See article 8 of the NMA in Chapter 6B (para 6B.9). 19. Conflicts of interest14 19.1 Whenever a Director finds himself or herself in a situation that is reasonably likely to give rise to a Conflict of Interest, he or she must declare his or her interest to the Directors unless, or except to the extent that, the other Directors are or ought reasonably to be aware of it already. 19.2 If any question arises as to whether a Director has a Conflict of Interest, the question shall be decided by a majority decision of the other Directors. 19.3 Whenever a matter is to be discussed at a meeting or decided in accordance with Article 18 and a Director has a Conflict of Interest in respect of that matter then, subject to Article Error! Reference source not found., he or she must: 19.3.1 remain only for such part of the meeting as in the view of the other Directors is necessary to inform the debate; 19.3.2 not be counted in the quorum for that part of the meeting; and 19.3.3 withdraw during the vote and have no vote on the matter. 19.4 When a Director has a Conflict of Interest which he or she has declared to the Directors, he or she shall not be in breach of his or her duties to the Company by withholding confidential information from the Company if to disclose it would result in a breach of any other duty or obligation of confidence owed by him or her.

14 The provisions in articles 19 and 20 reflect the position under the Companies Act 2006. However, it is recommended that, as a matter of good practice, all actual and potential conflicts of interest are disclosed in writing or at a meeting, as the case may be.

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20. Directors’ power to authorise a conflict of interest 20.1 The Directors have power to authorise a Director to be in a position of Conflict of Interest provided: 20.1.1 in relation to the decision to authorise a Conflict of Interest, the conflicted Director must comply with Article 19; 20.1.2 in authorising a Conflict of Interest, the Directors can decide the manner in which the Conflict of Interest may be dealt with and, for the avoidance of doubt, they can decide that the Director with a Conflict of Interest can participate in a vote on the matter and can be counted in the quorum; 20.1.3 the decision to authorise a Conflict of Interest can impose such terms as the Directors think fit and is subject always to their right to vary or terminate the authorisation. 20.2 If a matter, or office, employment or position, has been authorised by the Directors in accordance with Article 20.1 then, even if he or she has been authorised to remain at the meeting by the other Directors, the Director may absent himself or herself from meetings of the Directors at which anything relating to that matter, or that office, employment or position, will or may be discussed. 20.3 A Director shall not be accountable to the Company for any benefit which he or she derives from any matter, or from any office, employment or position, which has been authorised by the Directors in accordance with Article 20.1 (subject to any limits or conditions to which such approval was subject). 21. Register of Directors’ interests

The Directors shall cause a register of Directors’ interests to be kept. A Director must declare the nature and extent of any interest, direct or indirect, which he or she has in a proposed transaction or arrangement with the Company or in any transaction or arrangement entered into by the Company which has not previously been declared.

Articles 19–21 Analysis See article 14 of the NMA in Chapter 6B (para 6B.15).

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APPOINTMENT AND RETIREMENT OF DIRECTORS15 22. Methods of appointing Directors16 22.1 Those persons notified to the Registrar of Companies as the first Directors of the Company shall be the first Directors. 22.2 Any person who is willing to act as a Director, and is permitted by law to do so, may be appointed to be a Director by a decision of the Directors. 22.3 Each member of the company shall be a Director. Article 22 Analysis See article 17 of the NMA in Chapter 6B (para 6B.18). 23. Termination of Director’s appointment17

A person ceases to be a Director as soon as: (a) that person ceases to be a Director by virtue of any provision of the Companies Act 2006, or is prohibited from being a Director by law; (b) a bankruptcy order is made against that person, or an order is made against that person in individual insolvency proceedings in a jurisdiction other than England and Wales or Northern Ireland which have an effect similar to that of bankruptcy; (c) a composition is made with that person’s creditors generally in satisfaction of that person’s debts; (d) notification is received by the Company from the Director that the Director is resigning from office, and such resignation has taken effect in accordance with its terms (but only if at least two Directors will remain in office when such resignation has taken effect); or (e) the Director fails to attend three consecutive meetings of the Directors and the Directors resolve that the Director be removed for this reason. (f)

the Director ceases to be a member.

15 Private companies are obliged to have at least one director. Provisions can be inserted into the articles providing for a minimum number of directors. Where the company has just one director, that director must be a natural person. Article 12 notes that, where there is only one director, a majority decision is reached when that director makes a decision. In the case of a single director, the quorum provisions (article 15) will need to be amended accordingly. 16 In this set of model articles, there is no requirement for all directors to be members (shareholders) of the company, since it is likely that the only member will be an asset-locked body. 17 The board of directors cannot remove a director other than in accordance with the provisions in article 23 and the Companies Act 2006.

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Article 23 Analysis See article 18 of the NMA in Chapter 6B (para 6B.19). 24. Directors’ remuneration18 24.1 Directors may undertake any services for the Company that the Directors decide. 24.2 Subject to the Articles and in particular Article 3 Directors are entitled to such remuneration as the Directors determine: (a) for their services to the Company as Directors; and (b) for any other service which they undertake for the Company. 24.3 Subject to the Articles and in particular Article 3, a Director’s remuneration may: (a) take any form; and (b) include any arrangements in connection with the payment of a pension, allowance or gratuity, or any death, sickness or disability benefits, to or in respect of that Director. 24.4 Unless the Directors decide otherwise, Directors’ remuneration accrues from day to day. 24.5 Unless the Directors decide otherwise, Directors are not accountable to the Company for any remuneration which they receive as Directors or other officers or employees of the Company’s subsidiaries or of any other body corporate in which the Company is interested. Article 24 Analysis As per the provisions of article 24, a CIC may provide remuneration to its directors. The central disparity, in terms of private company limited by guarantee, incorporated under the Companies Act 2006 and using the model articles19 is the directors have no restrictions or rules to abide by. The CIC Regulator20 provides the following principles in relation to directors’ remuneration21: ●●

Directors may be paid for their services.

18 See the guidance on directors’ remuneration in the Regulator’s information and guidance notes, Chapter 9. 19 Schedule 2 Regulation 3 Model articles for private companies limited by guarantee. 20 Office of the Regulator of Community Interest Companies. 21 Regulator’s information and guidance notes, Chapter 9 (9.3. Directors’ remuneration).

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●●

Directors’ remuneration should never be more than is reasonable22.

●●

Directors’ remuneration arrangements should always be transparent23.

●●

The Regulator – or the members of a CIC – may take action if a CIC director’s remuneration appears to be too high24.

For further analysis and comparison, see article 19 of the NMA in Chapter 6B (para 6B.20). 25. Directors’ expenses

The Company may pay any reasonable expenses which the Directors properly incur in connection with their attendance at: (a) meetings of Directors or committees of Directors; (b) general meetings; or (c) separate meetings of the holders of any class of shares or of debentures of the Company,



or otherwise in connection with the exercise of their powers and the discharge of their responsibilities in relation to the Company. Article 25 Analysis See article 20 of the NMA in Chapter 6B (para 6B.21).

SHARES 26. All shares to be fully paid up and issued at nominal value to a Director 26.1 No share is to be issued for less than the aggregate of its nominal value and any premium to be paid to the Company in consideration for its issue. 26.2 This does not apply to shares taken on the formation of the Company by the subscribers to the Company’s Memorandum. 26.3 No share shall be issued to a person except a Director.

22 Reasonable – having regard to the contribution which they make to the success of the company and the benefits it provides for the community (9.3.6. What is “reasonable” remuneration). 23 All companies are required to keep copies of directors’ service contracts, or memoranda of their terms, available at an appropriate place for inspection by their members (9.3.7. Transparency). 24 If the Regulator becomes aware of potentially excessive director remuneration, the Regulator is likely to wish to discuss the matter further with the CIC concerned (9.3.8. Action by the Regulator).

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Article 26 Analysis See article 21 of the NMA in Chapter 6B (para 6B.22). 27. Powers to issue different classes of share25 27.1 Subject to the Articles, but without prejudice to the rights attached to any existing share, the Company may issue shares with such rights or restrictions as may be determined by ordinary resolution. 27.2 The Company may issue shares which are to be redeemed, or are liable to be redeemed at the option of the Company or the holder, and the Directors may determine the terms, conditions and manner of redemption of any such shares. Article 27 Analysis See article 22 of the NMA in Chapter 6B (para 6B.23). 28. Company not bound by less than absolute interests

Except as required by law, no person is to be recognised by the Company as holding any share upon any trust, and except as otherwise required by law or the Articles, the Company is not in any way to be bound by or recognise any interest in a share other than the holder’s absolute ownership of it and all the rights attaching to it. Article 28 Analysis See article 23 of the NMA in Chapter 6B (para 6B.24).

29. Share certificates 29.1 The Company must issue each shareholder, free of charge, with one or more certificates in respect of the shares which that shareholder holds. 29.2 Every certificate must specify: (a) in respect of how many shares, of what class, it is issued; (b) the nominal value of those shares; 25 Note that, unless specific wording is added to the contrary, the directors of a company with only one class of shares will be able to issue new shares without needing the consent of the existing shareholders. If appropriate, limitations (such as a cap on the number of shares) can be added, but bespoke drafting will be required.

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(c) that the shares are fully paid; and (d) any distinguishing numbers assigned to them. 29.3 No certificate may be issued in respect of shares of more than one class. 29.4 If more than one person holds a share, only one certificate may be issued in respect of it. 29.5 Certificates must: (a) have affixed to them the Company’s common seal26; or (b) be otherwise executed in accordance with the Companies Acts. Article 29 Analysis See article 24 of the NMA in Chapter 6B (para 6B.25). 30. Replacement share certificates 30.1 If a certificate issued in respect of a shareholder’s shares is: (a) damaged or defaced; or (b) said to be lost, stolen or destroyed,

that shareholder is entitled to be issued with a replacement certificate in respect of the same shares.

30.2 A shareholder exercising the right to be issued with such a replacement certificate: (a) may at the same time exercise the right to be issued with a single certificate or separate certificates; (b) must return the certificate which is to be replaced to the Company if it is damaged or defaced; and (c) must comply with such conditions as to evidence, indemnity and the payment of a reasonable fee as the Directors decide. Article 30 Analysis See article 25 of the NMA in Chapter 6B (para 6B.26).

26 If the company does not have a common seal, share certificates can be executed by two directors, by one director and the secretary (if there is one), or by one director in the presence of an independent witness.

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31. Share transfers27 31.1 Shares may be transferred by means of an instrument of transfer in any usual form or any other form approved by the Directors, which is executed by or on behalf of the transferor. 31.2 No fee may be charged for registering any instrument of transfer or other Document relating to or affecting the title to any share. 31.3 The Company may retain any instrument of transfer which is registered. 31.4 The transferor remains the holder of a share until the transferee’s name is entered in the register of shareholders as holder of it. 31.5 The Directors may refuse to register the transfer of a share to a person of whom they do not approve. 31.6 They may also refuse to register the transfer unless it is lodged at the registered office of the Company or at such other place as the Directors may appoint and is accompanied by such evidence as the Directors may reasonably require to show the right of the transferor to make the transfer, and by such other information, as they may reasonably require. 31.7 If the Directors refuse to register such a transfer, they shall, within two months after the date on which the transfer was lodged with the Company send to the transferee notice of the refusal. 31.8 The provisions of this Article apply in addition to any restrictions on the transfer of a share which maybe set out elsewhere in the Memorandum or Articles of the Company. Article 31 Analysis See article 26 of the NMA in Chapter 6B (para 6B.27). 32. Purchase of own shares28

Subject to the articles, the Company may purchase its own shares (including any redeemable shares) and may make a payment in respect of

27 Articles 31.5 to 31.8 are mandatory, reflecting CICR, Sch 2, para 2. The model constitution does not contain any other additional restrictions on the transfer of shares, but note that the directors may refuse to register a transfer of shares to a person of whom they do not approve. 28 A company which adopts the provisions of CICR, Sch 2 rather than CICR, Sch 3 (ie a company which only intends to pay dividends to asset-locked bodies) must not make use of this provision to buy back any share which is not held by an asset-locked body, as the repurchase of such shares will amount to a breach of the asset lock provisions set out in CICR, Sch 2, para 1 and article 3. This article, in itself, does not provide sufficient authority for the company to purchase its own shares. The company must also comply with the relevant statutory requirements – in particular, Companies Act 2006, ss 693–700.

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the redemption or purchase of its own shares otherwise than out of the distributable profits of the Company or the proceeds of a fresh issue of shares. Any share so purchased shall be purchased at its nominal value. Article 32 Analysis See footnote. 33. Transmission of shares29 33.1 If title to a share passes to a transmittee, the Company may only recognise the transmittee as having any title to that share. 33.2 A transmittee who produces such evidence of entitlement to shares as the Directors may properly require: (a) may, subject to the Articles, choose either to become the holder of those shares or to have them transferred to another person; and (b) subject to the Articles, and pending any transfer of the shares to another person, has the same rights as the holder had. 33.3 But transmittees do not have the right to attend or vote at a general meeting, or agree to a proposed written resolution, in respect of shares to which they are entitled, by reason of the holder’s death or bankruptcy or otherwise, unless they become the holders of those shares. Article 33 Analysis See article 27 of the NMA in Chapter 6B (para 6B.28). 34. Exercise of transmittees’ rights 34.1 Transmittees who wish to become the holders of shares to which they have become entitled must notify the Company in Writing of that wish. 34.2 If the transmittee wishes to have a share transferred to another person, the transmittee must execute an instrument of transfer in respect of it. We recommend that you take legal advice before taking any steps towards the company purchasing its own shares. It is important that any purchase of shares made in accordance with this article is also made in accordance with article 3 (asset lock). 29 In the event of the death of a shareholder, the share will pass according to the will of the deceased shareholder, or the intestacy rules.

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34.3 Any transfer made or executed under this Article is to be treated as if it were made or executed by the person from whom the transmittee has derived rights in respect of the share, and as if the event which gave rise to the transmission had not occurred. Article 34 Analysis See article 28 of the NMA in Chapter 6B (para 6B.29). 35. Transmittees bound by prior notices 35.1 If a notice is given to a shareholder in respect of shares and a transmittee is entitled to those shares, the transmittee is bound by the notice if it was given to the shareholder before the transmittee’s name has been entered in the register of shareholders. Article 35 Analysis See article 29 of the NMA in Chapter 6B (para 6B.30). DIVIDENDS AND OTHER DISTRIBUTIONS30 36. Procedure for declaring dividends 36.1 Subject to the Companies Acts, the Regulations and the Articles, the Company may by ordinary resolution declare dividends, and the Directors may, provided that such decision is authorised by an ordinary resolution of the shareholders, decide to pay interim dividends. 36.2 For the avoidance of doubt the payment of dividends shall be considered to be a transfer of assets other than for full consideration and shall not be permitted other than in the circumstances prescribed in Article 3. 36.3 A dividend must not be declared unless the Directors have made a recommendation as to its amount. Such a dividend must not exceed the amount recommended by the Directors. 36.4 No dividend may be declared or paid unless it is in accordance with shareholders’ respective rights. 30 A company which does not intend to pay dividends or make other distributions to private investors (ie a company which adopts the provisions of CICR, Sch 2 rather than those of CICR, Sch 3) should not make use of this provision to pay dividends on any share held by a private investor, as the payment of any such dividends will amount to a breach of the asset lock provisions set out in CICR, Sch 2, para 1 and article 3.

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36.5 Unless the shareholders’ resolution to declare or Directors’ decision to pay a dividend, or the terms on which shares are issued, specify otherwise, it must be paid by reference to each shareholder’s holding of shares on the date of the resolution or decision to declare or pay it. 36.6 If the Company’s share capital is divided into different classes, no interim dividend may be paid on shares carrying deferred or nonpreferred rights if, at the time of payment, any preferential dividend is in arrear. 36.7 The Directors may pay at intervals any dividend payable at a fixed rate if it appears to them that the profits available for distribution justify the payment. 36.8 If the Directors act in good faith, they do not incur any liability to the holders of shares conferring preferred rights for any loss they may suffer by the lawful payment of an interim dividend on shares with deferred or non-preferred rights.

Article 36 Analysis See article 30 of the NMA in Chapter 6B (para 6B.31). 37. Payment of dividends and other distributions 37.1 Where a dividend or other sum which is a distribution is payable in respect of a share, it must be paid by one or more of the following means: (a) transfer to a bank or building society account indicated by the distribution recipient either in Writing or as the Directors may otherwise decide; (b) sending a cheque made payable to the distribution recipient by post to the distribution recipient at the distribution recipient’s registered Address (if the distribution recipient is a holder of the share), or (in any other case) to an Address indicated by the distribution recipient either in Writing or as the Directors may otherwise decide; (c) sending a cheque made payable to such person by post to such person at such Address as the distribution recipient has indicated either in Writing or as the Directors may otherwise decide; or (d) any other means of payment as the Directors agree with the distribution recipient either in Writing or by such other means as the Directors decide. 282

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37.2 In the Articles, “the distribution recipient” means, in respect of a share in respect of which a dividend or other sum is payable: (a) the holder of the share; or (b) if the share has two or more joint holders, whichever of them is named first in the register of members; or (c) if the holder is no longer entitled to the share by reason of death or bankruptcy, or otherwise by operation of law, the transmittee. Article 37 Analysis See article 31 of the NMA in Chapter 6B (para 6B.32). 38. No interest on distributions

The Company may not pay interest on any dividend or other sum payable in respect of a share unless otherwise provided by: (a) the terms on which the share was issued; or (b) the provisions of another agreement between the holder of that share and the Company. Article 38 Analysis See article 32 of the NMA in Chapter 6B (para 6B.33).

39. Unclaimed distributions 39.1 All dividends or other sums which are: (a) payable in respect of shares; and (b) unclaimed after having been declared or become payable,

may be invested or otherwise made use of by the Directors for the benefit of the Company until claimed.

39.2 The payment of any such dividend or other sum into a separate account does not make the Company a trustee in respect of it. 39.3 If: (a) twelve years have passed from the date on which a dividend or other sum became due for payment; and (b) the distribution recipient has not claimed it,

the distribution recipient is no longer entitled to that dividend or other sum and it ceases to remain owing by the Company. 283

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Article 39 Analysis See article 33 of the NMA in Chapter 6B (para 6B.34). 40. Non-cash distributions 40.1 Subject to the terms of issue of the share in question, the Company may, by ordinary resolution on the recommendation of the Directors, decide to pay all or part of a dividend or other distribution payable in respect of a share by transferring non-cash assets of equivalent value (including, without limitation, shares or other securities in any company). 40.2 For the purposes of paying a non-cash distribution, the Directors may make whatever arrangements they think fit, including, where any difficulty arises regarding the distribution: (a) fixing the value of any assets; (b) paying cash to any distribution recipient on the basis of that value in order to adjust the rights of recipients; and (c) vesting any assets in trustees. Article 40 Analysis See article 34 of the NMA in Chapter 6B (para 6B.35). 41. Waiver of distributions

Distribution recipients may waive their entitlement to a dividend or other distribution payable in respect of a share by giving the Company notice in Writing to that effect, but if: (a) the share has more than one holder; or (b) more than one person is entitled to the share, whether by reason of the death or bankruptcy of one or more joint holders, or otherwise,



the notice is not effective unless it is expressed to be given, and signed, by all the holders or persons otherwise entitled to the share. Article 41 Analysis See article 35 of the NMA in Chapter 6B (para 6B.36).

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CAPITALISATION OF PROFITS 42. Authority to capitalise and appropriation of capitalised sums 42.1 Subject to the Articles, the Directors may, if they are so authorised by an ordinary resolution: (a) decide to capitalise any profits of the Company (whether or not they are available for distribution) which are not required for paying a preferential dividend, or any sum standing to the credit of the Company’s share premium account or capital redemption reserve; and (b) appropriate any sum which they so decide to capitalise (a “capitalised sum”) to the persons who would have been entitled to it if it were distributed by way of dividend (the “persons entitled”) and in the same proportions. 42.2 Capitalised sums must be applied: (a) on behalf of the persons entitled; and (b) in the same proportions as a dividend would have been distributed to them. 42.3 Any capitalised sum may be applied in paying up new shares of a nominal amount equal to the capitalised sum which are then allotted credited as fully paid to the persons entitled or as they may direct. 42.4 A capitalised sum which was appropriated from profits available for distribution may be applied in paying up new debentures of the Company which are then allotted credited as fully paid to the persons entitled or as they may direct. 42.5 Subject to the Articles the Directors may: (a) apply capitalised sums in accordance with Articles 42.3 and 42.4 partly in one way and partly in another; (b) make such arrangements as they think fit to deal with shares or debentures becoming distributable in fractions under this Article (including the issuing of fractional certificates or the making of cash payments); and (c) authorise any person to enter into an agreement with the Company on behalf of all the persons entitled which is binding on them in respect of the allotment of shares and debentures to them under this Article. Article 42 Analysis See article 36 of the NMA in Chapter 6B (para 6B.37). 285

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DECISION-MAKING BY SHAREHOLDERS 43. Meetings31 43.1 The Directors may call a general meeting at any time. 43.2 General meetings must be held in accordance with the provisions regarding such meetings in the Companies Act32. 43.3 A person who is not a shareholder of the Company shall not have any right to vote at a general meeting of the Company; but this is without prejudice to any right to vote on a resolution affecting the rights attached to a class of the Company’s debentures33. 43.4 Article 43.3 shall not prevent a person who is a proxy for a member or a duly authorised representative of a member from voting at a general meeting of the Company. Article 43 Analysis See article 9 of the NMA in Chapter 6B (para 6B.10). 44. Written resolutions 44.1 Subject to Article Error! Reference source not found., a written resolution of the Company passed in accordance with this Article Error! Reference source not found. shall have effect as if passed by the Company in general meeting: 44.1.1 A written resolution is passed as an ordinary resolution if it is passed by a simple majority of the total voting rights of eligible shareholders. 44.1.2 A written resolution is passed as a special resolution if it is passed by shareholders representing not less than 75% of the total voting rights of eligible shareholders. A written resolution is not a special resolution unless it states that it was proposed as a special resolution. 31 The Companies Act 2006 has removed the need for private companies to hold annual general meetings, and therefore these articles follow suit; however, if you wish, you can insert an additional provision which obliges the company to hold annual general meetings. 32 Article 43.2 provides that general meetings must be held in accordance with the provisions of the Companies Act 2006. You may insert additional provisions that specify how many shareholders are required to be present to hold a valid general meeting. The quorum may be fixed in absolute terms (eg “four shareholders”) or as a proportion of the total number of shareholders (eg “three quarters of the shareholders from time to time”). You may even wish to stipulate that particular named shareholders, or shareholders representing particular stakeholder interests, must be present to constitute a quorum. In any event, it is recommended that the quorum should never be less than half of the total number of shareholders. 33 Article 43.3 reflects CICR, Sch 2, para 3(1) and is mandatory.

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44.2 In relation to a resolution proposed as a written resolution of the Company the eligible shareholders are the shareholders who would have been entitled to vote on the resolution on the Circulation Date of the resolution. 44.3 A shareholders’ resolution under the Companies Acts removing a Director or an auditor before the expiration of his or her term of office may not be passed as a written resolution. 44.4 A copy of the written resolution must be sent to every shareholder together with a statement informing the shareholder how to signify their agreement to the resolution and the date by which the resolution must be passed if it is not to lapse. Communications in relation to written notices shall be sent to the Company’s auditors in accordance with the Companies Acts. 44.5 A shareholder signifies their agreement to a proposed written resolution when the Company receives from him or her an authenticated Document identifying the resolution to which it relates and indicating his or her agreement to the resolution. 44.5.1 If the Document is sent to the Company in Hard Copy Form, it is authenticated if it bears the shareholder’s signature. 44.5.2 If the Document is sent to the Company by Electronic Means, it is authenticated [if it bears the shareholder’s signature] or [if the identity of the shareholder is confirmed in a manner agreed by the Directors] or [if it is accompanied by a statement of the identity of the shareholder and the Company has no reason to doubt the truth of that statement] or [if it is from an email Address notified by the shareholder to the Company for the purposes of receiving Documents or information by Electronic Means]. 44.6 A written resolution is passed when the required majority of eligible shareholders have signified their agreement to it. 44.7 A proposed written resolution lapses if it is not passed within 28 days beginning with the Circulation Date. Article 44 Analysis See article 8 of the NMA in Chapter 6B (para 6B.9). ADMINISTRATIVE ARRANGEMENTS AND MISCELLANEOUS 45. Means of communication to be used 45.1 Subject to the Articles, anything sent or supplied by or to the Company under the Articles may be sent or supplied in any way 287

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in which the Companies Act 2006 provides for Documents or information which are authorised or required by any provision of that Act to be sent or supplied by or to the Company. 45.2 Subject to the Articles, any notice or Document to be sent or supplied to a Director in connection with the taking of decisions by Directors may also be sent or supplied by the means by which that Director has asked to be sent or supplied with such notices or Documents for the time being. 45.3 A Director may agree with the Company that notices or Documents sent to that Director in a particular way are to be deemed to have been received within an agreed time of their being sent, and for the agreed time to be less than 48 hours. Article 45 Analysis See article 48 of the NMA in Chapter 6B (para 6B.49). 46. Irregularities

The proceedings at any meeting or on the taking of any poll or the passing of a written resolution or the making of any decision shall not be invalidated by reason of any accidental informality or irregularity (including any accidental omission to give or any non-receipt of notice) or any want of qualification in any of the persons present or voting or by reason of any business being considered which is not referred to in the notice unless a provision of the Companies Acts specifies that such informality, irregularity or want of qualification shall invalidate it. Article 46 Analysis This article does not appear in any of the new model articles.

47. Minutes 47.1 The Directors must cause minutes to be made in books kept for the purpose: 47.1.1 of all appointments of officers made by the Directors; 47.1.2 of all resolutions of the Company and of the Directors (including, without limitation, decisions of the Directors made without a meeting); and 47.1.3 of all proceedings at meetings of the Company and of the Directors, and of committees of Directors, including the names of the Directors present at each such meeting; 288

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and any such minute, if purported to be signed (or in the case of minutes of Directors’ meetings signed or authenticated) by the chair of the meeting at which the proceedings were had, or by the chair of the next succeeding meeting, shall, as against any shareholder or Director of the Company, be sufficient evidence of the proceedings.

