Are you a prospective Community Interest Company (CIC) or current CIC director looking for answers to whether your organization must have an asset lock? If so, this blog post is for you!
Overview of the Purpose of a CIC and What is an Asset Lock
A Community Interest Company (CIC) is a corporate structure that exists to benefit the community, not private shareholders like a traditional company. They are often set up around charitable initiatives and social enterprise projects, giving them a unique set of requirements in terms of allowable income and how it can be used.
An “asset lock” is one such requirement; it is essentially a way to ensure that the money generated by the CIC is used for its intended purpose and does not end up being distributed to shareholders as profit. The asset lock also includes provisions for what should happen if the company dissolves or ceases its activities so that any remaining funds are properly utilized in accordance with CIC regulations.
Benefits of Having an Asset Lock
Having an asset lock provides many benefits to Community Interest Companies (CIC).
Asset locks protect a CIC’s assets, ensuring they can only be used for the CIC’s activities. By preventing assets from being taken out of the company, it helps to simplify ownership structures and better protect members against any dilution in value that could occur if assets were transferred elsewhere. An asset lock also prevents creditors of the company from having access to company assets. Having an asset lock prevents businesses from using their assets as security on external loans unless approved by regulator supervision.
Types of Assets That May Need to be Locked
Asset locks can be an important tool in helping to protect investments and assets of a Community Interest Company (CIC).
Assets that are often locked include tangible items like property, cash, stocks, bonds and other securities. Intangible investments such as intellectual property, patents and trademarks should also be secured.
Steps should be taken to ensure that all key assets of the CIC are both managed and locked properly.
Regulations Around Asset Locking in a CIC
A CIC’s articles must have certain statutory provisions in order to:
- Prevent the CIC from coming under the control of people or organizations who are not members.
- Lock in the assets for the benefit of the community it served.
In contrast to “regular” organizations, the “asset lock” is governed by law, and the statutory provisions cannot be changed in its constitution. This distinguishes it from other businesses and stops demutualization and the distribution of windfall profits to its directors and members.
How is a CIC and the asset lock regulated?
The following obligations must be met by a CIC besides those placed on a regular corporation in order for it to maintain its CIC status:
- To show that the company’s operations are being carried out for the benefit of the community it was founded to serve in order to fulfill and maintain a community interest test.
- To adopt specific legislative provisions in its constitution, such as one that locks in assets for the benefit of the community.
- To send a CIC report together with its annual accounts.
What is the community interest test?
Section 35(1) of the Companies (Audit, Investigations and Community Enterprise) Act
2004 states: “A company satisfies the community interest test if a reasonable person might
consider that its activities are being carried on for the benefit of the community”.
In short, a CIC must show that they are using their assets for the company’s stated purpose, not to benefit any individuals or groups.
Can the assets be used for collateral?
The short answer is yes. If the venture for which the assets were put up as collateral fails, the assets can be liquidated to meet the control needs of the obligation.
How are profits invested in a CIC?
Since the CIC’s primary function is to fit the community, the profits must be used for that purpose. Profits need to apply to the community function.
Effects of an asset lock
The effect of an asset lock is that all the CIC’s assets will be used for the original and stated purpose. The only times that assets can be liquidated or moved is if a) they are used to discharge contractual obligations of a debt or b) the CIC is dissolved, then the assets are moved to another CIC or charity that will use those assets for a similar purpose.
If you have questions about how asset locks for CICs work, please contact us at KG Accountants. We’re happy to answer your questions.