When forming a CIC, there is a guideline that a CIC cannot transfer its assets except under special circumstances. It’s called an asset lock.
Asset lock is one of the key features of a CIC. It’s this concept that governs how a CIC can use or transfer its assets.
The Basic Criteria for Transfer of Assets
Because a CIC is a special type of company, there are rules that govern its conduct. While these rules are less strict than charities, there are some that prevent a CIC from operating in a free market manner.
A CIC can retain its assets for use in its founding purpose, the community propose that was set forth in its constitution. In other words, the most obvious use of all CIC assets is to do the job it was created to do.
If the CIC wishes to transfer assets, the transfer is covered by certain criteria. It must meet one of the following requirements:
- The transfer has to be for the full fair market value of the assets. The CIC then must retain that value. In other words, a CIC can sell an asset, but only for a fair price and it must keep the funds for its community activity.
- The transfer can be to an asset-locked body that was set forth in the Article of Association. Note that this means that one has to plan ahead to make this type of transfer. The founders would have defined the asset-locked body at the very beginning of the CIC.
- The Regulator can grant consent to transfer to another asset locked body. If there was no provision made for the transfer of the asset to a certain asset locked body, the CIC would need to appeal to the Registrar and get permission to make the transfer.
- The transfer is made for the benefit of the community. This is a big more vague, but should be used as a reason for a transfer of assets very carefully. There must be a clear community benefit to move forward with a transfer.
Any transfer of assets from a CIC to any other body must meet one of these criteria to be valid.
What are asset locked bodies?
This is an odd term: asset locked bodies. In reality, it’s a simple concept. These are organisations that have been founded for the benefit of the larger community. In other words, a for-profit company can transfer its assets anytime it wants to, to any other organisations, for any reason. An asset locked body, because it’s given privileges under law that for-profit organisations don’t get, must be prevented from simply releasing assets for just any reason to just any organisation or individual.
The following are asset locked bodies:
- Community interest companies (CICs)
- Charitable Incorporated Organisations (CIO)
- A permitted registered society
- A body that’s established outside the UK that is same as the above
At the foundation of the CIC, the Articles of Association can nominate more than one asset locked body to receive the CIC’s assets.
The law allows for the nomination of asset locked bodies outside the UK. The CIC needs to provide proof that the entity in question is similar to the above designations, a charity, a CIC, or other allowed asset locked body.
Assets as collateral
Because a CIC starts life as a limited company, it can conduct business that way. That means that it can use its assets a collateral for doing business. In fact, the law is written to encourage a CIC to operate normally in almost every respect, except the distribution of profits.
A CIC can use its assets as collateral for a loan or other debt. If the assets are used for a debt and the CIC fails, the assets can be used to meet its obligations. The assets can either be transferred as a whole or sold to meet a debt-obligation.
At the End – When a CIC Fails
If a CIC fails, the organisation’s assets will be transferred to one of the nominated asset locked bodies. That body needs to have been nominated in the Articles of Association.
All of the CIC’s residual assets, after the payment of debts, will be transferred to the nominated asset locked body.
The purpose of allowing the transfer is that the law was written to allow the assets to continue to benefit the community.
One of the things that’s not written in the law is that it’s not necessary to notify the nominated asset locked body that they are in your articles of association, but it makes sense to let them know. It might get a bit confusing if someone shows up to transfer a bunch of assets from your organisation unannounced and unexpected.
The importance of legal advice
The decision to form a community interest company should be taken very seriously, because once it is set up, the only way out is to dissolve the company and cease to exist or convert the CIC into a charity. All assets will need to be passed on to a nominated charitable organisation. It is therefore strongly recommended that an individual gets legal advice before forming a CIC.
At KG Accountants , we provide a cost-effective, high value solution to meet all of your CIC needs. if you need to register a new CIC then look no further!
All our CIC fees are fixed.
By giving you a fixed and competitive price, we can take the worry away when it comes to running your CIC; allowing you to concentrate on running your organisation.
Call us on: 0207 953 8913