47.2 The minutes must be kept for at least ten years from the date of the meeting, resolution or decision. Article 47 Analysis See article 15 of the NMA in Chapter 6B (para 6B.16). 48. Records and accounts34

The Directors shall comply with the requirements of the Companies Acts as to maintaining a shareholders’ register, keeping financial records, the audit or examination of accounts and the preparation and transmission to the Registrar of Companies and the Regulator of: 48.1 annual reports; 48.2 annual returns; and 48.3 annual statements of account. 48.4 Except as provided by law or authorised by the Directors or an ordinary resolution of the Company, no person is entitled to inspect any of the Company’s accounting or other records or documents merely by virtue of being a shareholder. Article 48 Analysis Article 48 provides an overview of section 38635 which states any company must keep adequate accounting records. This article does not appear in any of the new model articles.

49. Indemnity 49.1 Subject to Article 49.2, a relevant Director of the Company or an associated company may be indemnified out of the Company’s assets against: 34 See the Companies House guidance booklet, “Accounts and Accounting Reference Dates” (available online at www.companies-house.gov.uk/about/gbhtml/gba3.shtml). On the annual CIC report, see the Regulator’s information and guidance notes, Chapter 8. 35 Companies Act 2006, s 386 (Duty to keep accounting records).

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(a) any liability incurred by that Director in connection with any negligence, default, breach of duty or breach of trust in relation to the Company or an associated company; (b) any liability incurred by that Director in connection with the activities of the Company or an associated company in its capacity as a trustee of an occupational pension scheme (as defined in section 235(6) of the Companies Act 2006); and (c) any other liability incurred by that Director as an officer of the Company or an associated company. 49.2 This Article does not authorise any indemnity which would be prohibited or rendered void by any provision of the Companies Acts or by any other provision of law. 49.3 In this Article: (a) companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate; and (b) a “relevant Director” means any Director or former Director of the Company or an associated company. 50. Insurance 50.1 The Directors may decide to purchase and maintain insurance, at the expense of the Company, for the benefit of any relevant Director in respect of any relevant loss. 50.2 In this Article: (a) a “relevant Director” means any Director or former Director of the Company or an associated company; (b) a “relevant loss” means any loss or liability which has been or may be incurred by a relevant Director in connection with that Director’s duties or powers in relation to the Company, any associated company or any pension fund or employees’ share scheme of the Company or associated company; and (c) companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate. Articles 49 and 50 Analysis See articles 52 and 53 of the NMA in Chapter 6B (paras 6B.53 and 6B.54).

51. Exclusion of model articles

The relevant model articles for a company limited by shares are hereby expressly excluded. 290

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Article 51 Analysis In order to explicitly state the exclusion, it is good practice to provide the provision at the beginning of the document and specifically refer to the model articles regulations. It should be noted, for companies incorporated under previous Companies Acts, that the relevant articles should be expressly excluded. There is provision for an alternative precedent, as follows: “The model articles for private companies limited by guarantee contained or incorporated in Schedule 1 to the Companies (Model Articles) Regulations 2008, SI 2008/3229, as amended prior to the date of adoption of these articles (the ‘Model Articles’) shall not apply to the Company, save insofar as they are varied or excluded by, or are inconsistent with, the following articles.”

SCHEDULE INTERPRETATION 1.

In the Articles, unless the context requires otherwise, the following terms shall have the following meanings:

Term “Address” “Articles” “asset-locked body”

“bankruptcy”

“Chair” “Circulation Date”

Meaning includes a number or address used for the purposes of sending or receiving Documents by Electronic Means; means the Company’s articles of association; means (i) a community interest company or a charity36 or a Permitted Society; or (ii) a body established outside the United Kingdom that is equivalent to any of those; includes individual insolvency proceedings in a jurisdiction other than England and Wales or Northern Ireland which have an effect similar to that of bankruptcy; has the meaning given in Article 10; in relation to a written resolution, has the meaning given to it in the Companies Acts;

36 Charities Act 2006, s 1(1) defines a “charity” as an institution which “is established for charitable purposes only, and falls to be subject to the control of the High Court in the exercise of its jurisdiction with respect to charities”.

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Term “Clear Days”

Meaning in relation to the period of a notice, that period excluding the day when the notice is given or deemed to be given and the day for which it is given or on which it is to take effect; “community” is to be construed in accordance with the section 35(5) of the Companies (Audit, Investigations and Community Enterprise) Act 2004; “Companies Acts” means the Companies Acts (as defined in section 2 of the Companies Act 2006), in so far as they apply to the Company; “Company” [.............................] [Community Interest Company/C.I.C.]; “Conflict of Interest” any direct or indirect interest of a Director (whether personal, by virtue of a duty of loyalty to another organisation or otherwise) that conflicts or might conflict with the interests of the Company; “Director” means a director of the Company, and includes any person occupying the position of director, by whatever name called; “distribution recipient” has the meaning given in Article 37; “Document” includes, unless otherwise indicated, any document sent or supplied in Electronic Form; “Electronic Form and have the meanings respectively given to them Electronic Means” in section 1168 of the Companies Act 2006; “fully paid” in relation to a share, means that the nominal value and any premium to be paid to the Company in respect of that share have been paid to the Company; “Hard Copy Form” has the meaning given in section 1168 of the Companies Act 2006; “holder” in relation to shares means the person whose name is entered in the register of shareholders as the holder of the shares; “instrument” means a Document in Hard Copy Form; “Memorandum” the Company’s memorandum of association; “paid” means paid or credited as paid; “participate” in relation to a Directors’ meeting, has the meaning given in Article 14; 292

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Term “Permitted Registered Society”

Meaning Means – a)

A registered society within the meaning given by section 1(1) of the Co-operative and Community Benefit Societies Act 2014; or

b)

“the Regulator” “the Regulations” “Secretary” “shareholder” “shares” “specified” “subsidiary” “transfer”

“transmittee” “Writing”

2.

A society registered or deemed to be registered under the Industrial and provident Societies Act (Northern Ireland) 1969; means the Regulator of Community Interest Companies; means the Community Interest Company Regulations 2005 (as amended); the secretary of the Company (if any); means a person who is the holder of a share; means shares in the Company; means specified in the articles of association of the Company for the purposes of this paragraph; has the meaning given in section 1159 of the Companies Act 2006; includes every description of disposition, payment, release or distribution, and the creation or extinction of an estate or interest in, or right over, any property; means a person entitled to a share by reason of the death or bankruptcy of a shareholder or otherwise by operation of law; and means the representation or reproduction of words, symbols or other information in a visible form by any method or combination of methods, whether sent or supplied in Electronic Form or otherwise.

Subject to clause 3 of this Schedule, any reference in the Articles to an enactment includes a reference to that enactment as re-enacted or amended from time to time and to any subordinate legislation made under it.

3. Unless the context otherwise requires, other words or expressions contained in these Articles bear the same meaning as in the Companies Acts as in force on the date when these Articles become binding on the Company. 293

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Chapter 8.3  Community Interest Company Limited by Shares (CIC Limited by Shares, Schedule 2, Large Membership) The Companies Act 2006 Articles of Association of [INSERT NAME] [Community Interest Company/C.I.C. delete as applicable] INTERPRETATION 1.

Defined terms



The interpretation of these Articles is governed by the provisions set out in the Schedule to the Articles.

COMMUNITY INTEREST COMPANY AND ASSET LOCK 2.

Community Interest Company



The Company shall be a community interest company.

3.

Asset Lock1 3.1 The Company shall not transfer any of its assets other than for full consideration. 3.2 Provided the conditions in Article 3.3 are satisfied, Article 3.1 shall not apply to: (a) the transfer of assets to any specified asset-locked body, or (with the consent of the Regulator) to any other asset-locked body; and (b) the transfer of assets made for the benefit of the community other than by way of a transfer of assets into an asset-locked body.

1 See “Office of the Regulator of Community Interest Companies: Information and guidance notes” (DBEIS, May 2016), Chapter 6. Inclusion of the provisions contained in articles 3.1 to 3.3 (reflecting Community Interest Company Regulations 2005 (CICR), Sch 1, para 1(1) and (3)) is mandatory.

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3.3 The conditions are that the transfer of assets must comply with any restrictions on the transfer of assets for less than full consideration which may be set out elsewhere in the Memorandum or Articles of the Company. 3.4 If: 3.4.1 the Company is wound up under the Insolvency Act 1986; and 3.4.2 all its liabilities have been satisfied

any residual assets shall be given or transferred to the asset-locked body specified in Article 3.5 below.2

3.5 For the purposes of this Article 3, the following asset-locked body is specified as a potential recipient of the Company’s assets under Articles 3.2 and 3.4:

Name: [......................................................................]3



(Please note that a community interest company cannot nominate itself as the asset locked body. It also cannot nominate a non-asset locked body. An asset locked body is defined as a CIC or charity, a permitted society or non-UK based equivalent.)



Charity Registration Number (if applicable): [.....................   ]



Company Registration Number (if applicable): [..................   ]



Registered Office: [..................................................................  ]

4.

Not for profit



The Company is not established or conducted for private gain: any surplus or assets are used principally for the benefit of the community.

OBJECTS, POWERS AND LIMITATION OF LIABILITY 5.

Objects4



The objects of the Company are to carry on activities which benefit the community and in particular (without limitation) to [    ].

2 When a CIC is wound up, its “residual assets” are any property remaining after satisfaction of the company’s liabilities under the Insolvency Act 1986. The CICR permit shareholders to be paid back, out of the residual assets, the nominal value of their shares. Anything left over after this process is classed as “remaining residual assets” and must be paid to a specified asset-locked body (or, if no such body is specified, to an asset-locked body chosen by the Regulator in consultation with the company). 3 See CICR, reg 23 and the Regulator’s information and guidance notes, Chapters 6 and 10.3. If the company does not specify that the remaining residual assets are to be transferred to a particular asset-locked body, an appropriate recipient will be chosen by the Regulator, in consultation with the company’s directors and shareholders. 4 On the specification of the company’s objects, see the Regulator’s information and guidance notes, Chapter 5.

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6.

Powers



To further its objects the Company may do all such lawful things as may further the Company’s objects and, in particular, but, without limitation, may borrow or raise and secure the payment of money for any purpose including for the purposes of investment or of raising funds.

7.

Liability of shareholders5



The liability of the shareholders is limited to the amount, if any, unpaid on the shares held by them. Article 7 Analysis See article 2 of the NMA in Chapter 6B (para 6B.3).

DIRECTORS DIRECTORS’ POWERS AND RESPONSIBILITIES 8.

Directors’ general authority



Subject to the Articles, the Directors are responsible for the management of the Company’s business, for which purpose they may exercise all the powers of the Company. Article 8 Analysis See article 3 of the NMA in Chapter 6B (para 6B.4).

9.

Shareholders’ reserve power 9.1 The shareholders may, by special resolution, direct the Directors to take, or refrain from taking, specific action. 9.2 No such special resolution invalidates anything which the Directors have done before the passing of the resolution.

Article 9 Analysis See article 4 of the NMA in Chapter 6B (para 6B.5).

5 On limited liability and share capital generally, see the Regulator’s information and guidance notes, Chapter 3.

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10. Chair

The Directors may appoint one of their number to be the chair of the Directors for such term of office as they may determine and may at any time remove him or her from office. Article 10 Analysis See article 12 of the NMA in Chapter 6B (para 6B.13).

11. Directors may delegate6 11.1 Subject to the Articles, the Directors may delegate any of the powers which are conferred on them under the Articles: (a) to such person or committee; (b) by such means (including by power of attorney); (c) to such an extent; (d) in relation to such matters or territories; and (e) on such terms and conditions,

as they think fit.

11.2 If the Directors so specify, any such delegation may authorise further delegation of the Directors’ powers by any person to whom they are delegated. 11.3 The Directors may revoke any delegation in whole or part, or alter its terms and conditions. Article 11 Analysis See article 5 of the NMA in Chapter 6B (para 6B.6).

12. Committees 12.1 Committees to which the Directors delegate any of their powers must follow procedures which are based as far as they are applicable 6

Articles 11 and 12 permit the directors to delegate any of their functions. Delegation may take the form of, for instance, the directors giving a managing director general authority to run the company’s dayto-day business, or responsibility for specific matters being delegated to particular directors (eg financial matters to a finance director). However, it may be equally appropriate to delegate matters to persons other than directors. In all cases, it is important to remember that delegation does not absolve directors of their general duties towards the company and their overall responsibility for its management. This means, amongst other things, that directors must be satisfied that those to whom responsibilities are delegated are competent to carry them out.

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on those provisions of the Articles which govern the taking of decisions by Directors. 12.2 The Directors may make rules of procedure for all or any committees, which prevail over rules derived from the Articles if they are not consistent with them. Article 12 Analysis See article 6 of the NMA in Chapter 6B (para 6B.7). DECISION-MAKING BY DIRECTORS 13. Directors to take decisions collectively7

Any decision of the Directors must be either a majority decision at a meeting or a decision taken in accordance with Article 0. Article 13 Analysis See article 7 of the NMA in Chapter 6B (para 6B.8).

14. Calling a Directors’ meeting 14.1 Two Directors may (and the Secretary, if any, must at the request of two Directors) call a Directors’ meeting. 14.2 A Directors’ meeting must be called by at least seven Clear Days’ notice unless either: 14.2.1 all the Directors agree; or 14.2.2 urgent circumstances require shorter notice. 14.3 Notice of Directors’ meetings must be given to each Director. 14.4 Every notice calling a Directors’ meeting must specify: 14.4.1 the place, day and time of the meeting; and 14.4.2 if it is anticipated that Directors participating in the meeting will not be in the same place, how it is proposed that they should communicate with each other during the meeting. 14.5 Notice of Directors’ meetings need not be in Writing. 14.6 Notice of Directors’ meetings may be sent by Electronic Means to an Address provided by the Director for the purpose. 7 Article 13 states that the directors must make decisions by majority at a meeting in accordance with article 15; or unanimously if taken in accordance with article 19.

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Article 14 Analysis See article 9 of the NMA in Chapter 6B (para 6B.10).

15. Participation in Directors’ meetings 15.1 Subject to the Articles, Directors participate in a Directors’ meeting, or part of a Directors’ meeting, when: 15.1.1 the meeting has been called and takes place in accordance with the Articles; and 15.1.2 they can each communicate to the others any information or opinions they have on any particular item of the business of the meeting. 15.2 In determining whether Directors are participating in a Directors’ meeting, it is irrelevant where any Director is or how they communicate with each other.8 15.3 If all the Directors participating in a meeting are not in the same place, they may decide that the meeting is to be treated as taking place wherever any of them is. Article 15 Analysis See article 10 of the NMA in Chapter 6B (para 6B.11). 16. Quorum for Directors’ meetings9 16.1 At a Directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting. 16.2 The quorum for Directors’ meetings may be fixed from time to time by a decision of the Directors, but it must never be less than two, and unless otherwise fixed it is [two].

8 Article 15.2 is designed to facilitate the taking of decisions by the directors communicating via telephone or video conference calls. Note the requirement to keep a written record of meetings and decisions (article 62). 9 The quorum may be fixed in absolute terms (e.g. “two Directors”) or as a proportion of the total number of directors (eg “one third of the total number of Directors”).You may even wish to stipulate that particular named directors, or directors representing particular stakeholder interests, must be present to constitute a quorum.

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16.3 If the total number of Directors for the time being is less than the quorum required, the Directors must not take any decision other than a decision: 16.3.1 to appoint further Directors; or 16.3.2 to call a general meeting so as to enable the shareholders to appoint further Directors. Article 16 Analysis See article 11 of the NMA in Chapter 6B (para 6B.12). 17. Chairing of Directors’ meetings

The Chair, if any, or in his or her absence another Director nominated by the Directors present shall preside as chair of each Directors’ meeting. Article 17 Analysis See article 12 of the NMA in Chapter 6B (para 6B.13).

18. Voting10 18.1 Questions arising at a Directors’ meeting shall be decided by a majority of votes. 18.2 In all proceedings of Directors each director must not have more than one vote.11 18.3 In case of an equality of votes, the Chair shall have a second or casting vote. Article 18 Analysis See article 12 of the NMA in Chapter 6B (para 6B.13). 19. Decisions without a meeting12 19.1 The Directors may take a unanimous decision without a Directors’ meeting by indicating to each other by any means, including 10 Article 18 reflects CICR, Sch 2, para 4, which is required to be included in the articles of all CICs. 11 You may wish to include a provision which gives the chair of the board a casting vote. This will enable the directors to resolve any deadlock at board level. 12 Article 19 is designed to facilitate the taking of decisions by directors following discussions in the form of, for example, email exchanges copied to all the directors. Note the requirements as to recording the decision in articles 19.2 and 62.

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without limitation by Electronic Means, that they share a common view on a matter. Such a decision may, but need not, take the form of a resolution in Writing, copies of which have been signed by each Director or to which each Director has otherwise indicated agreement in Writing. 19.2 A decision which is made in accordance with Article 0 shall be as valid and effectual as if it had been passed at a meeting duly convened and held, provided the following conditions are complied with: 19.2.1 approval from each Director must be received by one person being either such person as all the Directors have nominated in advance for that purpose or such other person as volunteers if necessary (“the Recipient”), which person may, for the avoidance of doubt, be one of the Directors; 19.2.2 following receipt of responses from all of the Directors, the Recipient must communicate to all of the Directors by any means whether the resolution has been formally approved by the Directors in accordance with this Article 0; 19.2.3 the date of the decision shall be the date of the communication from the Recipient confirming formal approval; 19.2.4 the Recipient must prepare a minute of the decision in accordance with Article 0. Article 19 Analysis See article 8 of the NMA in Chapter 6B (para 6B.9). 20. Conflicts of interest13 20.1 Whenever a Director finds himself or herself in a situation that is reasonably likely to give rise to a Conflict of Interest, he or she must declare his or her interest to the Directors unless, or except to the extent that, the other Directors are or ought reasonably to be aware of it already. 20.2 Whenever a matter is to be discussed at a meeting or decided in accordance with Article 0 and a Director has a Conflict of Interest in respect of that matter then, subject to Article 0, he or she must: 20.2.1 remain only for such part of the meeting as in the view of the other Directors is necessary to inform the debate; 13 The provisions in articles 20 and 21 reflect the position under the Companies Act 2006. However, it is recommended that, as a matter of good practice, all actual and potential conflicts of interest are disclosed in writing or at a meeting, as the case may be.

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20.2.2 not be counted in the quorum for that part of the meeting; and 20.2.3 withdraw during the vote and have no vote on the matter. 20.3 If any question arises as to whether a Director has a Conflict of Interest, the question shall be decided by a majority decision of the other Directors. 20.4 When a Director has a Conflict of Interest which he or she has declared to the Directors, he or she shall not be in breach of his or her duties to the Company by withholding confidential information from the Company if to disclose it would result in a breach of any other duty or obligation of confidence owed by him or her. 21. Directors’ power to authorise a conflict of interest 21.1 The Directors have power to authorise a Director to be in a position of Conflict of Interest provided: 21.1.1 in relation to the decision to authorise a Conflict of Interest, the conflicted Director must comply with Article 20.3; 21.1.2 in authorising a Conflict of Interest, the Directors can decide the manner in which the Conflict of Interest may be dealt with and, for the avoidance of doubt, they can decide that the Director with a Conflict of Interest can participate in a vote on the matter and can be counted in the quorum; and 21.1.3 the decision to authorise a Conflict of Interest can impose such terms as the Trustees think fit and is subject always to their right to vary or terminate the authorisation. 21.2 If a matter, or office, employment or position, has been authorised by the Directors in accordance with Article 0 then, even if he or she has been authorised to remain at the meeting by the other Directors, the Director may absent himself or herself from meetings of the Directors at which anything relating to that matter, or that office, employment or position, will or may be discussed. 21.3 A Director shall not be accountable to the Company for any benefit which he or she derives from any matter, or from any office, employment or position, which has been authorised by the Directors in accordance with Article 0 (subject to any limits or conditions to which such approval was subject). 22. Register of Directors’ interests

The Directors shall cause a register of Directors’ interests to be kept. A Director must declare the nature and extent of any interest, direct or indirect, which he or she has in a proposed transaction or arrangement with the Company or in any transaction or arrangement entered into by the Company which has not previously been declared. 303

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Articles 20–22 Analysis See article 14 of the NMA in Chapter 6B (para 6B.15). APPOINTMENT AND RETIREMENT OF DIRECTORS14 23. Methods of appointing Directors 23.1 Those persons notified to the Registrar of Companies as the first Directors of the Company shall be the first Directors. 23.2 Any person who is willing to act as a Director, and is permitted by law to do so, may be appointed to be a Director: (a) by ordinary resolution; or (b) by a decision of the Directors. 23.3 In any case where, as a result of death, the Company has no shareholders and no Directors, the personal representatives of the last shareholder to have died have the right, by notice in Writing, to appoint a person to be a Director. 23.4 For the purposes of Article 23.3, where 2 or more shareholders die in circumstances rendering it uncertain who was the last to die, a younger shareholder is deemed to have survived an older shareholder. Article 23 Analysis See article 17 of the NMA in Chapter 6B (para 6B.18). 24. Termination of director’s appointment15 A person ceases to be a Director as soon as: (a) that person ceases to be a Director by virtue of any provision of the Companies Act 2006, or is prohibited from being a Director by law;

14 Private companies are obliged to have at least one director. Provisions can be inserted into the articles providing for a minimum number of directors. Where the company has just one director, that director must be a natural person. You may wish to consider whether provision should also be made for a maximum number of directors (eg “and the total number of Directors in office at any one time shall not exceed four”). While it is often important to ensure proper representation of a number of different groups on a board of directors, very large boards can become unwieldy and a maximum number of directors provision may help to guard against this. 15 The board of directors cannot remove a director other than in accordance with the provisions in article 24 and the Companies Act 2006. The shareholders may, of course, vote to remove a director appointed by the directors.

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(b) a bankruptcy order is made against that person, or an order is made against that person in individual insolvency proceedings in a jurisdiction other than England and Wales or Northern Ireland which have an effect similar to that of bankruptcy; (c) a composition is made with that person’s creditors generally in satisfaction of that person’s debts; (d) notification is received by the Company from the Director that the Director is resigning from office, and such resignation has taken effect in accordance with its terms (but only if at least two Directors will remain in office when such resignation has taken effect); or (e) the Director fails to attend three consecutive meetings of the Directors and the Directors resolve that the Director be removed for this reason. Article 24 Analysis See article 18 of the NMA in Chapter 6B (para 6B.19). 25. Directors’ remuneration16 25.1 Directors may undertake any services for the Company that the Directors decide. 25.2 Subject to the Articles and in particular Article 3 Directors are entitled to such remuneration as the Directors determine: (a) for their services to the Company as Directors; and (b) for any other service which they undertake for the Company. 25.3 Subject to the Articles and in particular Article 3, a director’s remuneration may: (a) take any form; and (b) include any arrangements in connection with the payment of a pension, allowance or gratuity, or any death, sickness or disability benefits, to or in respect of that director. 25.4 Unless the Directors decide otherwise, Directors’ remuneration accrues from day to day. 25.5 Unless the Directors decide otherwise, Directors are not accountable to the Company for any remuneration which they receive as Directors or other officers or employees of the Company’s subsidiaries or of any other body corporate in which the Company is interested. 16 See the guidance on directors’ remuneration in the Regulator’s information and guidance notes, Chapter 9.

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Article 25 Analysis As per the provisions of article 25, a CIC may provide remuneration to its directors. The central disparity, in terms of private company limited by guarantee, incorporated under the Companies Act 2006 and using the model articles17 is the directors have no restrictions or rules to abide by. The CIC Regulator18 provides the following principles in relation to directors’ remuneration:19 ●●

Directors may be paid for their services.

●●

Directors’ remuneration should never be more than is reasonable.20

●●

Directors’ remuneration arrangements should always be transparent.21

●●

The Regulator – or the members of a CIC – may take action if a CIC director’s remuneration appears to be too high.22

For further analysis and comparison, see article 19 of the NMA in Chapter 6B (para 6B.20).

26. Directors’ expenses

The Company may pay any reasonable expenses which the Directors properly incur in connection with their attendance at: (a) meetings of Directors or committees of Directors; (b) general meetings; or (c) separate meetings of the holders of any class of shares or of debentures of the Company,



or otherwise in connection with the exercise of their powers and the discharge of their responsibilities in relation to the Company. Article 26 Analysis See article 20 of the NMA in Chapter 6B (para 6B.21).

17 18 19 20

Schedule 2 Regulation 3 Model articles for private companies limited by guarantee. Office of the Regulator of Community Interest Companies. Regulator’s information and guidance notes, Chapter 9 (9.3. Directors’ remuneration). Reasonable – having regard to the contribution which they make to the success of the company and the benefits it provides for the community (9.3.6. What is “reasonable” remuneration). 21 All companies are required to keep copies of directors’ service contracts, or memoranda of their terms, available at an appropriate place for inspection by their members (9.3.7. Transparency). 22 If the Regulator becomes aware of potentially excessive director remuneration, the Regulator is likely to wish to discuss the matter further with the CIC concerned (9.3.8. Action by the Regulator).

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SHARES AND DISTRIBUTIONS SHARES 27. All shares to be fully paid up 27.1 No share is to be issued for less than the aggregate of its nominal value and any premium to be paid to the Company in consideration for its issue. 27.2 This does not apply to shares taken on the formation of the Company by the subscribers to the Company’s Memorandum. Article 27 Analysis See article 21 of the NMA in Chapter 6B (para 6B.22). 28. Powers to issue different classes of share 28.1 Subject to the Articles, but without prejudice to the rights attached to any existing share, the Company may issue shares with such rights or restrictions as may be determined by ordinary resolution. 28.2 The Company may issue shares which are to be redeemed, or are liable to be redeemed at the option of the Company or the holder, and the Directors may determine the terms, conditions and manner of redemption of any such shares. Article 28 Analysis See article 22 of the NMA in Chapter 6B (para 6B.23).

29. Company not bound by less than absolute interests

Except as required by law, no person is to be recognised by the Company as holding any share upon any trust, and except as otherwise required by law or the Articles, the Company is not in any way to be bound by or recognise any interest in a share other than the holder’s absolute ownership of it and all the rights attaching to it. Article 29 Analysis See article 23 of the NMA in Chapter 6B (para 6B.24).

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30. Share certificates 30.1 The Company must issue each shareholder, free of charge, with one or more certificates in respect of the shares which that shareholder holds. 30.2 Every certificate must specify: (a) in respect of how many shares, of what class, it is issued; (b) the nominal value of those shares; (c) that the shares are fully paid; and (d) any distinguishing numbers assigned to them. 30.3 No certificate may be issued in respect of shares of more than one class. 30.4 If more than one person holds a share, only one certificate may be issued in respect of it. 30.5 Certificates must: (a) have affixed to them the Company’s common seal;23 or (b) be otherwise executed in accordance with the Companies Acts. Article 30 Analysis See article 24 of the NMA in Chapter 6B (para 6B.25). 31. Replacement share certificates 31.1 If a certificate issued in respect of a shareholder’s shares is: (a) damaged or defaced; or (b) said to be lost, stolen or destroyed,

that shareholder is entitled to be issued with a replacement certificate in respect of the same shares.

