As a community interest company (CIC) leader, it’s essential to understand the concept of the asset-locked body.
An asset-locked body is an entity that has at least two shareholders—one with and another without voting rights. The CLA’s assets are “locked” in by a trust deed. As a result, the organisers cannot distribute funds among the shareholders until meeting specific conditions.
As its name implies, the purpose of a CIC is to generate social and environmental benefit. It must also remain financially sustainable.
As such, they’re limited in what assets they can own. The asset lock protects the community as well as investors. It also ensures sustainability by limiting how much money organisers can withdraw from company funds in any given year.
For a comprehensive guide to understanding the CIC asset lock, keep reading.
What Is an Asset-Locked Body?
The asset lock is a vital feature of CICs. If you’re establishing a community interest company, it’s essential to understand the concept before setting up your organisation.
An asset lock has permanent and long-term consequences. With this in mind, there are rules that you must understand about how CICs can use and transfer assets.
In general, CICs must retain assets to benefit the community and for the purpose for which it was formed. Alternatively, CICs can transfer assets out of the organisation. However, the organisation must satisfy several requirements to do so—more on those requirements in a moment.
There are other forms of organisations that you can consider asset-locked bodies. These organisations include:
• Charitable incorporated organisations (CIOs)
• Permitted registered societies
• Equivalent organisations outside the UK
You can nominate another asset-locked body to receive the proceeds of your organisation in the event it ends its activities. Also, it’s possible to select more than one asset-locked body. However, you cannot appoint the director of the organisation to receive proceeds from this event.
Restrictions on the Transfer of Assets
An asset lock ensures that the assets of a community interest company benefit the community. These assets include any profits or surpluses generated by organisational activity.
When forming a CIC, it’s vital to consider if you want to specify another asset-locked body as the recipient of your CIC assets. You’ll need to include this information in your CIC’s Articles.
This nomination is vital if the CIC gets dissolved while in possession of assets. Without a nomination, the Regulator will determine the fate of any remaining CIC assets.
The Regulator will also approve any transfers for less than full consideration. They must also agree to a transfer to another asset-locked body not listed in your CIC’s Articles.
It’s important to remember that cash is typically a CIC’s main asset. Under normal circumstances, CICs must transfer assets at less than market value. However, this term has a broad interpretation.
In general, however, CICs cannot transfer disproportionately high funds to staff members and directors in relation to their abilities and services. Likewise, CICs cannot transfer funds disproportionately to non-asset-locked bodies.
Requirement for Transfer of Assets
An understanding of the community interest test may help to understand the requirements for the transfer of CIC assets. With this test, the activities of the CIC must benefit the community more than it benefits employees or directors.
Like for-profit organisations, however, community interest companies must fulfil their contractual obligations. With this in mind, it’s important not to see the asset lock as a barrier to doing business or meeting financial obligations. The asset lock ensures that CICS operate under normal trading conditions.
Again, CICs must transfer funds with the intent of benefiting the community. Furthermore, it must do so at full market value and not above. Also, the CIC must retain the value of the transferred asset.
When needed, organisers can also transfer assets to another asset-locked body. However, as previously mentioned, this organisation must already have representation in the CIC’s Articles of Association. Furthermore, organisers must include these provisions in the CIC’s Articles.
CIC organisers can also enact more stringent requirements. However, they must also list these requirements along with the basic CIC provisions.
Restrictions on the Return of Assets to Members
There are also restrictions on the return of assets to CIC members. For instance, CICs cannot return assets to members unless those members are also asset-locked bodies.
There are few exceptions to this rule, except for the payment of dividends. Another exception is the return of paid-up capital on liquidation of the CIC.
With this in mind, organisers must also comply with dividend distribution rules. CIC dividend transfer rules strike a balance between encouraging investment in CICs and making sure that most of the profits go to the benefit of the community.
In general, CICs must invest 65% of their profit back into the community. This practice ensures that dividends are not disproportionate to the amount invested as well as the profits made by the company.
Getting Help with CIC Asset Lock Compliance
Now you know a bit more about the CIC asset lock. As a director, it’s your responsibility to comply with the guidelines of an asset lock organisation.
You could seek help from the Regulator in this regard. However, that assistance doesn’t constitute professional advice. In the event of a future issue, you’d leave your organisation open to liability.
KG Accountants is here to help. We can help you ensure that your organisation remains in compliance. We can also help you to better reach your fundraising objectives.
Please feel free to contact KG Accountants at +0207 953 8913 or contact us online for a free initial consultation.