31.2 A shareholder exercising the right to be issued with such a replacement certificate: (a) may at the same time exercise the right to be issued with a single certificate or separate certificates;

23 If the company does not have a common seal, share certificates can be executed by two directors, by one director and the secretary (if there is one), or by one director in the presence of an independent witness.

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(b) must return the certificate which is to be replaced to the Company if it is damaged or defaced; and (c) must comply with such conditions as to evidence, indemnity and the payment of a reasonable fee as the Directors decide. Article 31 Analysis See article 25 of the NMA in Chapter 6B (para 6B.26). 32. Share transfers24 32.1 Shares may be transferred by means of an instrument of transfer25 in any usual form or any other form approved by the Directors, which is executed by or on behalf of the transferor. 32.2 No fee may be charged for registering any instrument of transfer or other Document relating to or affecting the title to any share. 32.3 The Company may retain any instrument of transfer which is registered. 32.4 The transferor remains the holder of a share until the transferee’s name is entered in the register of shareholders as holder of it. 32.5 The Directors may refuse to register the transfer of a share to a person of whom they do not approve. 32.6 They may also refuse to register the transfer unless it is lodged at the registered office of the Company or at such other place as the Directors may appoint and is accompanied by such evidence as the Directors may reasonably require to show the right of the transferor to make the transfer, and by such other information, as they may reasonably require. 32.7 If the Directors refuse to register such a transfer, they shall, within two months after the date on which the transfer was lodged with the Company send to the transferee notice of the refusal. 32.8 The provisions of this Article apply in addition to any restrictions on the transfer of a share which maybe set out elsewhere in the Memorandum or Articles of the Company.

24 Articles 32.5 to 32.8 are mandatory, reflecting CICR, Sch 2, para 2. However, the model constitution does not contain any other restrictions on the transfer of shares. Note, specifically, that the directors may refuse to register a transfer to persons of whom they do not approve. 25 Eg the standard stock transfer form prescribed under the Stock Transfer Act 1963.

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Article 32 Analysis See article 26 of the NMA in Chapter 6B (para 6B.27). 33. Purchase of own shares26

Subject to the Articles, the Company may purchase its own shares (including any redeemable shares) and may make a payment in respect of the redemption or purchase of its own shares otherwise than out of the distributable profits of the Company or the proceeds of a fresh issue of shares. Any share so purchased shall be purchased at its nominal value. Article 33 Analysis See footnote.

34. Transmission of shares27 34.1 If title to a share passes to a transmittee, the Company may only recognise the transmittee as having any title to that share. 34.2 A transmittee who produces such evidence of entitlement to shares as the Directors may properly require: (a) may, subject to the Articles, choose either to become the holder of those shares or to have them transferred to another person; and (b) subject to the Articles, and pending any transfer of the shares to another person, has the same rights as the holder had. 34.3 But transmittees do not have the right to attend or vote at a general meeting, or agree to a proposed written resolution, in respect of shares to which they are entitled, by reason of the holder’s death or bankruptcy or otherwise, unless they become the holders of those shares.

26 A company which adopts the provisions of CICR, Sch 2 rather than CICR, Sch 3 (ie a company which only intends to pay dividends to asset-locked bodies) must not make use of this provision to buy back any share which is not held by an asset-locked body, as the repurchase of such shares will amount to a breach of the asset lock provisions set out in CICR, Sch 2, para 1 and article 3. This article, in itself, does not provide sufficient authority for the company to purchase its own shares. The company must also comply with the relevant statutory requirements – in particular, Companies Act 2006, ss 693–700. We recommend that you take legal advice before taking any steps towards the company purchasing its own shares. It is important that any purchase of shares made in accordance with this article is also made in accordance with article 3 (asset lock). 27 In the event of the death of a shareholder, the share will pass according to the will of the deceased shareholder, or the intestacy rules.

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Article 34 Analysis See article 27 of the NMA in Chapter 6B (para 6B.28). 35. Exercise of transmittees’ rights 35.1 Transmittees who wish to become the holders of shares to which they have become entitled must notify the Company in Writing of that wish. 35.2 If the transmittee wishes to have a share transferred to another person, the transmittee must execute an instrument of transfer in respect of it. 35.3 Any transfer made or executed under this Article is to be treated as if it were made or executed by the person from whom the transmittee has derived rights in respect of the share, and as if the event which gave rise to the transmission had not occurred. Article 35 Analysis See article 28 of the NMA in Chapter 6B (para 6B.29). 36. Transmittees bound by prior notices 36.1 If a notice is given to a shareholder in respect of shares and a transmittee is entitled to those shares, the transmittee is bound by the notice if it was given to the shareholder before the transmittee’s name has been entered in the register of shareholders. Article 36 Analysis See article 29 of the NMA in Chapter 6B (para 6B.30). DIVIDENDS AND OTHER DISTRIBUTIONS28 37. Procedure for declaring dividends 37.1 Subject to the Companies Acts, the Regulations and the Articles, the Company may by ordinary resolution declare dividends, and 28 A company which does not intend to pay dividends or make other distributions to private investors (ie a company which adopts the provisions of CICR, Sch 2 rather than those of CICR, Sch 3) must not make use of this provision to pay dividends on any share held by a private investor, as the payment of any such dividends will amount to a breach of the asset lock provisions set out in CICR, Sch 2, para 1 and article 3.

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the Directors may, provided that such decision is authorised by an ordinary resolution of the shareholders, decide to pay interim dividends. 37.2 For the avoidance of doubt the payment of dividends shall be considered to be a transfer of assets other than for full consideration and shall not be permitted other than in the circumstances prescribed in Article 3.29 37.3 A dividend must not be declared unless the Directors have made a recommendation as to its amount. Such a dividend must not exceed the amount recommended by the Directors. 37.4 No dividend may be declared or paid unless it is in accordance with shareholders’ respective rights. 37.5 Unless the shareholders’ resolution to declare or Directors’ decision to pay a dividend, or the terms on which shares are issued, specify otherwise, it must be paid by reference to each shareholder’s holding of shares on the date of the resolution or decision to declare or pay it. 37.6 If the Company’s share capital is divided into different classes, no interim dividend may be paid on shares carrying deferred or nonpreferred rights if, at the time of payment, any preferential dividend is in arrear. 37.7 The Directors may pay at intervals any dividend payable at a fixed rate if it appears to them that the profits available for distribution justify the payment. 37.8 If the Directors act in good faith, they do not incur any liability to the holders of shares conferring preferred rights for any loss they may suffer by the lawful payment of an interim dividend on shares with deferred or non-preferred rights. Article 37 Analysis See article 30 of the NMA in Chapter 6B (para 6B.31). 38. Payment of dividends and other distributions 38.1 Where a dividend or other sum which is a distribution is payable in respect of a share, it must be paid by one or more of the following means:

29 These words reflect the prohibition on paying dividends to private investors where the provisions set out in CICR, Sch 2 are adopted as part of a CIC’s articles.

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(a) transfer to a bank or building society account indicated by the distribution recipient either in Writing or as the Directors may otherwise decide; (b) sending a cheque made payable to the distribution recipient by post to the distribution recipient at the distribution recipient’s registered Address (if the distribution recipient is a holder of the share), or (in any other case) to an Address indicated by the distribution recipient either in Writing or as the Directors may otherwise decide; (c) sending a cheque made payable to such person by post to such person at such Address as the distribution recipient has indicated either in Writing or as the Directors may otherwise decide; or (d) any other means of payment as the Directors agree with the distribution recipient either in Writing or by such other means as the Directors decide. 38.2 In the Articles, “the distribution recipient” means, in respect of a share in respect of which a dividend or other sum is payable: (a) the holder of the share; or (b) if the share has two or more joint holders, whichever of them is named first in the register of members; or (c) if the holder is no longer entitled to the share by reason of death or bankruptcy, or otherwise by operation of law, the transmittee. Article 38 Analysis See article 31 of the NMA in Chapter 6B (para 6B.32). 39. No interest on distributions

The Company may not pay interest on any dividend or other sum payable in respect of a share unless otherwise provided by: (a) the terms on which the share was issued; or (b) the provisions of another agreement between the holder of that share and the Company. Article 39 Analysis See article 32 of the NMA in Chapter 6B (para 6B.33).

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40. Unclaimed distributions 40.1 All dividends or other sums which are: (a) payable in respect of shares; and (b) unclaimed after having been declared or become payable,

may be invested or otherwise made use of by the Directors for the benefit of the Company until claimed.

40.2 The payment of any such dividend or other sum into a separate account does not make the Company a trustee in respect of it. 40.3 If: (a) twelve years have passed from the date on which a dividend or other sum became due for payment; and (b) the distribution recipient has not claimed it,

the distribution recipient is no longer entitled to that dividend or other sum and it ceases to remain owing by the Company.

Article 40 Analysis See article 33 of the NMA in Chapter 6B (para 6B.34). 41. Non-cash distributions 41.1 Subject to the terms of issue of the share in question, the Company may, by ordinary resolution on the recommendation of the Directors, decide to pay all or part of a dividend or other distribution payable in respect of a share by transferring non-cash assets of equivalent value (including, without limitation, shares or other securities in any company). 41.2 For the purposes of paying a non-cash distribution, the Directors may make whatever arrangements they think fit, including, where any difficulty arises regarding the distribution: (a) fixing the value of any assets; (b) paying cash to any distribution recipient on the basis of that value in order to adjust the rights of recipients; and (c) vesting any assets in trustees.

Article 41 Analysis See article 34 of the NMA in Chapter 6B (para 6B.35).

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42. Waiver of distributions

Distribution recipients may waive their entitlement to a dividend or other distribution payable in respect of a share by giving the Company notice in Writing to that effect, but if: (a) the share has more than one holder; or (b) more than one person is entitled to the share, whether by reason of the death or bankruptcy of one or more joint holders, or otherwise,



the notice is not effective unless it is expressed to be given, and signed, by all the holders or persons otherwise entitled to the share. Article 42 Analysis See article 35 of the NMA in Chapter 6B (para 6B.36).

CAPITALISATION OF PROFITS 43. Authority to capitalise and appropriation of capitalised sums 43.1 Subject to the Articles, the Directors may, if they are so authorised by an ordinary resolution: (a) decide to capitalise any profits of the Company (whether or not they are available for distribution) which are not required for paying a preferential dividend, or any sum standing to the credit of the Company’s share premium account or capital redemption reserve; and (b) appropriate any sum which they so decide to capitalise (a “capitalised sum”) to the persons who would have been entitled to it if it were distributed by way of dividend (the “persons entitled”) and in the same proportions. 43.2 Capitalised sums must be applied: (a) on behalf of the persons entitled and (b) in the same proportions as a dividend would have been distributed to them. 43.3 Any capitalised sum may be applied in paying up new shares of a nominal amount equal to the capitalised sum which are then allotted credited as fully paid to the persons entitled or as they may direct. 43.4 A capitalised sum which was appropriated from profits available for distribution may be applied in paying up new debentures of the Company which are then allotted credited as fully paid to the persons entitled or as they may direct. 315

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43.5 Subject to the Articles the Directors may: (a) apply capitalised sums in accordance with Articles 43.3 and 43.4 partly in one way and partly in another; (b) make such arrangements as they think fit to deal with shares or debentures becoming distributable in fractions under this Article (including the issuing of fractional certificates or the making of cash payments); and (c) authorise any person to enter into an agreement with the Company on behalf of all the persons entitled which is binding on them in respect of the allotment of shares and debentures to them under this Article. Article 43 Analysis See article 36 of the NMA in Chapter 6B (para 6B.37). DECISION-MAKING BY SHAREHOLDERS ORGANISATION OF GENERAL MEETINGS30 44. General meetings31 44.1 The Directors may call a general meeting at any time. 44.2 The Directors must call a general meeting if required to do so by the shareholders under the Companies Acts. 45. Length of notice

All general meetings must be called by either: 45.1 at least 14 Clear Days’ notice; or 45.2 shorter notice if it is so agreed by [a majority of the shareholders having a right to attend and vote at that meeting.Any such majority must together represent at least [90%] of the total voting rights at that meeting of all the shareholders].

30 The Companies Act 2006 has removed the need for private companies to hold annual general meetings and therefore these articles follow suit; however, if you wish, you can insert an additional provision which obliges the company to hold annual general meetings. 31 Article 44.2 provides that general meetings must be held in accordance with the provisions of the Companies Act 2006. You must specify how many shareholders are required to be present to hold a valid general meeting. The quorum may be fixed in absolute terms (eg “four shareholders”) or as a proportion of the total number of shareholders (eg “three quarters of the shareholders from time to time”).You may even wish to stipulate that particular named shareholders, or shareholders representing particular stakeholder interests, must be present to constitute a quorum. In any event, it is recommended that the quorum should never be less than half of the total number of shareholders.

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46. Contents of notice 46.1 Every notice calling a general meeting must specify the place, day and time of the meeting, whether it is a general or an annual general meeting, and the general nature of the business to be transacted. 46.2 If a special resolution is to be proposed, the notice must include the proposed resolution and specify that it is proposed as a special resolution. 46.3 In every notice calling a meeting of the Company there must appear with reasonable prominence a statement informing the shareholder of his or her rights to appoint another person as his or her proxy at a general meeting. 47. Service of notice

Notice of general meetings must be given to every shareholder, to the Directors and to the auditors of the Company. Articles 44–47 Analysis See article 9 of the NMA in Chapter 6B (para 6B.10).

48. Attendance and speaking at general meetings 48.1 A person is able to exercise the right to speak at a general meeting when that person is in a position to communicate to all those attending the meeting, during the meeting, any information or opinions which that person has on the business of the meeting. 48.2 A person is able to exercise the right to vote at a general meeting when: (a) that person is able to vote, during the meeting, on resolutions put to the vote at the meeting; and (b) that person’s vote can be taken into account in determining whether or not such resolutions are passed at the same time as the votes of all the other persons attending the meeting. 48.3 The Directors may make whatever arrangements they consider appropriate to enable those attending a general meeting to exercise their rights to speak or vote at it. 48.4 In determining attendance at a general meeting, it is immaterial whether any two or more shareholders attending it are in the same place as each other.

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48.5 Two or more persons who are not in the same place as each other attend a general meeting if their circumstances are such that if they have (or were to have) rights to speak and vote at that meeting, they are (or would be) able to exercise them. Article 48 Analysis See article 37 of the NMA in Chapter 6B (para 6B.38). 49. Quorum for general meetings 49.1 No business other than the appointment of the chairman of the meeting is to be transacted at a general meeting if the persons attending it do not constitute a quorum. 49.2 The quorum for a general meeting shall be two persons entitled to vote on the business to be transacted (each being a shareholder, a proxy for a shareholder or a duly authorised representative of a shareholder) or 10% of the total shareholding (represented in person or by proxy) whichever is greater. Article 49 Analysis See article 38 of the NMA in Chapter 6B (para 6B.39). 50. Chairing general meetings 50.1 If the Directors have appointed a chairman, the chairman shall chair general meetings if present and willing to do so. 50.2 If the Directors have not appointed a chairman, or if the chairman is unwilling to chair the meeting or is not present within ten minutes of the time at which a meeting was due to start: (a) the Directors present; or (b) (if no Directors are present), the meeting,

must appoint a Director or shareholder to chair the meeting, and the appointment of the chairman of the meeting must be the first business of the meeting.

50.3 The person chairing a meeting in accordance with this Article is referred to as “the chairman of the meeting”. Article 50 Analysis See article 39 of the NMA in Chapter 6B (para 6B.40).

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51. Attendance and speaking by Directors and non-shareholders 51.1 Directors may attend and speak at general meetings, whether or not they are shareholders. 51.2 The chairman of the meeting may permit other persons who are not: (a) shareholders of the Company; or (b) otherwise entitled to exercise the rights of shareholders in relation to general meetings,

to attend and speak at a general meeting.

Article 51 Analysis See article 40 of the NMA in Chapter 6B (para 6B.41). 52. Adjournment 52.1 If the persons attending a general meeting within half an hour of the time at which the meeting was due to start do not constitute a quorum, or if during a meeting a quorum ceases to be present, the chairman of the meeting must adjourn it. 52.2 The chairman of the meeting may adjourn a general meeting at which a quorum is present if: (a) the meeting consents to an adjournment; or (b) it appears to the chairman of the meeting that an adjournment is necessary to protect the safety of any person attending the meeting or ensure that the business of the meeting is conducted in an orderly manner. 52.3 The chairman of the meeting must adjourn a general meeting if directed to do so by the meeting. 52.4 When adjourning a general meeting, the chairman of the meeting must: (a) either specify the time and place to which it is adjourned or state that it is to continue at a time and place to be fixed by the Directors; and (b) have regard to any directions as to the time and place of any adjournment which have been given by the meeting. 52.5 If the continuation of an adjourned meeting is to take place more than 14 days after it was adjourned, the Company must give at least 7 Clear Days’ notice of it (that is, excluding the day of the adjourned meeting and the day on which the notice is given): 319

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(a) to the same persons to whom notice of the Company’s general meetings is required to be given; and (b) containing the same information which such notice is required to contain. 52.6 No business may be transacted at an adjourned general meeting which could not properly have been transacted at the meeting if the adjournment had not taken place. Article 52 Analysis See article 41 of the NMA in Chapter 6B (para 6B.42). VOTING AT GENERAL MEETINGS 53. Voting: general 53.1 A resolution put to the vote of a general meeting must be decided on a show of hands unless a poll is duly demanded in accordance with the Articles. 53.2 A person who is not a shareholder of the Company shall not have any right to vote at a general meeting of the Company; but this is without prejudice to any right to vote on a resolution affecting the rights attached to a class of the Company’s debentures. 53.3 Article 0 shall not prevent a person who is a proxy for a shareholder or an Authorised Representative from voting at a general meeting of the Company. 53.4 On a vote on a resolution on a show of hands at a meeting every person present in person (whether a shareholder, proxy or Authorised Representative of a shareholder) and entitled to vote shall have a maximum of one vote. 53.5 On a vote on a resolution on a poll at a meeting every shareholder present in person or by proxy or Authorised Representative shall have one vote. 53.6 In the case of an equality of votes, whether on a show of hands or on a poll, the chair of the meeting shall not be entitled to a casting vote in addition to any other vote he or she may have. 53.7 No shareholder shall be entitled to vote at any general meeting unless all monies presently payable by him, her or it to the Company have been paid.

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53.8 The following provisions apply to any organisation that is a shareholder (“a Shareholder Organisation”): 53.8.1 a Shareholder Organisation may nominate any individual to act as its representative (“an Authorised Representative”) at any meeting of the Company; 53.8.2 the Shareholder Organisation must give notice in Writing to the Company of the name of its Authorised Representative. The Authorised Representative will not be entitled to represent the Shareholder Organisation at any meeting of the Company unless such notice has been received by the Company. The Authorised Representative may continue to represent the Shareholder Organisation until notice in Writing is received by the Company to the contrary; 53.8.3 a Shareholder Organisation may appoint an Authorised Representative to represent it at a particular meeting of the Company or at all meetings of the Company until notice in Writing to the contrary is received by the Company; 53.8.4 any notice in Writing received by the Company shall be conclusive evidence of the Authorised Representative’s authority to represent the Shareholder Organisation or that his or her authority has been revoked. The Company shall not be required to consider whether the Authorised Representative has been properly appointed by the Shareholder Organisation; 53.8.5 an individual appointed by a Shareholder Organisation to act as its Authorised Representative is entitled to exercise (on behalf of the Shareholder Organisation) the same powers as the Shareholder Organisation could exercise if it were an individual shareholder; 53.8.6 on a vote on a resolution at a meeting of the Company, the Authorised Representative has the same voting rights as the Shareholder Organisation would be entitled to if it was an individual shareholder present in person at the meeting; and 53.8.7 the power to appoint an Authorised Representative under this Article 0 is without prejudice to any rights which the Shareholder Organisation has under the Companies Acts and the Articles to appoint a proxy or a corporate representative.

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Article 53 Analysis The Shareholder Organisation provisions (art 53.8) do not appear in the new model articles for private companies limited by shares or guarantee. See article 41 of the NMA in Chapter 6B (para 6B.42). 54. Poll votes 54.1 A poll on a resolution may be demanded: (a) in advance of the general meeting where it is to be put to the vote; or (b) at a general meeting, either before a show of hands on that resolution or immediately after the result of a show of hands on that resolution is declared. 54.2 A poll may be demanded by: (a) the chairman of the meeting; (b) the Directors; (c) two or more persons having the right to vote on the resolution; (d) any person, who, by virtue of being appointed proxy for one or more members having the right to vote at the meeting, holds two or more votes; or (e) a person or persons representing not less than one tenth of the total voting rights of all the shareholders having the right to vote on the resolution. 54.3 A demand for a poll may be withdrawn if: (a) the poll has not yet been taken; and (b) the chairman of the meeting consents to the withdrawal. 54.4 Polls must be taken immediately and in such manner as the chairman of the meeting directs. Article 54 Analysis See article 44 of the NMA in Chapter 6B (para 6B.45).

55. Errors and disputes 55.1 No objection may be raised to the qualification of any person voting at a general meeting except at the meeting or adjourned 322

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meeting at which the vote objected to is tendered, and every vote not disallowed at the meeting is valid. 55.2 Any such objection must be referred to the chairman of the meeting, whose decision is final. Article 55 Analysis See article 43 of the NMA in Chapter 6B (para 6B.44). 56. Content of Proxy Notices 56.1 Proxies may only validly be appointed by a notice in Writing (a “Proxy Notice”) which: (a) states the name and Address of the shareholder appointing the proxy; (b) identifies the person appointed to be that shareholder’s proxy and the general meeting in relation to which that person is appointed; (c) is signed by or on behalf of the shareholder appointing the proxy, or is authenticated in such manner as the Directors may determine; and (d) is delivered to the Company in accordance with the Articles and any instructions contained in the notice of the general meeting to which they relate. 56.2 The Company may require Proxy Notices to be delivered in a particular form, and may specify different forms for different purposes. 56.3 Proxy notices may specify how the proxy appointed under them is to vote (or that the proxy is to abstain from voting) on one or more resolutions. 56.4 Unless a Proxy Notice indicates otherwise, it must be treated as: (a) allowing the person appointed under it as a proxy discretion as to how to vote on any ancillary or procedural resolutions put to the meeting; and (b) appointing that person as a proxy in relation to any adjournment of the general meeting to which it relates as well as the meeting itself.

Article 56 Analysis See article 45 of the NMA in Chapter 6B (para 6B.46).

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57. Delivery of Proxy Notices 57.1 A person who is entitled to attend, speak or vote (either on a show of hands or on a poll) at a general meeting remains so entitled in respect of that meeting or any adjournment of it, even though a valid Proxy Notice has been delivered to the Company by or on behalf of that person. 57.2 An appointment under a Proxy Notice may be revoked by delivering to the Company a notice in Writing given by or on behalf of the person by whom or on whose behalf the Proxy Notice was given. 57.3 A notice revoking a proxy appointment only takes effect if it is delivered before the start of the meeting or adjourned meeting to which it relates. 57.4 If a Proxy Notice is not executed by the person appointing the proxy, it must be accompanied by written evidence of the authority of the person who executed it to execute it on the appointor’s behalf. Article 57 Analysis See article 46 of the NMA in Chapter 6B (para 6B.47). 58. Amendments to resolutions 58.1 An ordinary resolution to be proposed at a general meeting may be amended by ordinary resolution if: (a) notice of the proposed amendment is given to the Company in Writing by a person entitled to vote at the general meeting at which it is to be proposed not less than 48 hours before the meeting is to take place (or such later time as the chairman of the meeting may determine); and (b) the proposed amendment does not, in the reasonable opinion of the chairman of the meeting, materially alter the scope of the resolution. 58.2 A special resolution to be proposed at a general meeting may be amended by ordinary resolution, if: (a) the chairman of the meeting proposes the amendment at the general meeting at which the resolution is to be proposed; and (b) the amendment does not go beyond what is necessary to correct a grammatical or other non-substantive error in the resolution. 324

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58.3 If the chairman of the meeting, acting in good faith, wrongly decides that an amendment to a resolution is out of order, the chairman’s error does not invalidate the vote on that resolution. Article 58 Analysis See article 47 of the NMA in Chapter 6B (para 6B.48). WRITTEN RESOLUTIONS 59. Written resolutions 59.1 Subject to Article 0, a written resolution of the Company passed in accordance with this Article 0 shall have effect as if passed by the Company in general meeting: 59.1.1 A written resolution is passed as an ordinary resolution if it is passed by a simple majority of the total voting rights of eligible shareholders. 59.1.2 A written resolution is passed as a special resolution if it is passed by shareholders representing not less than 75% of the total voting rights of eligible shareholders. A written resolution is not a special resolution unless it states that it was proposed as a special resolution. 59.2 In relation to a resolution proposed as a written resolution of the Company the eligible shareholders are the shareholders who would have been entitled to vote on the resolution on the Circulation Date of the resolution. 59.3 A shareholders’ resolution under the Companies Acts removing a Director or an auditor before the expiration of his or her term of office may not be passed as a written resolution. 59.4 A copy of the written resolution must be sent to every shareholder together with a statement informing the shareholder how to signify their agreement to the resolution and the date by which the resolution must be passed if it is not to lapse. Communications in relation to written notices shall be sent to the Company’s auditors in accordance with the Companies Acts. 59.5 A shareholder signifies their agreement to a proposed written resolution when the Company receives from him or her an authenticated Document identifying the resolution to which it relates and indicating his or her agreement to the resolution. 59.5.1 If the Document is sent to the Company in Hard Copy Form, it is authenticated if it bears the shareholder’s signature. 325

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59.5.2 If the Document is sent to the Company by Electronic Means, it is authenticated [if it bears the shareholder’s signature] or [if the identity of the shareholder is confirmed in a manner agreed by the Directors] or [if it is accompanied by a statement of the identity of the shareholder and the Company has no reason to doubt the truth of that statement] or [if it is from an email Address notified by the shareholder to the Company for the purposes of receiving Documents or information by Electronic Means]. 59.6 A written resolution is passed when the required majority of eligible shareholders have signified their agreement to it. 59.7 A proposed written resolution lapses if it is not passed within 28 days beginning with the Circulation Date. Article 59 Analysis See article 8 of the NMA in Chapter 6B (para 6B.9). ADMINISTRATIVE ARRANGEMENTS AND MISCELLANEOUS 60. Means of communication to be used 60.1 Subject to the Articles, anything sent or supplied by or to the Company under the Articles may be sent or supplied in any way in which the Companies Act 2006 provides for Documents or information which are authorised or required by any provision of that Act to be sent or supplied by or to the Company. 60.2 Subject to the Articles, any notice or Document to be sent or supplied to a Director in connection with the taking of decisions by Directors may also be sent or supplied by the means by which that Director has asked to be sent or supplied with such notices or Documents for the time being. 60.3 A Director may agree with the Company that notices or Documents sent to that Director in a particular way are to be deemed to have been received within an agreed time of their being sent, and for the agreed time to be less than 48 hours. Article 60 Analysis See article 48 of the NMA in Chapter 6B (para 6B.49).

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61. Irregularities

The proceedings at any meeting or on the taking of any poll or the passing of a written resolution or the making of any decision shall not be invalidated by reason of any accidental informality or irregularity (including any accidental omission to give or any non-receipt of notice) or any want of qualification in any of the persons present or voting or by reason of any business being considered which is not referred to in the notice unless a provision of the Companies Acts specifies that such informality, irregularity or want of qualification shall invalidate it. Article 61 Analysis This article does not appear in any of the new model articles.

62. Minutes 62.1 The Directors must cause minutes to be made in books kept for the purpose: 62.1.1 of all appointments of officers made by the Directors; 62.1.2 of all resolutions of the Company and of the Directors (including, without limitation, decisions of the Directors made without a meeting); and 62.1.3 of all proceedings at meetings of the Company and of the Directors, and of committees of Directors, including the names of the Directors present at each such meeting;

and any such minute, if purported to be signed (or in the case of minutes of Directors’ meetings signed or authenticated) by the chair of the meeting at which the proceedings were had, or by the chair of the next succeeding meeting, shall, as against any shareholder or Director of the Company, be sufficient evidence of the proceedings.

62.2 The minutes must be kept for at least ten years from the date of the meeting, resolution or decision.

Article 62 Analysis See article 15 of the NMA in Chapter 6B (para 6B.16).

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63. Records and accounts32

The Directors shall comply with the requirements of the Companies Acts as to maintaining a shareholders’ register, keeping financial records, the audit or examination of accounts and the preparation and transmission to the Registrar of Companies and the Regulator of: 63.1 annual reports; 63.2 annual returns; and 63.3 annual statements of account. 63.4 Except as provided by law or authorised by the Directors or an ordinary resolution of the Company, no person is entitled to inspect any of the Company’s accounting or other records or Documents merely by virtue of being a shareholder. Article 63 Analysis Article 63 provides an overview of section 38633 which states any company must keep adequate accounting records. This article does not appear in any of the new model articles.

64. Indemnity 64.1 Subject to Article 0, a relevant Director of the Company or an associated company may be indemnified out of the Company’s assets against: (a) any liability incurred by that Director in connection with any negligence, default, breach of duty or breach of trust in relation to the Company or an associated company; (b) any liability incurred by that Director in connection with the activities of the Company or an associated company in its capacity as a trustee of an occupational pension scheme (as defined in section 235(6) of the Companies Act 2006); (c) any other liability incurred by that Director as an officer of the Company or an associated company. 64.2 This Article does not authorise any indemnity which would be prohibited or rendered void by any provision of the Companies Acts or by any other provision of law.

32 See the Companies House guidance booklet, “Accounts and Accounting Reference Dates” (available online at www.companies-house.gov.uk/about/gbhtml/gba3.shtml). On the annual CIC report, see the Regulator’s information and guidance notes, Chapter 8. 33 Companies Act 2006, s 386 (Duty to keep accounting records).

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64.3 In this Article: (a) companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate; and (b) a “relevant Director” means any Director or former Director of the Company or an associated company. 65. Insurance 65.1 The Directors may decide to purchase and maintain insurance, at the expense of the Company, for the benefit of any relevant director in respect of any relevant loss. 65.2 In this Article: (a) a “relevant Director” means any Director or former Director of the Company or an associated company; (b) a “relevant loss” means any loss or liability which has been or may be incurred by a relevant Director in connection with that Director’s duties or powers in relation to the Company, any associated company or any pension fund or employees’ share scheme of the Company or associated company; and (c) companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate. Articles 64 and 65 Analysis See articles 52 and 53 of the NMA in Chapter 6B (paras 6B.53 and 6B.54). 66. Exclusion of model articles

The relevant model articles for a company limited by shares are hereby expressly excluded. Article 66 Analysis In order to explicitly state the exclusion, it is good practice to provide the provision at the beginning of the document and specifically refer to the model articles regulations. It should be noted, for companies incorporated under previous Companies Acts, that the relevant articles should be expressly excluded. There is provision for an alternative precedent, as follows: “The model articles for private companies limited by guarantee contained or incorporated in Schedule 1 to the Companies (Model Articles) Regulations 2008, SI 2008/3229, as amended prior to the date of adoption of these articles (the ‘Model Articles’) shall not apply to the Company, save insofar as they are varied or excluded by, or are inconsistent with, the following articles.”

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SCHEDULE INTERPRETATION 1.

In the Articles, unless the context requires otherwise, the following terms shall have the following meanings:

Term “Address” “Articles” “asset-locked body”

“Authorised Representative” “bankruptcy”

“Chair” “chairman of the meeting” “Circulation Date” “Clear Days”

“community”

“Companies Acts”

Meaning includes a number or address used for the purposes of sending or receiving Documents by Electronic Means; means the Company’s articles of association; means (i) a community interest Company or a charity34 or a Permitted Society; or (ii) a body established outside the United Kingdom that is equivalent to any of those; means any individual nominated by a Shareholder Organisation to act as its representative at any meeting of the Company in accordance with Article 0; includes individual insolvency proceedings in a jurisdiction other than England and Wales or Northern Ireland which have an effect similar to that of bankruptcy; has the meaning given in Article 10; has the meaning given in Article 0; in relation to a written resolution, has the meaning given to it in the Companies Acts; in relation to the period of a notice, that period excluding the day when the notice is given or deemed to be given and the day for which it is given or on which it is to take effect; is to be construed in accordance with the section 35(5) of the Companies (Audit, Investigations and Community Enterprise) Act 2004; means the Companies Acts (as defined in section 2 of the Companies Act 2006), in so far as they apply to the Company;

34 Charities Act 2006, s 1(1) defines a “charity” as an institution which “is established for charitable purposes only, and falls to be subject to the control of the High Court in the exercise of its jurisdiction with respect to charities”.

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Term “Company” “Conflict of Interest”

“Director” “distribution recipient" “Document”

Meaning [....................................] [Community Interest Company/C.I.C.]; any direct or indirect interest of a Director (whether personal, by virtue of a duty of loyalty to another organisation or otherwise) that conflicts or might conflict with the interests of the Company; means a director of the Company, and includes any person occupying the position of director, by whatever name called; has the meaning given in Article 38;

includes, unless otherwise indicated, any document sent or supplied in Electronic Form; “Electronic Form and have the meanings respectively given to them Electronic Means” in section 1168 of the Companies Act 2006; “fully paid” in relation to a share, means that the nominal value and any premium to be paid to the Company in respect of that share have been paid to the Company; “Hard Copy Form” has the meaning given in section 1168 of the Companies Act 2006; “holder” in relation to shares means the person whose name is entered in the register of shareholders as the holder of the shares; “instrument” means a Document in Hard Copy” Form; "Memorandum” the Company’s memorandum of association; “paid” means paid or credited as paid; “participate” in relation to a Directors’ meeting, has the meaning given in Article 15; “Permitted Registered Means: Society” (a) A registered society within the meaning given by section 1(1) of the Co-operative and Community Benefit Societies Act 2014; or (b) A society registered or deemed to be registered under the Industrial and Provident Societies Act (Northern Ireland) 1969;

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Term “Proxy Notice” “the Regulator” “the Regulations” “Secretary” “shareholder” “shares” “specified” “subsidiary” “transfer”

“transmittee” “Writing”

2.

Meaning has the meaning given in Article 0; means the Regulator of Community Interest Companies; means the Community Interest Company Regulations 2005 (as amended); the secretary of the Company (if any); means a person who is the holder of a share; means shares in the Company; means specified in the articles of association of the Company for the purposes of this paragraph; has the meaning given in section 1159 of the Companies Act 2006; includes every description of disposition, payment, release or distribution, and the creation or extinction of an estate or interest in, or right over, any property; means a person entitled to a share by reason of the death or bankruptcy of a shareholder or otherwise by operation of law; and means the representation or reproduction of words, symbols or other information in a visible form by any method or combination of methods, whether sent or supplied in Electronic Form or otherwise.

Subject to clause 3 of this Schedule, any reference in the Articles to an enactment includes a reference to that enactment as re-enacted or amended from time to time and to any subordinate legislation made under it.

3. Unless the context otherwise requires, other words or expressions contained in these Articles bear the same meaning as in the Companies Act 2006 as in force on the date when the Articles become binding on the Company

332

Chapter 8.4  Community Interest Company Limited by Shares (CIC Limited by Shares, Schedule 3, Small Membership) The Companies Act 2006 Articles of Association of [INSERT NAME] [Community Interest Company/C.I.C. delete as applicable] INTERPRETATION 1.

Defined terms



The interpretation of these Articles is governed by the provisions set out in the Schedule to the Articles.

COMMUNITY INTEREST COMPANY AND ASSET LOCK 2.

Community Interest Company



The Company shall be a community interest company. Article 2 Analysis A company limited by shares or a company limited by guarantee and not having a share capital may be formed as or become a CIC, and a company limited by guarantee and having a share capital may become a CIC. In terms of conversion, the company is required to alter its articles to state that it is to be a CIC. Adaptation may be required to ensure the company conforms to the requirements of CIC legislation, and the name of the company will require alteration to include one of the CIC designations.

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3.

Asset Lock1 3.1 The Company shall not transfer any of its assets other than for full consideration. 3.2 Provided the conditions in Article 3.3 are satisfied, Article 3.1 shall not apply to: (a) the transfer of assets to any specified asset-locked body, or (with the consent of the Regulator) to any other asset-locked body; (b) the transfer of assets made for the benefit of the community other than by way of a transfer of assets into an asset-locked body; (c) the payment of dividends in respect of shares in the Company; (d) the distribution of assets on a winding up; (e) payments on the redemption or purchase of the Company’s own shares; (f)

payments on the reduction of share capital; and

(g) the extinguishing or reduction of the liability of shareholders in respect of share capital not paid up on the reduction of share capital. 3.3 The conditions are that the transfer of: (a) assets must comply with any restrictions on the transfer of assets for less than full consideration which may be set out elsewhere in the Memorandum or Articles of the Company; and (b) must not exceed any limits imposed by, or by virtue of, Part 2 of the Companies (Audit, Investigations and Community Enterprise) Act 2004. 3.4 If: 3.4.1 the Company is wound up under the Insolvency Act 1986; and 3.4.2 all its liabilities have been satisfied

any residual assets shall be given or transferred to the asset-locked body specified in Article 3.5 below2.

1 See “Office of the Regulator of Community Interest Companies: Information and guidance notes” (DBEIS, May 2016), Chapter 6. Inclusion of the provisions contained in articles 3.1 to 3.3 (reflecting Community Interest Company Regulations 2005 (CICR), Sch 2, para 1(1) to (3)) is mandatory. 2 When a CIC is wound up, its “residual assets” are any property remaining after satisfaction of the company’s liabilities under the Insolvency Act 1986. The CICR permit shareholders to be paid back, out of the residual assets, the nominal value of their shares. Anything left over after this process is classed as “remaining residual assets” and must be paid to a specified asset-locked body (or, if no such body is specified, to an asset-locked body chosen by the Regulator in consultation with the company).

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3.5 For the purposes of this Article 3, the following asset-locked body is specified as a potential recipient of the Company’s assets under Articles 3.2 and 3.4:

Name: [.......................................................................]



(Please note that a community interest company cannot nominate itself as the asset locked body. It also cannot nominate a non-asset locked body. An asset locked body is defined as a CIC or charity, a permitted society or non-UK based equivalent).



Charity Registration Number (if applicable): [.......................]



Company Registration Number (if applicable): [......................]



Registered Office: [...................................................................]3

Article 3 Analysis The asset lock is the fundamental feature of the CIC, it is designed to ensure the company assets are specifically used for the benefit of the company. Chapter 64 of the regulator’s guidance provides further guidance. It should be noted the provisions cannot be edited or amended5. 4.

Not for profit



The Company is not established or conducted for private gain: any surplus or assets are used principally for the benefit of the community. Article 4 Analysis The company will have statutory powers and obligations conferred by the Companies Act 2006 and the Community Interest Company Regulations 2005, SI 2005/1788. Article 6 prescribes that the main powers must be used to further the company’s objects and all actions must be lawful. It is possible to limit the powers of the company. It should be noted that any adaptation of the provisions in the articles must not fetter the statutory powers bestowed by legislation.

3 See CICR, reg 23 and the Regulator’s information and guidance notes, Chapters 6 and 10.3. If the company does not specify that the remaining residual assets are to be transferred to a particular asset-locked body, an appropriate recipient will be chosen by the Regulator, in consultation with the company’s directors and shareholders. 4 Regulator’s information and guidance notes, Chapter 6. 5 CICs are also able to adopt asset lock rules that impose more stringent requirements, provided they also include these basic provisions.

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OBJECTS, POWERS AND LIMITATION OF LIABILITY 5.

Objects6



The objects of the Company are to carry on activities which benefit the community and in particular (without limitation) to [    ]. Article 5 Analysis Article 5 requires the objects of the company to be restricted. For example, “to provide day care and transport facilities for the elderly and physically disadvantaged in North Essex”. If the objects are not restricted by the articles, it would follow that the company does not meet the community interest test7.

6.

Powers



To further its objects the Company may do all such lawful things as may further the Company’s objects and, in particular, but, without limitation, may borrow or raise and secure the payment of money for any purpose including for the purposes of investment or of raising funds. Article 6 Analysis The company will have statutory powers and obligations conferred by the Companies Act 2006 and the Community Interest Company Regulations 2005, SI 2005/1788. This article prescribes that the main powers must be used to further the company’s objects and all actions must be lawful. It is possible to limit the powers of the company. It should be noted that any adaptation of the provisions in the articles must not fetter the statutory powers bestowed by legislation.

7.

Liability of shareholders8



The liability of the shareholders is limited to the amount, if any, unpaid on the shares held by them.

6 On the specification of the company’s objects, see the Regulator’s information and guidance notes, Chapter 5. 7 Regulator’s information and guidance notes, Chapter 5. 8 On limited liability and share capital generally, see the Regulator’s information and guidance notes, Chapter 3.

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Article 7 Analysis See article 2 of the NMA in Chapter 6B (para 6B.3). DIRECTORS DIRECTORS’ POWERS AND RESPONSIBILITIES9 8.

Directors’ general authority



Subject to the Articles, the Directors are responsible for the management of the Company’s business, for which purpose they may exercise all the powers of the Company. Article 8 Analysis See article 3 of the NMA in Chapter 6B (para 6B.4).

9.

Shareholders’ reserve power 9.1 The shareholders may, by special resolution, direct the Directors to take, or refrain from taking, specific action. 9.2 No such special resolution invalidates anything which the Directors have done before the passing of the resolution.

Article 9 Analysis See article 4 of the NMA in Chapter 6B (para 6B.5). 10. Chair

The Directors may appoint one of their number to be the chair of the Directors for such term of office as they may determine and may at any time remove him or her from office. Article 10 Analysis See article 12 of the NMA in Chapter 6B (para 6B.13).

9

Note that, although this model constitution assumes that all directors are issued shares and the directors are given wide powers, under the articles (and company law more generally) there are still some decisions which shareholders must make as shareholders (either in general meeting under the Companies Act 2006 (article 43), or by written resolution in accordance with article 44). [See, in general, the Companies House guidance booklet, “Resolutions” (available online at www.companieshouse.gov.uk/ about/gbhtml/gba7.shtml).]

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11. Directors may delegate10 11.1 Subject to the Articles, the Directors may delegate any of the powers which are conferred on them under the Articles or the implementation of their decision or day to day management of the affairs of the Company: (a) to such person or committee; (b) by such means (including by power of attorney); (c) to such an extent; (d) in relation to such matters or territories; and (e) on such terms and conditions,

as they think fit.

11.2 If the Directors so specify, any such delegation may authorise further delegation of the Directors’ powers by any person to whom they are delegated. 11.3 The Directors may revoke any delegation in whole or part, or alter its terms and conditions. Article 11 Analysis See article 5 of the NMA in Chapter 6B (para 6B.6). DECISION-MAKING BY DIRECTORS 12. Directors to take decisions collectively11

Any decision of the Directors must be either a majority decision at a meeting or a decision taken in accordance with Article Error! Reference source not found.. [In the event of the Company having only one Director, a majority decision is made when that single Director makes a decision.] Article 12 Analysis See article 7 of the NMA in Chapter 6B (para 6B.8).

10 Article 11 permits the directors to delegate any of their functions. Delegation may take the form of, for instance, the directors giving a managing director general authority to run the company’s day-today business, or responsibility for specific matters being delegated to particular directors (eg financial matters to a finance director); or it may be equally appropriate to delegate matters to persons other than directors. In all cases, it is important to remember that delegation does not absolve directors of their general duties towards the company and their overall responsibility for its management.This means that, amongst other things, directors must be satisfied that those to whom responsibilities are delegated are competent to carry them out. 11 Article 12 states that the directors must make decisions by majority at a meeting subject to article 14; or unanimously if taken in accordance with article 18.

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13. Calling a Directors’ meeting 13.1 Two Directors may (and the Secretary, if any, must at the request of two Directors) call a Directors’ meeting. 13.2 A Directors’ meeting must be called by at least seven Clear Days’ notice unless either: 13.2.1 all the Directors agree; or 13.2.2 urgent circumstances require shorter notice. 13.3 Notice of Directors’ meetings must be given to each Director. 13.4 Every notice calling a Directors’ meeting must specify: 13.4.1 the place, day and time of the meeting; and 13.4.2 if it is anticipated that Directors participating in the meeting will not be in the same place, how it is proposed that they should communicate with each other during the meeting. 13.5 Notice of Directors’ meetings need not be in writing. 13.6 Notice of Directors’ meetings may be sent by electronic means to an Address provided by the Director for the purpose. Article 13 Analysis See article 9 of the NMA in Chapter 6B (para 6B.10).

14. Participation in Directors’ meetings 14.1 Subject to the Articles, Directors participate in a Directors’ meeting, or part of a Directors’ meeting, when: 14.1.1 the meeting has been called and takes place in accordance with the Articles; and 14.1.2 they can each communicate to the others any information or opinions they have on any particular item of the business of the meeting. 14.2 In determining whether Directors are participating in a Directors’ meeting, it is irrelevant where any Director is or how they communicate with each other12.

12 Article 14.2 is designed to facilitate the taking of decisions by the directors communicating via telephone or video conference calls. Note the requirement to keep a written record of meetings and decisions (article 47).

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14.3 If all the Directors participating in a meeting are not in the same place, they may decide that the meeting is to be treated as taking place wherever any of them is. Article 14 Analysis See article 10 of the NMA in Chapter 6B (para 6B.11). 15. Quorum for Directors’ meetings13 15.1 At a Directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting. 15.2 The quorum for Directors’ meetings may be fixed from time to time by a decision of the Directors, but it must never be less than two, and unless otherwise fixed it is [two]. 15.3 If the total number of Directors for the time being is less than the quorum required, the Directors must not take any decision other than a decision: 15.3.1 to appoint further Directors; or 15.3.2 to call a general meeting so as to enable the shareholders to appoint further Directors. Article 15 Analysis See article 11 of the NMA in Chapter 6B (para 6B.12).

16. Chairing of Directors’ meetings

The Chair, if any, or in his or her absence another Director nominated by the Directors present shall preside as chair of each Directors’ meeting.

Article 16 Analysis See article 12 of the NMA in Chapter 6B (para 6B.13).

13 The quorum may be fixed in absolute terms (eg “two Directors”) or as a proportion of the total number of directors (eg “one third of the total number of Directors”). You may even wish to stipulate that particular named directors, or directors representing particular stakeholder interests, must be present to constitute a quorum.

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17. Voting14 17.1 Questions arising at a Directors’ meeting shall be decided by a majority of votes. 17.2 In all proceedings of directors each director must not have more than one vote15. 17.3 In case of an equality of votes, the Chair shall have a second or casting vote. Article 17 Analysis See article 12 of the NMA in Chapter 6B (para 6B.13). 18. Decisions without a meeting16 18.1 The Directors may take a unanimous decision without a Directors’ meeting by indicating to each other by any means, including without limitation by electronic means, that they share a common view on a matter. Such a decision may, but need not, take the form of a resolution in writing, copies of which have been signed by each Director or to which each Director has otherwise indicated agreement in writing. 18.2 A decision which is made in accordance with Article Error! Reference source not found. shall be as valid and effectual as if it had been passed at a meeting duly convened and held, provided the following conditions are complied with: 18.2.1 approval from each Director must be received by one person being either such person as all the Directors have nominated in advance for that purpose or such other person as volunteers if necessary (“the Recipient”), which person may, for the avoidance of doubt, be one of the Directors; 18.2.2 following receipt of responses from all of the Directors, the Recipient must communicate to all of the Directors by any means whether the resolution has been formally approved by the Directors in accordance with this Article Error! Reference source not found.;

14 Article 17 reflects CICR, Sch 3, para 4, which is required to be included in the articles of all CICs limited by shares. 15 You may wish to include a provision which gives the chair of the board a casting vote. This will enable the directors to resolve any deadlock at board level. 16 Article 18 is designed to facilitate the taking of decisions by directors following discussions in the form of, for example, email exchanges copied to all the directors. Note the requirements as to recording the decision in articles 18.2 and 47.

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18.2.3 the date of the decision shall be the date of the communication from the Recipient confirming formal approval; 18.2.4 the Recipient must prepare a minute of the decision in accordance with Article 47. Article 18 Analysis See article 8 of the NMA in Chapter 6B (para 6B.9). 19. Conflicts of interest17 19.1 Whenever a Director finds himself or herself in a situation that is reasonably likely to give rise to a Conflict of Interest, he or she must declare his or her interest to the Directors unless, or except to the extent that, the other Directors are or ought reasonably to be aware of it already. 19.2 Whenever a matter is to be discussed at a meeting or decided in accordance with Article Error! Reference source not found. and a Director has a Conflict of Interest in respect of that matter then, subject to Article Error! Reference source not found., he or she must: 19.2.1 remain only for such part of the meeting as in the view of the other Directors is necessary to inform the debate; 19.2.2 not be counted in the quorum for that part of the meeting; and 19.2.3 withdraw during the vote and have no vote on the matter. 19.3 If any question arises as to whether a Director has a Conflict of Interest, the question shall be decided by a majority decision of the other Directors. 19.4 When a Director has a Conflict of Interest which he or she has declared to the Directors, he or she shall not be in breach of his or her duties to the Company by withholding confidential information from the Company if to disclose it would result in a breach of any other duty or obligation of confidence owed by him or her. 20. Directors’ power to authorise a conflict of interest 20.1 The Directors have power to authorise a Director to be in a position of Conflict of Interest provided: 20.1.1 in relation to the decision to authorise a Conflict of Interest, the conflicted Director must comply with Article 19.3; 17 The provisions in articles 19 and 20 reflect the position under the Companies Act 2006. However, it is recommended that, as a matter of good practice, all actual and potential conflicts of interest are disclosed in writing or at a meeting, as the case may be.

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20.1.2 in authorising a Conflict of Interest, the Directors can decide the manner in which the Conflict of Interest may be dealt with and, for the avoidance of doubt, they can decide that the Director with a Conflict of Interest can participate in a vote on the matter and can be counted in the quorum; and 20.1.3 the decision to authorise a Conflict of Interest can impose such terms as the Trustees think fit and is subject always to their right to vary or terminate the authorisation. 20.2 If a matter, or office, employment or position, has been authorised by the Directors in accordance with Article Error! Reference source not found. then, even if he or she has been authorised to remain at the meeting by the other Directors, the Director may absent himself or herself from meetings of the Directors at which anything relating to that matter, or that office, employment or position, will or may be discussed. 20.3 A Director shall not be accountable to the Company for any benefit which he or she derives from any matter, or from any office, employment or position, which has been authorised by the Directors in accordance with Article Error! Reference source not found. (subject to any limits or conditions to which such approval was subject). 21. Register of Directors’ interests

The Directors shall cause a register of Directors’ interests to be kept. A Director must declare the nature and extent of any interest, direct or indirect, which he or she has in a proposed transaction or arrangement with the Company or in any transaction or arrangement entered into by the Company which has not previously been declared. Articles 19–21 Analysis See article 14 of the NMA in Chapter 6B (para 6B.15).

APPOINTMENT AND RETIREMENT OF DIRECTORS18 22. Methods of appointing Directors 22.1 Those persons notified to the Registrar of Companies as the first Directors of the Company shall be the first Directors. 18 Private companies are obliged to have at least one director. Provisions can be inserted into the articles providing for a minimum number of directors. Where the company has just one director, that director must be a natural person.

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22.2 Any person who is willing to act as a Director, and is permitted by law to do so, may be appointed to be a Director by a decision of the Directors. 22.3 Each member of the Company shall be a Director. Article 22 Analysis See article 17 of the NMA in Chapter 6B (para 6B.18). 23. Termination of Director’s appointment

A person ceases to be a Director as soon as: (a) that person ceases to be a Director by virtue of any provision of the Companies Act 2006 or is prohibited from being a Director by law; (b) a bankruptcy order is made against that person, or an order is made against that person in individual insolvency proceedings in a jurisdiction other than England and Wales or Northern Ireland which have an effect similar to that of bankruptcy; (c) a composition is made with that person’s creditors generally in satisfaction of that person’s debts; (d) the Directors reasonably believe he or she is suffering from mental disorder and incapable of acting and they resolve that he or she be removed from office; (e) notification is received by the Company from the Director that the Director is resigning from office, and such resignation has taken effect in accordance with its terms (but only if at least two Directors will remain in office when such resignation has taken effect); or (f) the Director fails to attend three consecutive meetings of the Directors and the Directors resolve that the Director be removed for this reason. (g) the Director ceases to be a member. Article 23 Analysis See article 18 of the NMA in Chapter 6B (para 6B.19).

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24. Directors’ remuneration19 24.1 Directors may undertake any services for the Company that the Directors decide. 24.2 Subject to the Articles, and in particular Article 3, Directors are entitled to such remuneration as the Directors determine: (a) for their services to the Company as Directors; and (b) for any other service which they undertake for the Company. 24.3 Subject to the Articles, and in particular Article 3, a Director’s remuneration may: (a) take any form; and (b) include any arrangements in connection with the payment of a pension, allowance or gratuity, or any death, sickness or disability benefits, to or in respect of that Director. 24.4 Unless the Directors decide otherwise, Directors’ remuneration accrues from day to day. 24.5 Unless the Directors decide otherwise, Directors are not accountable to the Company for any remuneration which they receive as Directors or other officers or employees of the Company’s subsidiaries or of any other body corporate in which the Company is interested. Article 24 Analysis As per the provisions of article 24, a CIC may provide remuneration to its directors. The central disparity, in terms of private company limited by guarantee, incorporated under the Companies Act 2006 and using the model articles20 is the directors have no restrictions or rules to abide by. The CIC Regulator21 provides the following principles in relation to directors’ remuneration22: ●●

Directors may be paid for their services.

●●

Directors’ remuneration should never be more than is reasonable23.

19 See the guidance on directors’ remuneration in the Regulator’s information and guidance notes, Chapter 9. 20 Schedule 2 Regulation 3 Model articles for private companies limited by guarantee. 21 Office of the Regulator of Community Interest Companies. 22 Regulator’s information and guidance notes, Chapter 9 (9.3. Directors’ remuneration). 23 Reasonable – having regard to the contribution which they make to the success of the company and the benefits it provides for the community (9.3.6. What is ‘reasonable’ remuneration).

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●●

Directors’ remuneration arrangements should always be transparent24.

●●

The Regulator – or the members of a CIC – may take action if a CIC director’s remuneration appears to be too high25.

For further analysis and comparison, see article 19 of the NMA in Chapter 6B (para 6B.20). 25. Directors’ expenses 25.1 The Company may pay any reasonable expenses which the Directors properly incur in connection with their attendance at: (a) meetings of Directors or committees of Directors; (b) general meetings; or (c) separate meetings of the holders of any class of shares or of debentures of the Company,

or otherwise in connection with the exercise of their powers and the discharge of their responsibilities in relation to the Company.

Article 25 Analysis See article 20 of the NMA in Chapter 6B (para 6B.21). SHARES 26. All shares to be fully paid up and issued at nominal value to a Director 26.1 No share is to be issued for less than the aggregate of its nominal value and any premium to be paid to the Company in consideration for its issue. 26.2 This does not apply to shares taken on the formation of the Company by the subscribers to the Company’s Memorandum. 26.3 No share shall be issued to a person except a Director. Article 26 Analysis See article 21 of the NMA in Chapter 6B (para 6B.22).

24 All companies are required to keep copies of directors’ service contracts, or memoranda of their terms, available at an appropriate place for inspection by their members (9.3.7. Transparency). 25 If the Regulator becomes aware of potentially excessive director remuneration, the Regulator is likely to wish to discuss the matter further with the CIC concerned (9.3.8. Action by the Regulator).

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27. Powers to issue different classes of share26 27.1 Subject to the Articles, but without prejudice to the rights attached to any existing share, the Company may issue shares with such rights or restrictions as may be determined by ordinary resolution. 27.2 The Company may issue shares which are to be redeemed, or are liable to be redeemed at the option of the Company or the holder, and the Directors may determine the terms, conditions and manner of redemption of any such shares. Article 27 Analysis See article 22 of the NMA in Chapter 6B (para 6B.23). 28. Company not bound by less than absolute interests

Except as required by law, no person is to be recognised by the Company as holding any share upon any trust, and except as otherwise required by law or the Articles, the Company is not in any way to be bound by or recognise any interest in a share other than the holder’s absolute ownership of it and all the rights attaching to it. Article 28 Analysis See article 23 of the NMA in Chapter 6B (para 6B.24).

29. Share certificates 29.1 The Company must issue each shareholder, free of charge, with one or more certificates in respect of the shares which that shareholder holds. 29.2 Every certificate must specify: (a) in respect of how many shares, of what class, it is issued; (b) the nominal value of those shares; (c) that the shares are fully paid; and (d) any distinguishing numbers assigned to them.

26 Note that, unless specific wording is added to the contrary, the directors of a company with only one class of shares will be able to issue new shares without needing the consent of the existing shareholders. If appropriate, limitations (such as a cap on the number of shares) can be added, but bespoke drafting will be required.

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29.3 No certificate may be issued in respect of shares of more than one class. 29.4 If more than one person holds a share, only one certificate may be issued in respect of it. 29.5 Certificates must: (a) have affixed to them the Company’s common seal27; or (b) be otherwise executed in accordance with the Companies Acts. Article 29 Analysis See article 24 of the NMA in Chapter 6B (para 6B.25).

30. Replacement share certificates 30.1 If a certificate issued in respect of a shareholder’s shares is: (a) damaged or defaced; or (b) said to be lost, stolen or destroyed,

that shareholder is entitled to be issued with a replacement certificate in respect of the same shares.

30.2 A shareholder exercising the right to be issued with such a replacement certificate: (a) may at the same time exercise the right to be issued with a single certificate or separate certificates; (b) must return the certificate which is to be replaced to the Company if it is damaged or defaced; and (c) must comply with such conditions as to evidence, indemnity and the payment of a reasonable fee as the Directors decide. Article 30 Analysis See article 25 of the NMA in Chapter 6B (para 6B.26).

27 If the company does not have a common seal, share certificates can be executed by two directors, by one director and the secretary (if there is one), or by one director in the presence of an independent witness.

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31. Share transfers28 31.1 Shares may be transferred by means of an instrument of transfer in any usual form or any other form approved by the Directors, which is executed by or on behalf of the transferor. 31.2 No fee may be charged for registering any instrument of transfer or other Document relating to or affecting the title to any share. 31.3 The Company may retain any instrument of transfer which is registered. 31.4 The transferor remains the holder of a share until the transferee’s name is entered in the register of shareholders as holder of it. 31.5 The Directors may refuse to register the transfer of a share to a person of whom they do not approve. 31.6 They may also refuse to register the transfer unless it is lodged at the registered office of the Company or at such other place as the Directors may appoint and is accompanied by such evidence as the Directors may reasonably require to show the right of the transferor to make the transfer, and by such other information, as they may reasonably require. 31.7 If the Directors refuse to register such a transfer, they shall, within two months after the date on which the transfer was lodged with the Company send to the transferee notice of the refusal. 31.8 The provisions of this Article apply in addition to any restrictions on the transfer of a share which maybe set out elsewhere in the Memorandum or Articles of the Company. Article 31 Analysis See article 26 of the NMA in Chapter 6B (para 6B.27). 32. Purchase of own shares29

Subject to the articles, the company may purchase its own shares (including any redeemable shares) and may make a payment in respect of

28 Articles 31.5 to 31.8 are mandatory, reflecting CICR, Sch 3, para 2. The model constitution does not contain any other additional restrictions on the transfer of shares, but note that the directors may refuse to register a transfer of shares to a person of whom they do not approve. 29 This article, in itself, does not provide sufficient authority for the company to purchase its own shares. The company must also comply with the relevant statutory requirements – in particular, Companies Act 2006, ss 693–700. We recommend that you take legal advice before taking any steps towards the company purchasing its own shares. It is important that any purchase of shares made in accordance with this article is also made in accordance with article 3 (asset lock).

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the redemption or purchase of its own shares otherwise than out of the distributable profits of the Company or the proceeds of a fresh issue of shares. Any share so purchased shall be purchased at its nominal value. Article 30 Analysis See footnote. 33. Transmission of shares30 33.1 If title to a share passes to a transmittee, the Company may only recognise the transmittee as having any title to that share. 33.2 A transmittee who produces such evidence of entitlement to shares as the Directors may properly require: (a) may, subject to the Articles, choose either to become the holder of those shares or to have them transferred to another person; and (b) subject to the Articles, and pending any transfer of the shares to another person, has the same rights as the holder had. 33.3 But transmittees do not have the right to attend or vote at a general meeting, or agree to a proposed written resolution, in respect of shares to which they are entitled, by reason of the holder’s death or bankruptcy or otherwise, unless they become the holders of those shares. Article 33 Analysis See article 27 of the NMA in Chapter 6B (para 6B.28).

34. Exercise of transmittees’ rights 34.1 Transmittees who wish to become the holders of shares to which they have become entitled must notify the Company in Writing of that wish. 34.2 If the transmittee wishes to have a share transferred to another person, the transmittee must execute an instrument of transfer in respect of it.

30 In the event of the death of a shareholder, the share will pass according to the will of the deceased shareholder, or the intestacy rules.

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34.3 Any transfer made or executed under this Article is to be treated as if it were made or executed by the person from whom the transmittee has derived rights in respect of the share, and as if the event which gave rise to the transmission had not occurred. Article 34 Analysis See article 28 of the NMA in Chapter 6B (para 6B.29). 35. Transmittees bound by prior notices 35.1 If a notice is given to a shareholder in respect of shares and a transmittee is entitled to those shares, the transmittee is bound by the notice if it was given to the shareholder before the transmittee’s name has been entered in the register of shareholders. Article 35 Analysis See article 29 of the NMA in Chapter 6B (para 6B.30). DIVIDENDS AND OTHER DISTRIBUTIONS 36. Procedure for declaring dividends 36.1 Subject to the Companies Acts, the Regulations and the Articles, the company may by ordinary resolution declare dividends, and the directors may, provided that such decision is authorised by an ordinary resolution of the shareholders, decide to pay interim dividends. 36.2 For the avoidance of doubt the payment of dividends shall be considered to be a transfer of assets other than for full consideration and shall not be permitted other than in the circumstances prescribed in Article 3. 36.3 The Company may by ordinary resolution declare dividends, and the Directors may decide to pay interim dividends. 36.4 A dividend must not be declared unless the Directors have made a recommendation as to its amount. Such a dividend must not exceed the amount recommended by the Directors. 36.5 No dividend may be declared or paid unless it is in accordance with shareholders’ respective rights. 36.6 Unless the shareholders’ resolution to declare or Directors’ decision to pay a dividend, or the terms on which shares are issued, specify 351

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otherwise, it must be paid by reference to each shareholder’s holding of shares on the date of the resolution or decision to declare or pay it. 36.7 If the Company’s share capital is divided into different classes, no interim dividend may be paid on shares carrying deferred or nonpreferred rights if, at the time of payment, any preferential dividend is in arrear. 36.8 The Directors may pay at intervals any dividend payable at a fixed rate if it appears to them that the profits available for distribution justify the payment. 36.9 If the Directors act in good faith, they do not incur any liability to the holders of shares conferring preferred rights for any loss they may suffer by the lawful payment of an interim dividend on shares with deferred or non-preferred rights. Article 36 Analysis See article 30 of the NMA in Chapter 6B (para 6B.31). 37. Payment of dividends and other distributions 37.1 Where a dividend or other sum which is a distribution is payable in respect of a share, it must be paid by one or more of the following means: (a) transfer to a bank or building society account indicated by the distribution recipient either in Writing or as the Directors may otherwise decide; (b) sending a cheque made payable to the distribution recipient by post to the distribution recipient at the distribution recipient’s registered Address (if the distribution recipient is a holder of the share), or (in any other case) to an Address indicated by the distribution recipient either in Writing or as the Directors may otherwise decide; (c) sending a cheque made payable to such person by post to such person at such Address as the distribution recipient has indicated either in Writing or as the Directors may otherwise decide; or (d) any other means of payment as the Directors agree with the distribution recipient either in Writing or by such other means as the Directors decide.

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37.2 In the Articles, “the distribution recipient” means, in respect of a share in respect of which a dividend or other sum is payable: (a) the holder of the share; or (b) if the share has two or more joint holders, whichever of them is named first in the register of members; or (c) if the holder is no longer entitled to the share by reason of death or bankruptcy, or otherwise by operation of law, the transmittee. Article 37 Analysis See article 31 of the NMA in Chapter 6B (para 6B.32). 38. No interest on distributions

The Company may not pay interest on any dividend or other sum payable in respect of a share unless otherwise provided by: (a) the terms on which the share was issued; or (b) the provisions of another agreement between the holder of that share and the Company. Article 38 Analysis See article 32 of the NMA in Chapter 6B (para 6B.33).

39. Unclaimed distributions 39.1 All dividends or other sums which are: (a) payable in respect of shares; and (b) unclaimed after having been declared or become payable,

may be invested or otherwise made use of by the Directors for the benefit of the Company until claimed.

39.2 The payment of any such dividend or other sum into a separate account does not make the Company a trustee in respect of it. 39.3 If: (a) twelve years have passed from the date on which a dividend or other sum became due for payment; and

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(b) the distribution recipient has not claimed it,

the distribution recipient is no longer entitled to that dividend or other sum and it ceases to remain owing by the Company.

Article 39 Analysis See article 33 of the NMA in Chapter 6B (para 6B.34). 40. Non-cash distributions 40.1 Subject to the terms of issue of the share in question, the Company may, by ordinary resolution on the recommendation of the Directors, decide to pay all or part of a dividend or other distribution payable in respect of a share by transferring non-cash assets of equivalent value (including, without limitation, shares or other securities in any company). 40.2 For the purposes of paying a non-cash distribution, the Directors may make whatever arrangements they think fit, including, where any difficulty arises regarding the distribution: (a) fixing the value of any assets; (b) paying cash to any distribution recipient on the basis of that value in order to adjust the rights of recipients; and (c) vesting any assets in trustees. Article 40 Analysis See article 34 of the NMA in Chapter 6B (para 6B.35). 41. Waiver of distributions

Distribution recipients may waive their entitlement to a dividend or other distribution payable in respect of a share by giving the Company notice in Writing to that effect, but if: (a) the share has more than one holder; or (b) more than one person is entitled to the share, whether by reason of the death or bankruptcy of one or more joint holders, or otherwise,



the notice is not effective unless it is expressed to be given, and signed, by all the holders or persons otherwise entitled to the share. Article 41 Analysis See article 35 of the NMA in Chapter 6B (para 6B.36). 354

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CAPITALISATION OF PROFITS 42. Authority to capitalise and appropriation of capitalised sums 42.1 Subject to the Articles, the Directors may, if they are so authorised by an ordinary resolution: (a) decide to capitalise any profits of the Company (whether or not they are available for distribution) which are not required for paying a preferential dividend, or any sum standing to the credit of the Company’s share premium account or capital redemption reserve; and (b) appropriate any sum which they so decide to capitalise (a “capitalised sum”) to the persons who would have been entitled to it if it were distributed by way of dividend (the “persons entitled”) and in the same proportions. 42.2 Capitalised sums must be applied: (a) on behalf of the persons entitled; and (b) in the same proportions as a dividend would have been distributed to them. 42.3 Any capitalised sum may be applied in paying up new shares of a nominal amount equal to the capitalised sum which are then allotted credited as fully paid to the persons entitled or as they may direct. 42.4 A capitalised sum which was appropriated from profits available for distribution may be applied in paying up new debentures of the Company which are then allotted credited as fully paid to the persons entitled or as they may direct. 42.5 Subject to the Articles the Directors may: (a) apply capitalised sums in accordance with Articles 42.3 and 42.4 partly in one way and partly in another; (b) make such arrangements as they think fit to deal with shares or debentures becoming distributable in fractions under this Article (including the issuing of fractional certificates or the making of cash payments); and (c) authorise any person to enter into an agreement with the Company on behalf of all the persons entitled which is binding on them in respect of the allotment of shares and debentures to them under this Article.

Article 42 Analysis See article 36 of the NMA in Chapter 6B (para 6B.37). 355

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DECISION-MAKING BY SHAREHOLDERS 43. Shareholders Meetings31 43.1 The Directors may call a general meeting at any time. 43.2 General meeting must be held in accordance with the provisions regarding such meetings in the Companies Act32. 43.3 A person who is not a shareholder of the Company shall not have any right to vote at a general meeting of the Company; but this is without prejudice to any right to vote on a resolution affecting the rights attached to a class of the Company’s debentures33. 43.4 Article 43.3 shall not prevent a person who is a proxy for a shareholder or a duly authorised representative of a shareholder from voting at a general meeting of the Company.

Article 43 Analysis See article 9 of the NMA in Chapter 6B (para 6B.10). WRITTEN RESOLUTIONS 44. Written resolutions 44.1 Subject to Article Error! Reference source not found., a written resolution of the Company passed in accordance with this Article Error! Reference source not found. shall have effect as if passed by the Company in general meeting: 44.1.1 A written resolution is passed as an ordinary resolution if it is passed by a simple majority of the total voting rights of eligible shareholders.

31 The Companies Act 2006 has removed the need for private companies to hold annual general meetings, and therefore these articles follow suit; however, if you wish, you can insert an additional provision which obliges the company to hold annual general meetings. 32 Article 43.2 provides that general meetings must be held in accordance with the provisions of the Companies Act 2006. You may insert additional provisions that specify how many shareholders are required to be present to hold a valid general meeting. The quorum may be fixed in absolute terms (eg “four shareholders”) or as a proportion of the total number of shareholders (eg “three quarters of the shareholders from time to time”). You may even wish to stipulate that particular named shareholders, or shareholders representing particular stakeholder interests, must be present to constitute a quorum. In any event, it is recommended that the quorum should never be less than half of the total number of shareholders. 33 Article 43.3 reflects CICR, Sch 3, para 3(1) and is mandatory.

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44.1.2 A written resolution is passed as a special resolution if it is passed by shareholders representing not less than 75% of the total voting rights of eligible shareholders. A written resolution is not a special resolution unless it states that it was proposed as a special resolution. 44.2 In relation to a resolution proposed as a written resolution of the Company the eligible shareholders are the shareholders who would have been entitled to vote on the resolution on the Circulation Date of the resolution. 44.3 A shareholders’ resolution under the Companies Acts removing a Director or an auditor before the expiration of his or her term of office may not be passed as a written resolution. 44.4 A copy of the written resolution must be sent to every shareholder together with a statement informing the shareholder how to signify their agreement to the resolution and the date by which the resolution must be passed if it is not to lapse. Communications in relation to written notices shall be sent to the Company’s auditors in accordance with the Companies Acts. 44.5 A shareholder signifies their agreement to a proposed written resolution when the Company receives from him or her an authenticated Document identifying the resolution to which it relates and indicating his or her agreement to the resolution. 44.5.1 If the Document is sent to the Company in hard copy form, it is authenticated if it bears the shareholder’s signature. 44.5.2 If the Document is sent to the Company by electronic means, it is authenticated [if it bears the shareholder’s signature] or [if the identity of the shareholder is confirmed in a manner agreed by the Directors] or [if it is accompanied by a statement of the identity of the shareholder and the Company has no reason to doubt the truth of that statement] or [if it is from an email Address notified by the shareholder to the Company for the purposes of receiving Documents or information by electronic means]. 44.6 A written resolution is passed when the required majority of eligible shareholders have signified their agreement to it. 44.7 A proposed written resolution lapses if it is not passed within 28 days beginning with the Circulation Date. Article 44 Analysis See article 8 of the NMA in Chapter 6B (para 6B.9).

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ADMINISTRATIVE ARRANGEMENTS AND MISCELLANEOUS 45. Means of communication to be used 45.1 Subject to the Articles, anything sent or supplied by or to the Company under the Articles may be sent or supplied in any way in which the Companies Act 2006 provides for Documents or information which are authorised or required by any provision of that Act to be sent or supplied by or to the Company. 45.2 Subject to the Articles, any notice or Document to be sent or supplied to a Director in connection with the taking of decisions by Directors may also be sent or supplied by the means by which that Director has asked to be sent or supplied with such notices or Documents for the time being. 45.3 A Director may agree with the Company that notices or Documents sent to that Director in a particular way are to be deemed to have been received within an agreed time of their being sent, and for the agreed time to be less than 48 hours.

Article 45 Analysis See article 48 of the NMA in Chapter 6B (para 6B.49). 46. Irregularities

The proceedings at any meeting or on the taking of any poll or the passing of a written resolution or the making of any decision shall not be invalidated by reason of any accidental informality or irregularity (including any accidental omission to give or any non-receipt of notice) or any want of qualification in any of the persons present or voting or by reason of any business being considered which is not referred to in the notice unless a provision of the Companies Acts specifies that such informality, irregularity or want of qualification shall invalidate it. Article 46 Analysis This article does not appear in any of the new model articles.

47. Minutes 47.1 The Directors must cause minutes to be made in books kept for the purpose: 47.1.1 of all appointments of officers made by the Directors; 358

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47.1.2 of all resolutions of the Company and of the Directors (including, without limitation, decisions of the Directors made without a meeting); and 47.1.3 of all proceedings at meetings of the Company and of the Directors, and of committees of Directors, including the names of the Directors present at each such meeting;

and any such minute, if purported to be signed (or in the case of minutes of Directors’ meetings signed or authenticated) by the chair of the meeting at which the proceedings were had, or by the chair of the next succeeding meeting, shall, as against any shareholder or Director of the Company, be sufficient evidence of the proceedings.

47.2 The minutes must be kept for at least ten years from the date of the meeting, resolution or decision. Article 47 Analysis See article 15 of the NMA in Chapter 6B (para 6B.16). 48. Records and accounts34

The Directors shall comply with the requirements of the Companies Acts as to maintaining a shareholders’ register, keeping financial records, the audit or examination of accounts and the preparation and transmission to the Registrar of Companies and the Regulator of: 48.1 annual reports; 48.2 annual returns; and 48.3 annual statements of account. 48.4 Except as provided by law or authorised by the Directors or an ordinary resolution of the Company, no person is entitled to inspect any of the Company’s accounting or other records or Documents merely by virtue of being a member. Article 48 Analysis Article 48 provides an overview of section 38635 which states any company must keep adequate accounting records. This article does not appear in any of the new model articles.

34 See the Companies House guidance booklet, “Accounts and Accounting Reference Dates” (available online at www.companies-house.gov.uk/about/gbhtml/gba3.shtml). On the annual CIC report, see the Regulator’s information and guidance notes, Chapter 8. 35 Companies Act 2006, s 386 (Duty to keep accounting records).

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49. Indemnity 49.1 Subject to Article 49.2, a relevant Director of the Company or an associated company may be indemnified out of the Company’s assets against: (a) any liability incurred by that Director in connection with any negligence, default, breach of duty or breach of trust in relation to the Company or an associated company; (b) any liability incurred by that Director in connection with the activities of the Company or an associated company in its capacity as a trustee of an occupational pension scheme (as defined in section 235(6) of the Companies Act 2006); (c) any other liability incurred by that Director as an officer of the Company or an associated company. 49.2 This Article does not authorise any indemnity which would be prohibited or rendered void by any provision of the Companies Acts or by any other provision of law. 49.3 In this Article: (a) companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate; and (b) a “relevant Director” means any Director or former Director of the Company or an associated company. 50. Insurance 50.1 The Directors may decide to purchase and maintain insurance, at the expense of the Company, for the benefit of any relevant Director in respect of any relevant loss. 50.2 In this Article: (a) a “relevant Director” means any Director or former Director of the Company or an associated company, (b) a “relevant loss” means any loss or liability which has been or may be incurred by a relevant Director in connection with that Director’s duties or powers in relation to the Company, any associated company or any pension fund or employees’ share scheme of the Company or associated company; and (c) companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate. Articles 49 and 50 Analysis See articles 52 and 53 of the NMA in Chapter 6B (paras 6B.53 and 6B.54).

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Chapter 8.4  CIC Limited by Shares, Schedule 3, Small Membership

51. Exclusion of model articles

The relevant model articles for a company limited by shares are hereby expressly excluded.

Article 51 Analysis In order to explicitly state the exclusion, it is good practice to provide the provision at the beginning of the document and specifically refer to the model articles regulations. It should be noted, for companies incorporated under previous Companies Acts, that the relevant articles should be expressly excluded. There is provision for an alternative precedent, as follows: “The model articles for private companies limited by guarantee contained or incorporated in Schedule 1 to the Companies (Model Articles) Regulations 2008, SI 2008/3229, as amended prior to the date of adoption of these articles (the ‘Model Articles’) shall not apply to the Company, save insofar as they are varied or excluded by, or are inconsistent with, the following articles.”

SCHEDULE INTERPRETATION 1.

In the Articles, unless the context requires otherwise, the following terms shall have the following meanings:

Term “Address” “Articles” “asset-locked body”

Meaning includes a number or address used for the purposes of sending or receiving Documents by Electronic Means; means the Company’s articles of association; means (i) a community interest Company or a charity36 or a Permitted Society; or (ii) a body established outside the United Kingdom that is equivalent to any of those;

36 Charities Act 2006, s 1(1) defines a “charity” as an institution which “is established for charitable purposes only, and falls to be subject to the control of the High Court in the exercise of its jurisdiction with respect to charities”.

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Term “bankruptcy”

“Chair” “Circulation Date” “Clear Days”

“community”

“Companies Acts” “Company” “Conflict of Interest”

“Director”

“distribution recipient” “Document” “Electronic Form and Electronic Means”

Meaning includes individual insolvency proceedings in a jurisdiction other than England and Wales or Northern Ireland which have an effect similar to that of bankruptcy; has the meaning given in Article 10; in relation to a written resolution, has the meaning given to it in the Companies Acts; in relation to the period of a notice, that period excluding the day when the notice is given or deemed to be given and the day for which it is given or on which it is to take effect; is to be construed in accordance with the section 35(5) of the Companies (Audit, Investigations and Community Enterprise) Act 2004; means the Companies Acts (as defined in section 2 of the Companies Act 2006), in so far as they apply to the Company; [..........................] [Community Interest Company/C.I.C.]; any direct or indirect interest of a Director (whether personal, by virtue of a duty of loyalty to another organisation or otherwise) that conflicts or might conflict with the interests of the Company; means a director of the Company, and includes any person occupying the position of director, by whatever name called; has the meaning given in Article 37; includes, unless otherwise indicated, any document sent or supplied in Electronic Form; have the meanings respectively given to them in section 1168 of the Companies Act 2006;

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Term “fully paid”

“Hard Copy Form” “holder” “instrument” “Memorandum” “paid” “participate” “Permitted Registered Society”

Meaning in relation to a share, means that the nominal value and any premium to be paid to the Company in respect of that share have been paid to the Company; has the meaning given in section 1168 of the Companies Act 2006; in relation to shares means the person whose name is entered in the register of shareholders as the holder of the shares; means a document in Hard Copy Form; the Company’s memorandum of association; means paid or credited as paid; in relation to a Directors’ meeting, has the meaning given in Article 14; Means – a)

A registered society within the meaning given by section 1(1) of the Co-operative and Community Benefit Societies Act 2014; or

b)

“the Regulations” “the Regulator” “Secretary” “shareholder” “shares” “specified” “subsidiary”

A society registered or deemed to be registered under the Industrial and Provident Societies Act (Northern Ireland) 1969 means the Community Interest Company Regulations 2005 (as amended); means the Regulator of Community Interest Companies; the secretary of the Company (if any); means a person who is the holder of a share; means shares in the Company; means specified in the articles of association of the Company for the purposes of this paragraph; has the meaning given in section 1159 of the Companies Act 2006;

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Term “transfer”

“transmittee”

“Writing”

2.

Meaning includes every description of disposition, payment, release or distribution, and the creation or extinction of an estate or interest in, or right over, any property; means a person entitled to a share by reason of the death or bankruptcy of a shareholder or otherwise by operation of law; and means the representation or reproduction of words, symbols or other information in a visible form by any method or combination of methods, whether sent or supplied in Electronic Form or otherwise.

Subject to clause 3 of this Schedule, any reference in the Articles to an enactment includes a reference to that enactment as re-enacted or amended from time to time and to any subordinate legislation made under it.

3. Unless the context otherwise requires, other words or expressions contained in these Articles bear the same meaning as in the Companies Acts as in force on the date when these Articles become binding on the Company.

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Chapter 8.5  Community Interest Company Limited by Shares (CIC Limited by Shares, Schedule 3, Large Membership) The Companies Act 2006 Articles of Association of [INSERT NAME] [Community Interest Company/C.I.C. delete as applicable] INTERPRETATION 1.

Defined terms



The interpretation of these Articles is governed by the provisions set out in the Schedule to the Articles.

COMMUNITY INTEREST COMPANY AND ASSET LOCK 2.

Community Interest Company



The Company shall be a community interest company. Article 2 Analysis A company limited by shares or a company limited by guarantee and not having a share capital may be formed as or become a CIC, and a company limited by guarantee and having a share capital may become a CIC. In terms of conversion, the company is required to alter its articles to state that it is to be a CIC. Adaptation may be required to ensure the company conforms to the requirements of CIC legislation, and the name of the company will require alteration to include one of the CIC designations.

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3.

Asset Lock1 3.1 The Company shall not transfer any of its assets other than for full consideration. 3.2 Provided the conditions in Article 3.3 are satisfied, Article 3.1 shall not apply to: (a) the transfer of assets to any specified asset-locked body, or (with the consent of the Regulator) to any other asset-locked body; (b) the transfer of assets made for the benefit of the community other than by way of a transfer of assets into an asset-locked body; (c) the payment of dividends in respect of shares in the Company; (d) the distribution of assets on a winding up; (e) payments on the redemption or purchase of the Company’s own shares; (f)

payments on the reduction of share capital; and

(g) the extinguishing or reduction of the liability of members in respect of share capital not paid up on the reduction of share capital. 3.3 The conditions are that the transfer of: (a) assets must comply with any restrictions on the transfer of assets for less than full consideration which may be set out elsewhere in the Memorandum or Articles of the Company; and (b) must not exceed any limits imposed by, or by virtue of, Part 2 of the Companies (Audit, Investigations and Community Enterprise) Act 2004. 3.4 If: 3.4.1 the Company is wound up under the Insolvency Act 1986; and 3.4.2 all its liabilities have been satisfied,

any residual assets2 shall be given or transferred to the asset-locked body specified in Article 3.5 below.

1 See “Office of the Regulator of Community Interest Companies: Information and guidance notes” (DBEIS, May 2016), Chapter 6. Inclusion of the provisions contained in articles 3.1 to 3.3 (reflecting Community Interest Company Regulations 2005 (CICR), Sch 3, para 1(1) and (3)) is mandatory. 2 When a CIC is wound up, its “residual assets” are any property remaining after satisfaction of the company’s liabilities under the Insolvency Act 1986. The CICR permit shareholders to be paid back, out of the residual assets, the nominal value of their shares. Anything left over after this process is classed as “remaining residual assets” and must be paid to a specified asset-locked body (or, if no such body is specified, to an asset-locked body chosen by the Regulator in consultation with the company).

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3.5 For the purposes of this Article 3, the following asset-locked body is specified as a potential recipient of the Company’s assets under Articles 3.2 and 3.4:3 Name: [................................................................]

(Please note that a community interest company cannot nominate itself as the asset locked body. It also cannot nominate a non-asset locked body. An asset locked body is defined as a CIC or charity, a permitted society or non-UK based equivalent.) Charity Registration Number (if applicable): [..........................] Company Registration Number (if applicable): [.......................] Registered Office: [..................................................................]

Article 3 Analysis The asset lock is the fundamental feature of the CIC, it is designed to ensure the company assets are specifically used for the benefit of the company. Chapter 64 of the regulator’s guidance provides further guidance. It should be noted the provisions cannot be edited or amended.5 4.

Not for profit



The Company is not established or conducted for private gain: any surplus or assets are used principally for the benefit of the community. Article 4 Analysis The company will have statutory powers and obligations conferred by the Companies Act 2006 and the Community Interest Company Regulations 2005, SI 2005/1788. Article 6 prescribes that the main powers must be used to further the company’s objects and all actions must be lawful. It is possible to limit the powers of the company. It should be noted that any adaptation of the provisions in the articles must not fetter the statutory powers bestowed by legislation.

3 See CICR, reg 23 and the Regulator’s information and guidance notes, Chapters 6 and 10.3. If the company does not specify that the remaining residual assets are to be transferred to a particular asset-locked body, an appropriate recipient will be chosen by the Regulator, in consultation with the company’s directors and shareholders. 4 Regulator’s information and guidance notes, Chapter 6. 5 CICs are also able to adopt asset lock rules that impose more stringent requirements, provided they also include these basic provisions.

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Chapter 8.5  CIC Limited by Shares, Schedule 3, Large Membership

OBJECTS, POWERS AND LIMITATION OF LIABILITY 5.

Objects6



The objects of the Company are to carry on activities which benefit the community and in particular (without limitation) to [     ]. Article 5 Analysis Article 5 requires the objects of the company to be restricted. For example, “to provide day care and transport facilities for the elderly and physically disadvantaged in North Essex”. If the objects are not restricted by the articles, it would follow that the company does not meet the community interest test.7

6.

Powers



To further its objects the Company may do all such lawful things as may further the Company’s objects and, in particular, but, without limitation, may borrow or raise and secure the payment of money for any purpose including for the purposes of investment or of raising funds. Article 6 Analysis The company will have statutory powers and obligations conferred by the Companies Act 2006 and the Community Interest Company Regulations 2005, SI 2005/1788. This article prescribes that the main powers must be used to further the company’s objects and all actions must be lawful. It is possible to limit the powers of the company. It should be noted that any adaptation of the provisions in the articles must not fetter the statutory powers bestowed by legislation.

7.

Liability of Shareholders8



The liability of the shareholders is limited to the amount, if any, unpaid on the shares held by them. Article 7 Analysis See article 2 of the NMA in Chapter 6B (para 6B.3).

6 On the specification of the company’s objects, see the Regulator’s information and guidance notes, Chapter 5. 7 Regulator’s information and guidance notes, Chapter 5. 8 On limited liability and share capital generally, see the Regulator’s information and guidance notes, Chapter 3.

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DIRECTORS DIRECTORS’ POWERS AND RESPONSIBILITIES 8.

Directors’ general authority



Subject to the Articles, the Directors are responsible for the management of the Company’s business, for which purpose they may exercise all the powers of the Company. Article 8 Analysis See article 3 of the NMA in Chapter 6B (para 6B.4).

9.

Shareholders’ reserve power 9.1 The shareholders may, by special resolution, direct the Directors to take, or refrain from taking, specific action. 9.2 No such special resolution invalidates anything which the Directors have done before the passing of the resolution.

Article 9 Analysis See article 4 of the NMA in Chapter 6B (para 6B.5). 10. Chair

The Directors may appoint one of their number to be the chair of the Directors for such term of office as they may determine and may at any time remove him or her from office. Article 10 Analysis See article 12 of the NMA in Chapter 6B (para 6B.13).

11. Directors may delegate9 11.1 Subject to the Articles, the Directors may delegate any of the powers which are conferred on them under the Articles: (a) to such person or committee; 9

Articles 11 and 12 permit the directors to delegate any of their functions. Delegation may take the form of, for instance, the directors giving a managing director general authority to run the company’s dayto-day business, or responsibility for specific matters being delegated to particular directors (eg financial

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(b) by such means (including by power of attorney); (c) to such an extent; (d) in relation to such matters or territories; and (e) on such terms and conditions,

as they think fit.

11.2 If the Directors so specify, any such delegation may authorise further delegation of the Directors’ powers by any person to whom they are delegated. 11.3 The Directors may revoke any delegation in whole or part, or alter its terms and conditions. Article 11 Analysis See article 5 of the NMA in Chapter 6B (para 6B.6). 12. Committees 12.1 Committees to which the Directors delegate any of their powers must follow procedures which are based as far as they are applicable on those provisions of the Articles which govern the taking of decisions by Directors. 12.2 The Directors may make rules of procedure for all or any committees, which prevail over rules derived from the Articles if they are not consistent with them. Article 12 Analysis See article 6 of the NMA in Chapter 6B (para 6B.7). DECISION-MAKING BY DIRECTORS 13. Directors to take decisions collectively10

Any decision of the Directors must be either a majority decision at a meeting or a decision taken in accordance with Article 0.

matters to a finance director). However, it may be equally appropriate to delegate matters to persons other than directors. In all cases, it is important to remember that delegation does not absolve directors of their general duties towards the company and their overall responsibility for its management. This means, amongst other things, that directors must be satisfied that those to whom responsibilities are delegated are competent to carry them out. 10 Article 13 states that the directors must make decisions by majority at a meeting in accordance with article 15; or unanimously if taken in accordance with article 19.

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Chapter 8.5  CIC Limited by Shares, Schedule 3, Large Membership

Article 13 Analysis See article 7 of the NMA in Chapter 6B (para 6B.8). 14. Calling a Directors’ meeting 14.1 Two Directors may (and the Secretary, if any, must at the request of two Directors) call a Directors’ meeting. 14.2 A Directors’ meeting must be called by at least seven Clear Days’ notice unless either: 14.2.1 all the Directors agree; or 14.2.2 urgent circumstances require shorter notice. 14.3 Notice of Directors’ meetings must be given to each Director. 14.4 Every notice calling a Directors’ meeting must specify: 14.4.1 the place, day and time of the meeting; and 14.4.2 if it is anticipated that Directors participating in the meeting will not be in the same place, how it is proposed that they should communicate with each other during the meeting. 14.5 Notice of Directors’ meetings need not be in Writing. 14.6 Notice of Directors’ meetings may be sent by Electronic Means to an Address provided by the Director for the purpose. Article 14 Analysis See article 9 of the NMA in Chapter 6B (para 6B.10). 15. Participation in Directors’ meetings 15.1 Subject to the Articles, Directors participate in a Directors’ meeting, or part of a Directors’ meeting, when: 15.1.1 the meeting has been called and takes place in accordance with the Articles; and 15.1.2 they can each communicate to the others any information or opinions they have on any particular item of the business of the meeting.

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Chapter 8.5  CIC Limited by Shares, Schedule 3, Large Membership

15.2 In determining whether Directors are participating in a Directors’ meeting, it is irrelevant where any Director is or how they communicate with each other.11 15.3 If all the Directors participating in a meeting are not in the same place, they may decide that the meeting is to be treated as taking place wherever any of them is. Article 15 Analysis See article 10 of the NMA in Chapter 6B (para 6B.11). 16. Quorum for Directors’ meetings12 16.1 At a Directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting. 16.2 The quorum for Directors’ meetings may be fixed from time to time by a decision of the Directors, but it must never be less than two, and unless otherwise fixed it is [two]. 16.3 If the total number of Directors for the time being is less than the quorum required, the Directors must not take any decision other than a decision: 16.3.1 to appoint further Directors; or 16.3.2 to call a general meeting so as to enable the shareholders to appoint further Directors. Article 16 Analysis See article 11 of the NMA in Chapter 6B (para 6B.12). 17. Chairing of Directors’ meetings

The Chair, if any, or in his or her absence another Director nominated by the Directors present shall preside as chair of each Directors’ meeting. Article 17 Analysis See article 12 of the NMA in Chapter 6B (para 6B.13).

11 Article 15.2 is designed to facilitate the taking of decisions by the directors communicating via telephone or video conference calls. Note the requirement to keep a written record of meetings and decisions (article 62). 12 The quorum may be fixed in absolute terms (eg “two Directors”) or as a proportion of the total number of directors (eg “one third of the total number of Directors”). You may even wish to stipulate that particular named directors, or directors representing particular stakeholder interests, must be present to constitute a quorum.

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Chapter 8.5  CIC Limited by Shares, Schedule 3, Large Membership

18. Voting13 18.1 Questions arising at a Directors’ meeting shall be decided by a majority of votes. 18.2 In all proceedings of Directors each Director must not have more than one vote.14 18.3 In case of an equality of votes, the Chair shall have a second or casting vote. Article 18 Analysis See article 12 of the NMA in Chapter 6B (para 6B.13). 19. Decisions without a meeting15 19.1 The Directors may take a unanimous decision without a Directors’ meeting by indicating to each other by any means, including without limitation by Electronic Means, that they share a common view on a matter. Such a decision may, but need not, take the form of a resolution in Writing, copies of which have been signed by each Director or to which each Director has otherwise indicated agreement in Writing. 19.2 A decision which is made in accordance with Article 0 shall be as valid and effectual as if it had been passed at a meeting duly convened and held, provided the following conditions are complied with: 19.2.1 approval from each Director must be received by one person being either such person as all the Directors have nominated in advance for that purpose or such other person as volunteers if necessary (“the Recipient”), which person may, for the avoidance of doubt, be one of the Directors; 19.2.2 following receipt of responses from all of the Directors, the Recipient must communicate to all of the Directors by any means whether the resolution has been formally approved by the Directors in accordance with this Article 0;

13 Article 18 reflects CICR, Sch 3, para 4, which is required to be included in the articles of all CICs. 14 You may wish to include a provision which gives the chair of the board a casting vote. This will enable the directors to resolve any deadlock at board level. 15 Article 19 is designed to facilitate the taking of decisions by directors following discussions in the form of, for example, email exchanges copied to all the directors. Note the requirements as to recording the decision in articles 19.2 and 48.

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Chapter 8.5  CIC Limited by Shares, Schedule 3, Large Membership

19.2.3 the date of the decision shall be the date of the communication from the Recipient confirming formal approval; 19.2.4 the Recipient must prepare a minute of the decision in accordance with Article 62. Article 19 Analysis See article 8 of the NMA in Chapter 6B (para 6B.9). 20. Conflicts of interest16 20.1 Whenever a Director finds himself or herself in a situation that is reasonably likely to give rise to a Conflict of Interest, he or she must declare his or her interest to the Directors unless, or except to the extent that, the other Directors are or ought reasonably to be aware of it already. 20.2 Whenever a matter is to be discussed at a meeting or decided in accordance with Article 0 and a Director has a Conflict of Interest in respect of that matter then, subject to Article 0, he or she must: 20.2.1 remain only for such part of the meeting as in the view of the other Directors is necessary to inform the debate; 20.2.2 not be counted in the quorum for that part of the meeting; and 20.2.3 withdraw during the vote and have no vote on the matter. 20.3 If any question arises as to whether a Director has a Conflict of Interest, the question shall be decided by a majority decision of the other Directors. 20.4 When a Director has a Conflict of Interest which he or she has declared to the Directors, he or she shall not be in breach of his or her duties to the Company by withholding confidential information from the Company if to disclose it would result in a breach of any other duty or obligation of confidence owed by him or her. 21. Directors’ power to authorise a conflict of interest 21.1 The Directors have power to authorise a Director to be in a position of Conflict of Interest provided: 21.1.1 in relation to the decision to authorise a Conflict of Interest, the conflicted Director must comply with Article 20.3; 16 The provisions in articles 20 and 21 reflect the position under the Companies Act 2006. However, it is recommended that, as a matter of good practice, all actual and potential conflicts of interest are disclosed in writing or at a meeting, as the case may be.

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Chapter 8.5  CIC Limited by Shares, Schedule 3, Large Membership

21.1.2 in authorising a Conflict of Interest, the Directors can decide the manner in which the Conflict of Interest may be dealt with and, for the avoidance of doubt, they can decide that the Director with a Conflict of Interest can participate in a vote on the matter and can be counted in the quorum; and 21.1.3 the decision to authorise a Conflict of Interest can impose such terms as the Trustees think fit and is subject always to their right to vary or terminate the authorisation. 21.2 If a matter, or office, employment or position, has been authorised by the Directors in accordance with Article 0 then, even if he or she has been authorised to remain at the meeting by the other Directors, the Director may absent himself or herself from meetings of the Directors at which anything relating to that matter, or that office, employment or position, will or may be discussed. 21.3 A Director shall not be accountable to the Company for any benefit which he or she derives from any matter, or from any office, employment or position, which has been authorised by the Directors in accordance with Article 0 (subject to any limits or conditions to which such approval was subject). 22. Register of Directors’ interests

The Directors shall cause a register of Directors’ interests to be kept. A Director must declare the nature and extent of any interest, direct or indirect, which he or she has in a proposed transaction or arrangement with the Company or in any transaction or arrangement entered into by the Company which has not previously been declared. Articles 20–22 Analysis See article 14 of the NMA in Chapter 6B (para 6B.15).

APPOINTMENT AND RETIREMENT OF DIRECTORS17 23. Methods of appointing Directors 23.1 Those persons notified to the Registrar of Companies as the first Directors of the Company shall be the first Directors. 17 Private companies are obliged to have at least one director. Provisions can be inserted into the articles providing for a minimum number of directors. Where the company has just one director, that director must be a natural person. You may wish to consider whether provision should also be made for a maximum number of directors (eg “and the total number of Directors in office at any one time shall not exceed four”). While it is often important to ensure proper representation of a number of different groups on a board of directors, very large boards can become unwieldy and a maximum number of directors provision may help to guard against this.

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Chapter 8.5  CIC Limited by Shares, Schedule 3, Large Membership

23.2 Any person who is willing to act as a Director, and is permitted by law to do so, may be appointed to be a Director: (a) by ordinary resolution; or (b) by a decision of the Directors. 23.3 In any case where, as a result of death, the Company has no shareholders and no Directors, the personal representatives of the last shareholder to have died have the right, by notice in Writing, to appoint a person to be a Director. 23.4 For the purposes of Article 23.3, where 2 or more shareholders die in circumstances rendering it uncertain who was the last to die, a younger shareholder is deemed to have survived an older shareholder. Article 23 Analysis See article 17 of the NMA in Chapter 6B (para 6B.18). 24. Termination of Director’s appointment18

A person ceases to be a Director as soon as: (a) that person ceases to be a Director by virtue of any provision of the Companies Act 2006, or is prohibited from being a Director by law; (b) a bankruptcy order is made against that person, or an order is made against that person in individual insolvency proceedings in a jurisdiction other than England and Wales or Northern Ireland which have an effect similar to that of bankruptcy; (c) a composition is made with that person’s creditors generally in satisfaction of that person’s debts; (d) notification is received by the Company from the Director that the Director is resigning from office, and such resignation has taken effect in accordance with its terms (but only if at least two Directors will remain in office when such resignation has taken effect); (e) the Director fails to attend three consecutive meetings of the Directors and the Directors resolve that the Director be removed for this reason; or (f)

at a general meeting of the Company, a resolution is passed that the Director be removed from office, provided the meeting has invited the views of the Director concerned and considered the matter in light of such views.

18 The board of directors cannot remove a director other than in accordance with the provisions in article 24 and the Companies Act 2006. The shareholders may, of course, vote to remove a director appointed by the directors.

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Chapter 8.5  CIC Limited by Shares, Schedule 3, Large Membership

Article 24 Analysis See article 18 of the NMA in Chapter 6B (para 6B.19). 25. Directors’ remuneration19 25.1 Directors may undertake any services for the Company that the Directors decide. 25.2 Subject to the Articles and in particular Article 3, Directors are entitled to such remuneration as the Directors determine: (a) for their services to the Company as Directors; and (b) for any other service which they undertake for the Company. 25.3 Subject to the Articles and in particular Article 3, a Director’s remuneration may: (a) take any form; and (b) include any arrangements in connection with the payment of a pension, allowance or gratuity, or any death, sickness or disability benefits, to or in respect of that Director. 25.4 Unless the Directors decide otherwise, Directors’ remuneration accrues from day to day. 25.5 Unless the Directors decide otherwise, Directors are not accountable to the Company for any remuneration which they receive as Directors or other officers or employees of the Company’s subsidiaries or of any other body corporate in which the Company is interested. Article 25 Analysis As per the provisions of article 25, a CIC may provide remuneration to its directors. The central disparity, in terms of private company limited by guarantee, incorporated under the Companies Act 2006 and using the model articles20 is the directors have no restrictions or rules to abide by. The CIC Regulator21 provides the following principles in relation to directors’ remuneration:22 ●●

Directors may be paid for their services.

19 See the guidance on directors’ remuneration in the Regulator’s information and guidance notes, Chapter 9. 20 Schedule 2 Regulation 3 Model articles for private companies limited by guarantee. 21 Office of the Regulator of Community Interest Companies. 22 Regulator’s information and guidance notes, Chapter 9 (9.3. Directors’ remuneration).

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●●

Directors’ remuneration should never be more than is reasonable.23

●●

Directors’ remuneration arrangements should always be transparent.24

●●

The Regulator – or the members of a CIC – may take action if a CIC director’s remuneration appears to be too high.25

For further analysis and comparison, see article 19 of the NMA in Chapter 6B (para 6B.20). 26. Directors’ expenses

The Company may pay any reasonable expenses which the Directors properly incur in connection with their attendance at: (a) meetings of Directors or committees of Directors; (b) general meetings; or (c) separate meetings of the holders of any class of shares or of debentures of the Company,



or otherwise in connection with the exercise of their powers and the discharge of their responsibilities in relation to the Company. Article 26 Analysis See article 20 of the NMA in Chapter 6B (para 6B.21).

SHARES AND DISTRIBUTIONS SHARES 27. All shares to be fully paid up 27.1 No share is to be issued for less than the aggregate of its nominal value and any premium to be paid to the Company in consideration for its issue. 27.2 This does not apply to shares taken on the formation of the Company by the subscribers to the Company’s Memorandum.

23 Reasonable – having regard to the contribution which they make to the success of the company and the benefits it provides for the community (9.3.6. What is “reasonable” remuneration). 24 All companies are required to keep copies of directors’ service contracts, or memoranda of their terms, available at an appropriate place for inspection by their members (9.3.7. Transparency). 25 If the Regulator becomes aware of potentially excessive director remuneration, the Regulator is likely to wish to discuss the matter further with the CIC concerned (9.3.8. Action by the Regulator).

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Article 27 Analysis See article 21 of the NMA in Chapter 6B (para 6B.22). 28. Powers to issue different classes of share 28.1 Subject to the Articles, but without prejudice to the rights attached to any existing share, the Company may issue shares with such rights or restrictions as may be determined by ordinary resolution. 28.2 The Company may issue shares which are to be redeemed, or are liable to be redeemed at the option of the Company or the holder, and the Directors may determine the terms, conditions and manner of redemption of any such shares. Article 28 Analysis See article 22 of the NMA in Chapter 6B (para 6B.23). 29. Company not bound by less than absolute interests

Except as required by law, no person is to be recognised by the Company as holding any share upon any trust, and except as otherwise required by law or the Articles, the Company is not in any way to be bound by or recognise any interest in a share other than the holder’s absolute ownership of it and all the rights attaching to it. Article 29 Analysis See article 23 of the NMA in Chapter 6B (para 6B.24).

30. Share certificates 30.1 The Company must issue each shareholder, free of charge, with one or more certificates in respect of the shares which that shareholder holds. 30.2 Every certificate must specify: (a) in respect of how many shares, of what class, it is issued; (b) the nominal value of those shares; (c) that the shares are fully paid; and (d) any distinguishing numbers assigned to them.

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30.3 No certificate may be issued in respect of shares of more than one class. 30.4 If more than one person holds a share, only one certificate may be issued in respect of it. 30.5 Certificates must: (a) have affixed to them the Company’s common seal;26 or (b) be otherwise executed in accordance with the Companies Acts. Article 30 Analysis See article 24 of the NMA in Chapter 6B (para 6B.25). 31. Replacement share certificates 31.1 If a certificate issued in respect of a shareholder’s shares is: (a) damaged or defaced; or (b) said to be lost, stolen or destroyed,

that shareholder is entitled to be issued with a replacement certificate in respect of the same shares.

31.2 A shareholder exercising the right to be issued with such a replacement certificate: (a) may at the same time exercise the right to be issued with a single certificate or separate certificates; (b) must return the certificate which is to be replaced to the Company if it is damaged or defaced; and (c) must comply with such conditions as to evidence, indemnity and the payment of a reasonable fee as the Directors decide. Article 31 Analysis See article 25 of the NMA in Chapter 6B (para 6B.26).

26 If the company does not have a common seal, share certificates can be executed by two directors, by one director and the secretary (if there is one), or by one director in the presence of an independent witness.

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32. Share transfers27 32.1 Shares may be transferred by means of an instrument of transfer28 in any usual form or any other form approved by the Directors, which is executed by or on behalf of the transferor. 32.2 No fee may be charged for registering any instrument of transfer or other Document relating to or affecting the title to any share. 32.3 The Company may retain any instrument of transfer which is registered. 32.4 The transferor remains the holder of a share until the transferee’s name is entered in the register of shareholders as holder of it. 32.5 The Directors may refuse to register the transfer of a share to a person of whom they do not approve. 32.6 They may also refuse to register the transfer unless it is lodged at the registered office of the Company or at such other place as the Directors may appoint and is accompanied by such evidence as the Directors may reasonably require to show the right of the transferor to make the transfer, and by such other information, as they may reasonably require. 32.7 If the Directors refuse to register such a transfer, they shall, within two months after the date on which the transfer was lodged with the Company send to the transferee notice of the refusal. 32.8 The provisions of this Article apply in addition to any restrictions on the transfer of a share which maybe set out elsewhere in the Memorandum or Articles of the Company. Article 32 Analysis See article 26 of the NMA in Chapter 6B (para 6B.27). 33. Purchase of own shares29

Subject to the articles, the Company may purchase its own shares (including any redeemable shares) and may make a payment in respect of

27 Articles 32.5 to 32.8 are mandatory, reflecting CICR, Sch 3, para 2. However, the model constitution does not contain any other restrictions on the transfer of shares. Note that the directors may refuse to register a transfer to persons of whom they do not approve. 28 Eg the standard stock transfer form prescribed under the Stock Transfer Act 1963. 29 This article, in itself, does not provide sufficient authority for the company to purchase its own shares. The company must also comply with the relevant statutory requirements – in particular, Companies Act 2006, ss 693–700. We recommend that you take legal advice before taking any steps towards the company purchasing its own shares. It is important that any purchase of shares made in accordance with this article is also made in accordance with article 3 (asset lock).

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the redemption or purchase of its own shares otherwise than out of the distributable profits of the Company or the proceeds of a fresh issue of shares. Any share so purchased shall be purchased at its nominal value. Article 30 Analysis See footnote. 34. Transmission of shares30 34.1 If title to a share passes to a transmittee, the Company may only recognise the transmittee as having any title to that share. 34.2 A transmittee who produces such evidence of entitlement to shares as the Directors may properly require: (a) may, subject to the Articles, choose either to become the holder of those shares or to have them transferred to another person; and (b) subject to the Articles, and pending any transfer of the shares to another person, has the same rights as the holder had. 34.3 But transmittees do not have the right to attend or vote at a general meeting, or agree to a proposed written resolution, in respect of shares to which they are entitled, by reason of the holder’s death or bankruptcy or otherwise, unless they become the holders of those shares. Article 34 Analysis See article 27 of the NMA in Chapter 6B (para 6B.28). 35. Exercise of transmittees’ rights 35.1 Transmittees who wish to become the holders of shares to which they have become entitled must notify the Company in Writing of that wish. 35.2 If the transmittee wishes to have a share transferred to another person, the transmittee must execute an instrument of transfer in respect of it.

30 In the event of the death of a shareholder, the share will pass according to the will of the deceased shareholder, or the intestacy rules.

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35.3 Any transfer made or executed under this Article is to be treated as if it were made or executed by the person from whom the transmittee has derived rights in respect of the share, and as if the event which gave rise to the transmission had not occurred. Article 35 Analysis See article 28 of the NMA in Chapter 6B (para 6B.29). 36. Transmittees bound by prior notices 36.1 If a notice is given to a shareholder in respect of shares and a transmittee is entitled to those shares, the transmittee is bound by the notice if it was given to the shareholder before the transmittee’s name has been entered in the register of shareholders. Article 36 Analysis See article 29 of the NMA in Chapter 6B (para 6B.30). DIVIDENDS AND OTHER DISTRIBUTIONS 37. Procedure for declaring dividends 37.1 Subject to the Companies Acts, the Regulations and the Articles, the Company may by ordinary resolution declare dividends, and the Directors may, provided that such decision is authorised by an ordinary resolution of the shareholders, decide to pay interim dividends. 37.2 For the avoidance of doubt the payment of dividends shall be considered to be a transfer of assets other than for full consideration and shall not be permitted other than in the circumstances prescribed in Article 3. 37.3 A dividend must not be declared unless the Directors have made a recommendation as to its amount. Such a dividend must not exceed the amount recommended by the Directors. 37.4 No dividend may be declared or paid unless it is in accordance with shareholders’ respective rights. 37.5 Unless the shareholders’ resolution to declare or Directors’ decision to pay a dividend, or the terms on which shares are issued, specify otherwise, it must be paid by reference to each shareholder’s holding of shares on the date of the resolution or decision to declare or pay it.

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37.6 If the Company’s share capital is divided into different classes, no interim dividend may be paid on shares carrying deferred or nonpreferred rights if, at the time of payment, any preferential dividend is in arrears. 37.7 The Directors may pay at intervals any dividend payable at a fixed rate if it appears to them that the profits available for distribution justify the payment. 37.8 If the Directors act in good faith, they do not incur any liability to the holders of shares conferring preferred rights for any loss they may suffer by the lawful payment of an interim dividend on shares with deferred or non-preferred rights. Article 37 Analysis See article 30 of the NMA in Chapter 6B (para 6B.31). 38. Payment of dividends and other distributions 38.1 Where a dividend or other sum which is a distribution is payable in respect of a share, it must be paid by one or more of the following means: (a) transfer to a bank or building society account indicated by the distribution recipient either in Writing or as the Directors may otherwise decide; (b) sending a cheque made payable to the distribution recipient by post to the distribution recipient at the distribution recipient’s registered Address (if the distribution recipient is a holder of the share), or (in any other case) to an Address indicated by the distribution recipient either in Writing or as the Directors may otherwise decide; (c) sending a cheque made payable to such person by post to such person at such Address as the distribution recipient has indicated either in Writing or as the Directors may otherwise decide; or (d) any other means of payment as the Directors agree with the distribution recipient either in Writing or by such other means as the Directors decide. 38.2 In the Articles, “the distribution recipient” means, in respect of a share in respect of which a dividend or other sum is payable: (a) the holder of the share; or (b) if the share has two or more joint holders, whichever of them is named first in the register of members; or 384

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(c) if the holder is no longer entitled to the share by reason of death or bankruptcy, or otherwise by operation of law, the transmittee. Article 38 Analysis See article 31 of the NMA in Chapter 6B (para 6B.32). 39. No interest on distributions

The Company may not pay interest on any dividend or other sum payable in respect of a share unless otherwise provided by: (a) the terms on which the share was issued; or (b) the provisions of another agreement between the holder of that share and the Company. Article 39 Analysis See article 32 of the NMA in Chapter 6B (para 6B.33).

40. Unclaimed distributions 40.1 All dividends or other sums which are: (a) payable in respect of shares; and (b) unclaimed after having been declared or become payable,

may be invested or otherwise made use of by the Directors for the benefit of the Company until claimed.

40.2 The payment of any such dividend or other sum into a separate account does not make the Company a trustee in respect of it. 40.3 If: (a) twelve years have passed from the date on which a dividend or other sum became due for payment; and (b) the distribution recipient has not claimed it,

the distribution recipient is no longer entitled to that dividend or other sum and it ceases to remain owing by the Company.

Article 40 Analysis See article 33 of the NMA in Chapter 6B (para 6B.34).

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41. Non-cash distributions 41.1 Subject to the terms of issue of the share in question, the Company may, by ordinary resolution on the recommendation of the Directors, decide to pay all or part of a dividend or other distribution payable in respect of a share by transferring non-cash assets of equivalent value (including, without limitation, shares or other securities in any company). 41.2 For the purposes of paying a non-cash distribution, the Directors may make whatever arrangements they think fit, including, where any difficulty arises regarding the distribution: (a) fixing the value of any assets; (b) paying cash to any distribution recipient on the basis of that value in order to adjust the rights of recipients; and (c) vesting any assets in trustees. Article 41 Analysis See article 34 of the NMA in Chapter 6B (para 6B.35). 42. Waiver of distributions

Distribution recipients may waive their entitlement to a dividend or other distribution payable in respect of a share by giving the Company notice in Writing to that effect, but if: (a) the share has more than one holder; or (b) more than one person is entitled to the share, whether by reason of the death or bankruptcy of one or more joint holders, or otherwise,



the notice is not effective unless it is expressed to be given, and signed, by all the holders or persons otherwise entitled to the share. Article 42 Analysis See article 35 of the NMA in Chapter 6B (para 6B.36).

CAPITALISATION OF PROFITS 43. Authority to capitalise and appropriation of capitalised sums 43.1 Subject to the Articles, the Directors may, if they are so authorised by an ordinary resolution:

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(a) decide to capitalise any profits of the Company (whether or not they are available for distribution) which are not required for paying a preferential dividend, or any sum standing to the credit of the Company’s share premium account or capital redemption reserve; and (b) appropriate any sum which they so decide to capitalise (a “capitalised sum”) to the persons who would have been entitled to it if it were distributed by way of dividend (the “persons entitled”) and in the same proportions. 43.2 Capitalised sums must be applied: (a) on behalf of the persons entitled; and (b) in the same proportions as a dividend would have been distributed to them. 43.3 Any capitalised sum may be applied in paying up new shares of a nominal amount equal to the capitalised sum which are then allotted credited as fully paid to the persons entitled or as they may direct. 43.4 A capitalised sum which was appropriated from profits available for distribution may be applied in paying up new debentures of the Company which are then allotted credited as fully paid to the persons entitled or as they may direct. 43.5 Subject to the Articles the Directors may: (a) apply capitalised sums in accordance with Articles 43.3 and 43.4 partly in one way and partly in another; (b) make such arrangements as they think fit to deal with shares or debentures becoming distributable in fractions under this Article (including the issuing of fractional certificates or the making of cash payments); and (c) authorise any person to enter into an agreement with the Company on behalf of all the persons entitled which is binding on them in respect of the allotment of shares and debentures to them under this Article.

Article 43 Analysis See article 36 of the NMA in Chapter 6B (para 6B.37).

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DECISION-MAKING BY SHAREHOLDERS ORGANISATION OF GENERAL MEETINGS31 44. General meetings 44.1 The Directors may call a general meeting at any time. 44.2 The Directors must call a general meeting if required to do so by the members under the Companies Acts.32 45. Length of notice

All general meetings must be called by either: 45.1 at least 14 Clear Days’ notice; or 45.2 shorter notice if it is so agreed by [a majority of the shareholders having a right to attend and vote at that meeting.Any such majority must together represent at least [90%] of the total voting rights at that meeting of all the shareholders].

46. Contents of notice 46.1 Every notice calling a general meeting must specify the place, day and time of the meeting, whether it is a general or an annual general meeting, and the general nature of the business to be transacted. 46.2 If a special resolution is to be proposed, the notice must include the proposed resolution and specify that it is proposed as a special resolution. 46.3 In every notice calling a meeting of the Company there must appear with reasonable prominence a statement informing the shareholder of his or her rights to appoint another person as his or her proxy at a general meeting. 47. Service of notice

Notice of general meetings must be given to every shareholder, to the Directors and to the auditors of the Company. Articles 44–47 Analysis See article 9 of the NMA in Chapter 6B (para 6B.10).

31 The Companies Act 2006 has removed the need for private companies to hold annual general meetings, and therefore these articles follow suit; however, if you wish, you can insert an additional provision which obliges the company to hold annual general meetings. 32 Article 44.2 provides that general meetings must be held in accordance with the provisions of the Companies Act 2006. You must specify how many shareholders are required to be present to hold a valid general meeting. The quorum may be fixed in absolute terms (eg “four shareholders”) or as a proportion of the total number of shareholders (eg “three quarters of the shareholders from time to time”).You may even wish to stipulate that particular named shareholders, or shareholders representing particular stakeholder interests, must be present to constitute a quorum. In any event, it is recommended that the quorum should never be less than half of the total number of shareholders.

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48. Attendance and speaking at general meetings 48.1 A person is able to exercise the right to speak at a general meeting when that person is in a position to communicate to all those attending the meeting, during the meeting, any information or opinions which that person has on the business of the meeting. 48.2 A person is able to exercise the right to vote at a general meeting when: (a) that person is able to vote, during the meeting, on resolutions put to the vote at the meeting; and (b) that person’s vote can be taken into account in determining whether or not such resolutions are passed at the same time as the votes of all the other persons attending the meeting. 48.3 The Directors may make whatever arrangements they consider appropriate to enable those attending a general meeting to exercise their rights to speak or vote at it. 48.4 In determining attendance at a general meeting, it is immaterial whether any two or more shareholders attending it are in the same place as each other. 48.5 Two or more persons who are not in the same place as each other attend a general meeting if their circumstances are such that if they have (or were to have) rights to speak and vote at that meeting, they are (or would be) able to exercise them. Article 48 Analysis See article 37 of the NMA in Chapter 6B (para 6B.38). 49. Quorum for general meetings 49.1 No business other than the appointment of the chairman of the meeting is to be transacted at a general meeting if the persons attending it do not constitute a quorum. 49.2 The quorum for a general meeting shall be two persons entitled to vote on the business to be transacted (each being a shareholder, a proxy for a shareholder or a duly authorised representative of a shareholder) or 10% of the total shareholding (represented in person or by proxy) whichever is greater. Article 49 Analysis See article 38 of the NMA in Chapter 6B (para 6B.39). 389

Chapter 8.5  CIC Limited by Shares, Schedule 3, Large Membership

50. Chairing general meetings 50.1 If the Directors have appointed a chairman, the chairman shall chair general meetings if present and willing to do so. 50.2 If the Directors have not appointed a chairman, or if the chairman is unwilling to chair the meeting or is not present within ten minutes of the time at which a meeting was due to start: (a) the Directors present; or (b) (if no Directors are present), the meeting,

must appoint a Director or shareholder to chair the meeting, and the appointment of the chairman of the meeting must be the first business of the meeting.

50.3 The person chairing a meeting in accordance with this Article is referred to as “the chairman of the meeting”. Article 50 Analysis See article 39 of the NMA in Chapter 6B (para 6B.40). 51. Attendance and speaking by Directors and non-shareholders 51.1 Directors may attend and speak at general meetings, whether or not they are shareholders. 51.2 The chairman of the meeting may permit other persons who are not: (a) shareholders of the Company; or (b) otherwise entitled to exercise the rights of shareholders in relation to general meetings,

to attend and speak at a general meeting.

Article 51 Analysis See article 40 of the NMA in Chapter 6B (para 6B.41). 52. Adjournment 52.1 If the persons attending a general meeting within half an hour of the time at which the meeting was due to start do not constitute a quorum, or if during a meeting a quorum ceases to be present, the chairman of the meeting must adjourn it.

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52.2 The chairman of the meeting may adjourn a general meeting at which a quorum is present if: (a) the meeting consents to an adjournment; or (b) it appears to the chairman of the meeting that an adjournment is necessary to protect the safety of any person attending the meeting or ensure that the business of the meeting is conducted in an orderly manner. 52.3 The chairman of the meeting must adjourn a general meeting if directed to do so by the meeting. 52.4 When adjourning a general meeting, the chairman of the meeting must: (a) either specify the time and place to which it is adjourned or state that it is to continue at a time and place to be fixed by the Directors; and (b) have regard to any directions as to the time and place of any adjournment which have been given by the meeting. 52.5 If the continuation of an adjourned meeting is to take place more than 14 days after it was adjourned, the Company must give at least 7 Clear Days’ notice of it (that is, excluding the day of the adjourned meeting and the day on which the notice is given): (a) to the same persons to whom notice of the Company’s general meetings is required to be given; and (b) containing the same information which such notice is required to contain. 52.6 No business may be transacted at an adjourned general meeting which could not properly have been transacted at the meeting if the adjournment had not taken place. Article 52 Analysis See article 41 of the NMA in Chapter 6B (para 6B.42). VOTING AT GENERAL MEETINGS 53. Voting: general 53.1 A resolution put to the vote of a general meeting must be decided on a show of hands unless a poll is duly demanded in accordance with the Articles. 53.2 A person who is not a shareholder of the Company shall not have any right to vote at a general meeting of the Company; but this is 391

Chapter 8.5  CIC Limited by Shares, Schedule 3, Large Membership

without prejudice to any right to vote on a resolution affecting the rights attached to a class of the Company’s debentures33. 53.3 Article 53.2 shall not prevent a person who is a proxy for a shareholder or a duly Authorised Representative from voting at a general meeting of the Company. 53.4 On a vote on a resolution on a show of hands at a meeting every person present in person (whether a shareholder, proxy or Authorised Representative of a shareholder) and entitled to vote shall have a maximum of one vote. 53.5 On a vote on a resolution on a poll at a meeting every shareholder present in person or by proxy or Authorised Representative shall have one vote. 53.6 In the case of an equality of votes, whether on a show of hands or on a poll, the chair of the meeting shall not be entitled to a casting vote in addition to any other vote he or she may have. 53.7 No shareholder shall be entitled to vote at any general meeting unless all monies presently payable by him, her or it to the Company have been paid. 53.8 The following provisions apply to any organisation that is a shareholder (“a Shareholder Organisation”): 53.8.1 a Shareholder Organisation may nominate any individual to act as its representative (“an Authorised Representative”) at any meeting of the Company; 53.8.2 the Shareholder Organisation must give notice in Writing to the Company of the name of its Authorised Representative. The Authorised Representative will not be entitled to represent the Shareholder Organisation at any meeting of the Company unless such notice has been received by the Company. The Authorised Representative may continue to represent the Shareholder Organisation until notice in Writing is received by the Company to the contrary; 53.8.3 a Shareholder Organisation may appoint an Authorised Representative to represent it at a particular meeting of the Company or at all meetings of the Company until notice in Writing to the contrary is received by the Company; 53.8.4 any notice in Writing received by the Company shall be conclusive evidence of the Authorised Representative’s authority to represent the Shareholder Organisation or that his or her authority has been revoked. The Company 33 Article 53.2 reflects CICR, Sch 3, para 3(1) and is mandatory.

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shall not be required to consider whether the Authorised Representative has been properly appointed by the Shareholder Organisation; 53.8.5 an individual appointed by a Shareholder Organisation to act as its Authorised Representative is entitled to exercise (on behalf of the Shareholder Organisation) the same powers as the Shareholder Organisation could exercise if it were an individual shareholder; 53.8.6 on a vote on a resolution at a meeting of the Company, the Authorised Representative has the same voting rights as the Shareholder Organisation would be entitled to if it was an individual shareholder present in person at the meeting; and 53.8.7 the power to appoint an Authorised Representative under this Article 0 is without prejudice to any rights which the Shareholder Organisation has under the Companies Acts and the Articles to appoint a proxy or a corporate representative Article 53 Analysis The Shareholder Organisation provisions (art 53.8) do not appear in the new model articles for private companies limited by shares or guarantee. See article 41 of the NMA in Chapter 6B (para 6B.42). 54. Poll votes 54.1 A poll on a resolution may be demanded: (a) in advance of the general meeting where it is to be put to the vote; or (b) at a general meeting, either before a show of hands on that resolution or immediately after the result of a show of hands on that resolution is declared. 54.2 A poll may be demanded by: (a) the chairman of the meeting; (b) the Directors; (c) two or more persons having the right to vote on the resolution; (d) any person, who, by virtue of being appointed proxy for one or more shareholder having the right to vote at the meeting, holds two or more votes; or 393

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(e) a person or persons representing not less than one tenth of the total voting rights of all the shareholders having the right to vote on the resolution. 54.3 A demand for a poll may be withdrawn if: (a) the poll has not yet been taken; and (b) the chairman of the meeting consents to the withdrawal. 54.4 Polls must be taken immediately and in such manner as the chairman of the meeting directs. Article 54 Analysis See article 44 of the NMA in Chapter 6B (para 6B.45). 55. Errors and disputes 55.1 No objection may be raised to the qualification of any person voting at a general meeting except at the meeting or adjourned meeting at which the vote objected to is tendered, and every vote not disallowed at the meeting is valid. 55.2 Any such objection must be referred to the chairman of the meeting, whose decision is final. Article 55 Analysis See article 43 of the NMA in Chapter 6B (para 6B.44). 56. Content of Proxy Notices 56.1 Proxies may only validly be appointed by a notice in Writing (a “Proxy Notice”) which: (a) states the name and Address of the shareholder appointing the proxy; (b) identifies the person appointed to be that shareholder’s proxy and the general meeting in relation to which that person is appointed; (c) is signed by or on behalf of the shareholder appointing the proxy, or is authenticated in such manner as the Directors may determine; and (d) is delivered to the Company in accordance with the Articles and any instructions contained in the notice of the general meeting to which they relate. 394

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56.2 The Company may require Proxy Notices to be delivered in a particular form, and may specify different forms for different purposes. 56.3 Proxy notices may specify how the proxy appointed under them is to vote (or that the proxy is to abstain from voting) on one or more resolutions. 56.4 Unless a Proxy Notice indicates otherwise, it must be treated as: (a) allowing the person appointed under it as a proxy discretion as to how to vote on any ancillary or procedural resolutions put to the meeting; and (b) appointing that person as a proxy in relation to any adjournment of the general meeting to which it relates as well as the meeting itself. Article 56 Analysis See article 45 of the NMA in Chapter 6B (para 6B.46). 57. Delivery of Proxy Notices 57.1 A person who is entitled to attend, speak or vote (either on a show of hands or on a poll) at a general meeting remains so entitled in respect of that meeting or any adjournment of it, even though a valid Proxy Notice has been delivered to the Company by or on behalf of that person. 57.2 An appointment under a Proxy Notice may be revoked by delivering to the Company a notice in Writing given by or on behalf of the person by whom or on whose behalf the Proxy Notice was given. 57.3 A notice revoking a proxy appointment only takes effect if it is delivered before the start of the meeting or adjourned meeting to which it relates. 57.4 If a Proxy Notice is not executed by the person appointing the proxy, it must be accompanied by written evidence of the authority of the person who executed it to execute it on the appointor’s behalf. Article 57 Analysis See article 46 of the NMA in Chapter 6B (para 6B.47).

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58. Amendments to resolutions 58.1 An ordinary resolution to be proposed at a general meeting may be amended by ordinary resolution if: (a) notice of the proposed amendment is given to the Company in Writing by a person entitled to vote at the general meeting at which it is to be proposed not less than 48 hours before the meeting is to take place (or such later time as the chairman of the meeting may determine); and (b) the proposed amendment does not, in the reasonable opinion of the chairman of the meeting, materially alter the scope of the resolution. 58.2 A special resolution to be proposed at a general meeting may be amended by ordinary resolution, if: (a) the chairman of the meeting proposes the amendment at the general meeting at which the resolution is to be proposed; and (b) the amendment does not go beyond what is necessary to correct a grammatical or other non-substantive error in the resolution. 58.3 If the chairman of the meeting, acting in good faith, wrongly decides that an amendment to a resolution is out of order, the chairman’s error does not invalidate the vote on that resolution. Article 58 Analysis See article 47 of the NMA in Chapter 6B (para 6B.48). WRITTEN RESOLUTIONS 59. Written resolutions 59.1 Subject to Article 0, a written resolution of the Company passed in accordance with this Article 0 shall have effect as if passed by the Company in general meeting: 59.1.1 A written resolution is passed as an ordinary resolution if it is passed by a simple majority of the total voting rights of eligible shareholders. 59.1.2 A written resolution is passed as a special resolution if it is passed by shareholders representing not less than 75% of the total voting rights of eligible shareholders. A written resolution is not a special resolution unless it states that it was proposed as a special resolution. 396

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59.2 In relation to a resolution proposed as a written resolution of the Company the eligible shareholders are the shareholders who would have been entitled to vote on the resolution on the Circulation Date of the resolution. 59.3 A shareholders’ resolution under the Companies Acts removing a Director or an auditor before the expiration of his or her term of office may not be passed as a written resolution. 59.4 A copy of the written resolution must be sent to every shareholder together with a statement informing the shareholder how to signify their agreement to the resolution and the date by which the resolution must be passed if it is not to lapse. Communications in relation to written notices shall be sent to the Company’s auditors in accordance with the Companies Acts. 59.5 A shareholder signifies their agreement to a proposed written resolution when the Company receives from him or her an authenticated Document identifying the resolution to which it relates and indicating his or her agreement to the resolution. 59.5.1 If the Document is sent to the Company in Hard Copy Form, it is authenticated if it bears the shareholder’s signature. 59.5.2 If the Document is sent to the Company by Electronic Means, it is authenticated [if it bears the shareholder’s signature] or [if the identity of the shareholder is confirmed in a manner agreed by the Directors] or [if it is accompanied by a statement of the identity of the shareholder and the Company has no reason to doubt the truth of that statement] or [if it is from an email Address notified by the shareholder to the Company for the purposes of receiving Documents or information by Electronic Means]. 59.6 A written resolution is passed when the required majority of eligible shareholders have signified their agreement to it. 59.7 A proposed written resolution lapses if it is not passed within 28 days beginning with the Circulation Date. Article 59 Analysis See article 8 of the NMA in Chapter 6B (para 6B.9). ADMINISTRATIVE ARRANGEMENTS AND MISCELLANEOUS 60. Means of communication to be used 60.1 Subject to the Articles, anything sent or supplied by or to the Company under the Articles may be sent or supplied in any way 397

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in which the Companies Act 2006 provides for Documents or information which are authorised or required by any provision of that Act to be sent or supplied by or to the Company. 60.2 Subject to the Articles, any notice or Document to be sent or supplied to a Director in connection with the taking of decisions by Directors may also be sent or supplied by the means by which that Director has asked to be sent or supplied with such notices or Documents for the time being. 60.3 A Director may agree with the Company that notices or Documents sent to that Director in a particular way are to be deemed to have been received within an agreed time of their being sent, and for the agreed time to be less than 48 hours.

Article 60 Analysis See article 48 of the NMA in Chapter 6B (para 6B.49). 61. Irregularities

The proceedings at any meeting or on the taking of any poll or the passing of a written resolution or the making of any decision shall not be invalidated by reason of any accidental informality or irregularity (including any accidental omission to give or any non-receipt of notice) or any want of qualification in any of the persons present or voting or by reason of any business being considered which is not referred to in the notice unless a provision of the Companies Acts specifies that such informality, irregularity or want of qualification shall invalidate it. Article 61 Analysis This article does not appear in any of the new model articles.

62. Minutes 62.1 The Directors must cause minutes to be made in books kept for the purpose: 62.1.1 of all appointments of officers made by the Directors; 62.1.2 of all resolutions of the Company and of the Directors (including, without limitation, decisions of the Directors made without a meeting); and

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62.1.3 of all proceedings at meetings of the Company and of the Directors, and of committees of Directors, including the names of the Directors present at each such meeting;

and any such minute, if purported to be signed (or in the case of minutes of Directors’ meetings signed or authenticated) by the chair of the meeting at which the proceedings were had, or by the chair of the next succeeding meeting, shall, as against any shareholder or Director of the Company, be sufficient evidence of the proceedings.

62.2 The minutes must be kept for at least ten years from the date of the meeting, resolution or decision. Article 62 Analysis See article 15 of the NMA in Chapter 6B (para 6B.16). 63. Records and accounts34

The Directors shall comply with the requirements of the Companies Acts as to maintaining a shareholders’ register, keeping financial records, the audit or examination of accounts and the preparation and transmission to the Registrar of Companies and the Regulator of: 63.1 annual reports; 63.2 annual returns; and 63.3 annual statements of account. 63.4 Except as provided by law or authorised by the Directors or an ordinary resolution of the Company, no person is entitled to inspect any of the Company’s accounting or other records or Documents merely by virtue of being a shareholder. Article 63 Analysis Article 63 provides an overview of section 38635 which states any company must keep adequate accounting records. This article does not appear in any of the new model articles.

34 See the Companies House guidance booklet, “Accounts and Accounting Reference Dates” (available online at www.companies-house.gov.uk/about/gbhtml/gba3.shtml). On the annual CIC report, see the Regulator’s information and guidance notes, Chapter 8. 35 Companies Act 2006, s 386 (Duty to keep accounting records).

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64. Indemnity 64.1 Subject to Article 0, a relevant Director of the Company or an associated company may be indemnified out of the Company’s assets against: (a) any liability incurred by that Director in connection with any negligence, default, breach of duty or breach of trust in relation to the Company or an associated company; (b) any liability incurred by that Director in connection with the activities of the Company or an associated company in its capacity as a trustee of an occupational pension scheme (as defined in section 235(6) of the Companies Act 2006); (c) any other liability incurred by that Director as an officer of the Company or an associated company. 64.2 This Article does not authorise any indemnity which would be prohibited or rendered void by any provision of the Companies Acts or by any other provision of law. 64.3 In this Article: (a) companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate; and (b) a “relevant Director” means any Director or former Director of the Company or an associated company. 65. Insurance 65.1 The Directors may decide to purchase and maintain insurance, at the expense of the Company, for the benefit of any relevant Director in respect of any relevant loss. 65.2 In this Article: (a) a “relevant Director” means any Director or former Director of the Company or an associated company; (b) a “relevant loss” means any loss or liability which has been or may be incurred by a relevant Director in connection with that Director’s duties or powers in relation to the Company, any associated company or any pension fund or employees’ share scheme of the Company or associated company; and (c) companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate. Articles 64 and 65 Analysis See articles 52 and 53 of the NMA in Chapter 6B (paras 6B.53 and 6B.54).

400

Chapter 8.5  CIC Limited by Shares, Schedule 3, Large Membership

66. Exclusion of model articles

The relevant model articles for a company limited by shares are hereby expressly excluded. Article 66 Analysis In order to explicitly state the exclusion that it is good practice to provide the provision at the beginning of the document and specifically refer to the model articles regulations. It should be noted, for companies incorporated under previous Companies Acts, that the relevant articles should be expressly excluded.

SCHEDULE INTERPRETATION 1.

In the Articles, unless the context requires otherwise, the following terms shall have the following meanings:

Term “Address”

Meaning includes a number or address used for the purposes of sending or receiving Documents by Electronic Means; “Articles” means the Company’s articles of association; “asset-locked body” means (i) a community interest Company or a charity36 or a Permitted Society; or (ii) a body established outside the United Kingdom that is equivalent to any of those; “Authorised Representative” means any individual nominated by a Shareholder Organisation to act as its representative at any meeting of the Company in accordance with Article 0; “bankruptcy” includes individual insolvency proceedings in a jurisdiction other than England and Wales or Northern Ireland which have an effect similar to that of bankruptcy; 36 Charities Act 2006, s 1(1) defines a “charity” as an institution which “is established for charitable purposes only, and falls to be subject to the control of the High Court in the exercise of its jurisdiction with respect to charities”.

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Chapter 8.5  CIC Limited by Shares, Schedule 3, Large Membership

Term “Chair” “chairman of the meeting” “Circulation Date” “Clear Days”

“community”

“Companies Acts”

“Company” “Conflict of Interest”

“Director”

“distribution recipient” ”Document” “Electronic Form” and “Electronic Means” “fully paid”

Meaning has the meaning given in Article 10; has the meaning given in Article 0; in relation to a written resolution, has the meaning given to it in the Companies Acts; in relation to the period of a notice, that period excluding the day when the notice is given or deemed to be given and the day for which it is given or on which it is to take effect; is to be construed in accordance with the section 35(5) of the Companies (Audit, Investigations and Community Enterprise) Act 2004; means the Companies Acts (as defined in section 2 of the Companies Act 2006), in so far as they apply to the Company; [.......................] [Community Interest Company/C.I.C.]; any direct or indirect interest of a Director (whether personal, by virtue of a duty of loyalty to another organisation or otherwise) that conflicts or might conflict with the interests of the Company; means a director of the Company, and includes any person occupying the position of director, by whatever name called; has the meaning given in Article 38; includes, unless otherwise indicated, any document sent or supplied in Electronic Form; have the meanings respectively given to them in section 1168 of the Companies Act 2006; in relation to a share, means that the nominal value and any premium to be paid to the Company in respect of that share have been paid to the Company;

402

Chapter 8.5  CIC Limited by Shares, Schedule 3, Large Membership

Term “Hard Copy Form” “holder” “instrument” “Memorandum” “paid” “participate” “Permitted Registered Society”

Meaning has the meaning given in section 1168 of the Companies Act 2006; in relation to shares means the person whose name is entered in the register of shareholders as the holder of the shares; means a document in Hard Copy Form; the Company’s memorandum of association; means paid or credited as paid; in relation to a Directors’ meeting, has the meaning given in Article 15; Means a)

b)

“Proxy Notice” “the Regulations” “the Regulator” “Secretary” “shareholder” “shares” “specified” “subsidiary” “transfer”

A registered society within the meaning given by section 1(1) of the Co-operative and Community Benefit Societies Act 2014; or

A society registered or deemed to be registered under the Industrial and Provident Societies Act (Northern Ireland) 1969; has the meaning given in Article 0; means the Community Interest Company Regulations 2005 (as amended); means the Regulator of Community Interest Companies; the secretary of the Company (if any); means a person who is the holder of a share; means shares in the Company; means specified in the articles of association of the Company for the purposes of this paragraph; has the meaning given in section 1159 of the Companies Act 2006; includes every description of disposition, payment, release or distribution, and the creation or extinction of an estate or interest in, or right over, any property;

403

Chapter 8.5  CIC Limited by Shares, Schedule 3, Large Membership

Term “transmittee”

“Writing”

Meaning means a person entitled to a share by reason of the death or bankruptcy of a shareholder or otherwise by operation of law; and means the representation or reproduction of words, symbols or other information in a visible form by any method or combination of methods, whether sent or supplied in Electronic Form or otherwise.

2.

Subject to clause 3 of this Schedule, any reference in the Articles to an enactment includes a reference to that enactment as re-enacted or amended from time to time and to any subordinate legislation made under it.

3.

Unless the context otherwise requires, other word of expression contained in these Articles bear the same meaning as in the Companies Acts as in force on the date when these Articles become binding on the Company.

404

Index [All references are to paragraph number] A Annual accounts inspection of private companies limited by shares, 6B.51 members and, 1.35 requirements for, 1.34 Appeals Appeal Officer, appointment of, 3.11 appeal process, 3.40 determination of appeal, 3.43 dismissal of appeal, 3.44 distribution of assets on a winding up, 3.39 notice of appeal, 3.41 procedure, 3.42 reasons, 3.45 time limits, 3.38 Articles of association see also Private companies limited by guarantee; Private companies limited by shares asset-lock provisions, 6A.12 charity, 1.46 community interest company limited by guarantee, 6A.4–6A.5 limited by shares, 6A.6–6A.8 company objects, 6A.13 alteration, 6A.15–6A.17 examples, 6A.14 contents, 1.40, 6A.11 drafting, 1.42 enforceability, 1.41 generally, 5.1–5.2 key points, 1.48 legality, 1.39, 6A.21 Model Articles post-1 October 2009, 1.47, 6A.1–6A.2, 6A.21 default application, 6A.21 exclusion of, 6A.19 latest model articles, 6A.10 use by CIC, 6A.9 variation of, 6A.19 non-charity, 1.45 not-for-profit organisations boiler plate clauses, 6C.4 code of conduct, 6C.13 conflicts of interest, 6C.12 dissolution, 6C.10

Articles of association – contd not-for-profit organisations – contd drafting assumptions, 6C.3 general comments, 6C.1 irregularities, 6C.8 key changes, 6C.2 not-for-profit, 6C.6 powers, 6C.7 powers to represent membership, 6C.5 reviewing and amending memorandum and articles, 6C.11 winding up, 6C.9 registration of, 6A.1 requirements, 1.37 short form, 6A.18 status, 1.38 Asset lock articles of association, 6A.12 circumvention of introduction, 7.27 purchase of its own shares, 7.29 redemption of shares, 7.28 reduction of share capital, 7.30 concept, 7.2 directors’ remuneration, 5.11 distribution caps, 7.9 dividend cap changes to share dividend cap, 7.15 generally, 7.5 maximum aggregate dividend cap, 7.14 removal of share dividend cap, 7.19 dividends community interest companies adopting Sch 2 articles, 7.7 companies adopting Sch 3 articles, 7.8 declarations of, 7.12–7.19 declaring dividends, 7.13 exempt dividends, 7.12 meaning, 7.3 relevant companies, 7.6 tax on, 7.4 interest limits on payment of, 7.10 setting limits, 7.11 introduction, 7.1 performance-related interest cap average debt, calculation of, 7.24 generally, 7.20

405

Index Asset lock – contd performance-related interest cap – contd interest cap regulations, 7.23 performance-related debt, 7.21 scope of, 7.22 worked example, 7.25 – 7.26 registered societies, 1.31 winding up distribution to asset-locked body, 5.19 Audits regulation of community interest companies, 3.22 C Charities articles of association, 1.46, 1.48 charitable rate relief, 1.28 consideration to be given to structure of, 1.26 conversion to community interest companies English charities, 4.27 Northern Ireland charities, 4.29 Scottish charities, 4.28 conversion of community interest companies to application and accompanying documents, 4.39 application to Companies House, 4.32 application to court to cancel resolutions, 4.33–4.37 consequences of Regulator’s decision, 4.41 decision by Regulator, 4.40 generally, 4.31 notice to registrar of court application or order, 4.38 reclaim tax, 1.29 tax relief, 1.26 Civil proceedings regulation of community interest companies, 3.23 Code of conduct not-for-profit organisations, 6C.13 Communications private companies limited by guarantee, 6C.51 private companies limited by shares, 6B.49 Community activities not benefitting, 4.13 meaning of ‘section of community’, 4.15 role of CICs, 1.13 Community interest companies (CICs) demutualisation, 1.4 DTI report ‘Proposals for a Community Interest Company’, 1.5, 1.6 history, 1.3 meaning, 1.2

Company seals private companies limited by guarantee, 6C.52 private companies limited by shares, 6B.50 Conflicts of interest directors private companies limited by guarantee, 6C.28, 6C.29 private companies limited by shares, 6B.15 not-for-profit organisations, 6C.12 Constitution see also Articles of association overview, 1.37 constitutional documents pre-1 October 2009, 1.43 constitutional documents post-1 October 2009, 1.44 Conversion charity to community interest companies English charities, 4.27 Northern Ireland charities, 4.29 Scottish charities, 4.28 community interest companies to charity application and accompanying documents, 4.39 application to Companies House, 4.32 application to court to cancel resolutions, 4.33–4.37 consequences of Regulator’s decision, 4.41 decision by Regulator, 4.40 generally, 4.31 notice to registrar of court application or order, 4.38 community interest companies to registered society, 4.42 company to community interest companies application and accompanying documents, 4.25 application to court to cancel resolution, 4.24 decision by Regulator, 4.26 generally, 4.23 implementation, 4.26 notice to registrar of court application or order, 4.24 re-registration, 4.30 Corporate governance community interest companies disclosure, 3.47–3.50 fees, 3.46 generally, 3.10

406

Index D Debentures reporting requirements, 5.28 Debt average debt, calculation of, 7.24 performance-related debt, 7.21 reporting requirements, 5.28 Delegation directors’ powers private companies limited by guarantee, 6C.19 private companies limited by shares, 6B.6 Directors community interest companies appointment of, 3.24 notification to Regulator of ceasing to act, 3.25 removal of director, 3.26 private companies limited by guarantee appointment, 6C.32, 6C.33 collective decisions, 6C.21 committees, 6C.20 conflicts of interest, 6C.28, 6C.29 discretion to make further rules, 6C.31 expenses, 6C.35 general authority, 6C.17 power to delegate, 6C.19 records of decisions, 6C.30 remuneration, 6C.34 unanimous decisions, 6C.22 private companies limited by shares appointment, 6B.18, 6B.19 collective decisions, 6B.8 committees, 6B.7 conflicts of interest, 6B.15 delegation, 6B.6 discretion to make further rules, 6B.17 expenses, 6B.21 general authority, 6B.4 remuneration, 6B.20 unanimous decisions, 6B.9 Directors’ meetings private companies limited by guarantee amendments to resolutions, 6C.50 chairman, election of, 6C.36 calling, 6C.23 casting votes, 6C.27 chairing, 6C.26 participation in, 6C.24 quorum, 6C.25 private companies limited by shares calling, 6B.10 casting vote, 6B.14

Directors’ meetings – contd private companies limited by shares – contd chairing, 6B.13 participation in, 6B.11 quorum, 6B.12 records of decisions, 6B.16 Directors’ powers and duties delegation private companies limited by guarantee, 6C.19 private companies limited by shares, 6B.6 general duties of directors, 5.4 generally, 5.3 Directors’ remuneration asset lock paradox, 5.11 commercial disputes and courts, 5.14 generally, 5.5 key issues, 5.7 members actions, 5.9 recourse to challenge excessive, 5.12 private companies limited by guarantee, 6C.34 private companies limited by shares, 6B.20 reasonableness, 5.6 regulators actions, 5.9 options, 5.15 recourse to challenge excessive pay, 5.13 views on, 5.10 transparency, 5.8 Dissolution community interest companies, 3.37 not-for-profit organisations, 6C.10 Distributions caps on, 7.9 private companies limited by shares no interest on distributions, 6B.33 non-cash distributions, 6B.35 unclaimed distributions, 6B.34 waiver of distributions, 6B.36 winding-up, on, 5.17–5.18 distribution to asset-locked body, 5.19 Dividends asset locks community interest companies adopting Sch 2 articles, 7.7 companies adopting Sch 3 articles, 7.8 declarations of, 7.12–7.19 declaring dividends, 7.13 exempt dividends, 7.12 meaning, 7.3 relevant companies, 7.6 tax on, 7.4

407

Index Dividends – contd caps on changes to share dividend cap, 7.15 generally, 7.5 maximum aggregate dividend cap, 7.14 removal of share dividend cap, 7.19 private companies limited by shares appropriation of capitalised sums, 6B.37 authority to capitalise, 6B.37 payment of, 6B.32 procedure for declaring, 6B.31 reporting requirements, 5.27 E Employees provision on cessation of business private companies limited by shares, 6B.52 Excluded companies activities not benefitting the community, 1.21 background, 1.16 community interest test, 1.17, 1.23 community test, 1.20 incidental activities, 1.22 political activities, 1.17, 1.18 reasonable person test, 1.19 subsidiaries, 1.22 F Financing company’s authorised share capital, 4.44 generally, 4.43 key points, 4.49 loan capital and debentures, 4.48 ordinary shares, 4.45 preference shares, 4.46 CIC preference shares, 4.47 Formation community interest company decision on eligibility, 4.20 four eligibility tests, 4.21 implementation of decision on eligibility, 4.22 community interest public limited company, 4.19 prescribed documents, 4.16 prescribed conversion documents, 4.17 private company limited by shares or guarantee, 4.18

G General meetings private companies limited by guarantee organisation of, 6C.40–6C.44 voting at, 6C.45–6C.49 private companies limited by shares adjournment, 6B.42 amendments to resolutions, 6B.48 attendance at, 6B.38, 6B.41 chairing, 6B.40 disputes, 6B.44 errors, 6B.44 poll votes, 6B.45 quorum, 6B.39 speaking at, 6B.38, 6B.41 voting, 6B.43 Guarantees see also Private companies limited by guarantee community interest company limited by, 6A.4–6A.5 I Incorporation advantages to social enterprises, 4.11–4.15 process of, 4.6 right to incorporate, 4.7 Indemnities private companies limited by guarantee, 6C.53 private companies limited by shares, 6B.53 Industrial and provident societies business structures, 4.8 Insurance private companies limited by shares, 6B.54 Interest asset lock provisions limits on payment of, 7.10 setting limits, 7.11 performance-related interest cap average debt, calculation of, 7.24 generally, 7.20 interest cap regulations, 7.23 performance-related debt, 7.21 scope of, 7.22 worked example, 7.25–7.26 Investigations regulation of community interest companies evidence, 3.20 failure to comply, 3.19 false information, 3.21 generally, 3.17 power to require documents and information, 3.18

408

Index L Legal background Companies (Audit, Investigations and Community Enterprise) Act 2004, 2.3 Companies (Audit, Investigations and Community Enterprise) Act 2004 (Commencement) and Companies Act 1989 (Commencement No 18) Order 2004, 2.4 Community Interest Company Regulations 2005, 2.5 amendments, 2.6 SI 2009/1942, 2.7 SI 2012/2335, 2.8 SI 2014/2483, 2.9 legislative background, 2.1 legislative overview, 2.2 Legal structure limited by guarantee or shares, 1.36 Legality articles of association, 1.39, 6A.21 Limited liability partnerships business structures, 4.9–4.10 Loan capital financial companies, 4.48 M Managers community interest companies appointment of, 3.27 failure to follow regulatory requirements, 3.32 regulatory requirements, 3.31 removal, 3.32 remuneration, 3.29 reports, 3.33 security to Regulator, 3.30 terms of appointment, 3.28 Members private companies limited by guarantee liability, 6C.16 membership, 6C.38 reserve power, 6C.18 termination of membership, 6C.39 private companies limited by shares liability, 6B.3 reserve power, 6B.5 representations on winding-up, 5.20 Memorandum of association post-1 October 2009, 6A.21 pre-1 October 2009, 6A.20 Model articles disapplication of private companies limited by guarantee, 6C.15

N Names endings, 1.25 restrictions on, 1.24 Nominees private companies limited by guarantee, 6C.37 Not-for-profit organisations see also Private companies limited by guarantee articles of association boiler plate clauses, 6C.4 code of conduct, 6C.13 conflicts of interest, 6C.12 dissolution, 6C.10 drafting assumptions, 6C.3 general comments, 6C.1 irregularities, 6C.8 key changes, 6C.2 ‘not-for-profit’, 6C.6 powers, 6C.5, 6C.7 reviewing and amending memorandum and articles, 6C.11 winding up, 6C.9 structural flaws, 1.5 O Objects of company articles of association, 6A.13 alteration, 6A.15–6A.17 examples, 6A.14 Official Property Holder community interest companies, 3.12 P Partnerships business structures, 4.2 Political activities advantages of incorporation, 4.12, 4.14 Private companies limited by guarantee administrative arrangements communications to be used, 6C.51 company seals, 6C.52 indemnities, 6C.53 directors appointment, 6C.32, 6C.33 collective decisions, 6C.21 committees, 6C.20 conflicts of interest, 6C.28, 6C.29 discretion to make further rules, 6C.31 expenses, 6C.35 general authority, 6C.17 power to delegate, 6C.19 records of decisions, 6C.30 remuneration, 6C.34 unanimous decisions, 6C.22

409

Index Private companies limited by guarantee – contd directors’ meetings amendments to resolutions, 6C.50 chairman, election of, 6C.36 calling, 6C.23 casting votes, 6C.27 chairing, 6C.26 participation in, 6C.24 quorum, 6C.25 disapplication of model articles, 6C.15 formation, 4.18 general meetings organisation of, 6C.40–6C.44 voting at, 6C.45–6C.49 interpretation, 6C.14 members liability, 6C.16 membership, 6C.38 reserve power, 6C.18 termination of membership, 6C.39 nominees, appointment of, 6C.37 proxies, 6C.48, 6C.49 Private companies limited by shares administrative arrangements communications to be used, 6B.49 company seals, 6B.50 indemnities, 6B.53 inspection of accounts and other records, 6B.51 insurance, 6B.54 provision for employees on cessation of business, 6B.52 defined terms, 6B.2 directors appointment, 6B.18, 6B.19 collective decisions, 6B.8 committees, 6B.7 conflicts of interest, 6B.15 delegation, 6B.6 discretion to make further rules, 6B.17 expenses, 6B.21 general authority, 6B.4 remuneration, 6B.20 unanimous decisions, 6B.9 directors’ meetings calling, 6B.10 casting vote, 6B.14 chairing, 6B.13 participation in, 6B.11 quorum, 6B.12 records of decisions, 6B.16 dividends and distributions appropriation of capitalised sums, 6B.37 authority to capitalise, 6B.37 no interest on distributions, 6B.33

Private companies limited by shares – contd dividends and distributions – contd non-cash distributions, 6B.35 payment of, 6B.32 procedure for declaring, 6B.31 unclaimed distributions, 6B.34 waiver of distributions, 6B.36 formation, 4.18 general meetings adjournment, 6B.42 amendments to resolutions, 6B.48 attendance at, 6B.38, 6B.41 chairing, 6B.40 disputes, 6B.44 errors, 6B.44 poll votes, 6B.45 quorum, 6B.39 speaking at, 6B.38, 6B.41 voting, 6B.43 introduction, 6B.1 members’ liability, 6B.3 proxy notices content, 6B.46 delivery, 6B.47 shareholders’ reserve power, 6B.5 shares company not bound by less than absolute interests, 6B.24 fully paid up, 6B.22 power to issue different classes of shares, 6B.23 share certificates, 6B.25, 6B.26 share transfers, 6B.27 transmission of shares, 6B.28–6B.30 Proxies private companies limited by guarantee, 6C.48, 6C.49 private companies limited by shares content, 6B.46 delivery, 6B.47 Purchase of own shares asset lock provisions, 7.29 winding-up, 5.22 Q Quorum directors’ meetings private companies limited by guarantee, 6C.25 private companies limited by shares, 6B.12 general meetings, 6B.39

410

Index R Redemption of shares asset lock provisions, 7.28 winding-up, 5.22 Registered societies asset lock, 1.31 background, 1.30 Registration articles of association, 6A.1 re-registration on conversion, 4.30 Regulation of CICs Appeal Officer, appointment of, 3.11 appeals appeal process, 3.40 determination of appeal, 3.43 dismissal of appeal, 3.44 distribution of assets on a winding up, 3.39 notice of appeal, 3.41 procedure, 3.42 reasons, 3.45 time limits, 3.38 audit, 3.22 civil proceedings, 3.23 Companies (Audit, Investigations and Community Enterprise) Act 2004 appointment of Regulator, 3.2 function of Regulator, 3.2 “light touch” regulation, 3.4 regulatory approach, 3.3 regulatory principles and goals, 3.5 style of regulation, 3.6 corporate governance disclosure, 3.47–3.50 fees, 3.46 generally, 3.10 directors appointment of, 3.24 notification to Regulator of ceasing to act, 3.25 removal of director, 3.26 disclosure by public authority, 3.48 generally, 3.47 restrictions on disclosure, 3.50 to public authority, 3.49 dissolution, 3.37 investigations evidence, 3.20 failure to comply, 3.19 false information, 3.21 generally, 3.17 power to require documents and information, 3.18 legislative background, 3.1

Regulation of CICs – contd managers appointment of, 3.27 failure to follow regulatory requirements, 3.32 regulatory requirements, 3.31 removal, 3.32 remuneration, 3.29 reports, 3.33 security to Regulator, 3.30 terms of appointment, 3.28 offences, 3.51 Official Property Holder, 3.12 orders made by the Regulator, 3.52 property, 3.34 regulations, power to make, 3.53 Regulator’s approach Appeal Officer, appointment of, 3.11 appointment of, 3.2 corporate governance, 3.10 generally, 3.7 Official Property Holder, 3.12 protection of property, 3.13 reporting requirements, 3.10 staff, 3.9 terms of appointment, 3.8 striking off, 3.37 supervision by Regulator company default condition, 3.14 powers to transfer shares, 3.14 supervisory powers, 3.14 transfer of shares, 3.35 winding up petition, 3.36 Remuneration directors see Directors’ remuneration managers of community interest companies, 3.29 Reporting requirements community interest company reports, 3.10, 5.25 company reports, 5.24 debentures on which performance-related rate is payable, 5.28 debts outstanding, 5.28 dividends, 5.27 managers of community interest companies, 3.33 transfers of assets, 5.26 Re-registration conversion, on, 4.30 Resolutions amendments to private companies limited by guarantee, 6C.50 private companies limited by shares, 6B.48

411

Index Role of community interest companies ‘community’, 1.13 government proposals, 1.15 initial considerations, 1.12 need for incorporation, 1.14 not-for-profit sector, 1.11 S Share capital company’s authorised share capital, 4.44 reduction of, 7.30 winding-up, 5.22 Shares asset lock provisions purchase of its own shares, 7.29 redemption of shares, 7.28 community interest companies limited by, 6A.6–6A.8 ordinary shares, 4.45 preference shares, 4.46 CIC preference shares, 4.47 private companies limited by shares company not bound by less than absolute interests, 6B.24 fully paid up, 6B.22 power to issue different classes of shares, 6B.23 share certificates, 6B.25, 6B.26 share transfers, 6B.27 transmission of shares, 6B.28–6B.30 purchase of own shares, 7.29 redemption of, 7.28 transfer of community interest companies, 3.35 private companies limited by shares, 6B.27 Social enterprises entrepreneurs and, 1.8, 1.9 legal form of, 1.1 meaning, 1.10 Social entrepreneurship meaning, 1.9 Sole traders business structures, 4.2 Striking off community interest companies, 3.37 Structures incorporated forms, 4.5 industrial and provident societies, 4.8 introduction, 4.1 limited liability partnerships, 4.9–4.10 partnerships, 4.2 sole traders, 4.2 unincorporated forms taxation, 4.2 unincorporated associations, 4.3 VAT, 4.4

T Taxation charities charitable rate relief, 1.28 generally, 1.26 reclaim tax, 1.29 tax relief, 1.26 community interest companies annual accounts, 1.34, 1.35 Company Taxation Manual. 1.32 corporation tax, 1.33 partnerships, 4.2 sole traders, 4.2 unincorporated associations, 4.3 Transfer of assets reporting requirements, 5.26 Transfer of shares community interest companies, 3.35 private companies limited by shares, 6B.27 U Unincorporated associations tax,4.3 VAT, 4.4 V VAT unincorporated associations, 4.4 Voting directors’ meetings private companies limited by guarantee, 6C.27 private companies limited by shares, 6B.14 general meetings private companies limited by guarantee, 6C.45–6C.49 private companies limited by shares, 6B.43 W Winding up assets on, 5.16 distribution of assets on, 5.17–5.18 distribution to asset-locked body, 5.19 members’ representations, 5.20 not-for-profit organisations, 6C.9 petition for, 3.36 regulator’s directions and considerations, 5.21 redemption and purchase of shares, 5.22 reduction of share capital, 5.23

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