Conversion to CIC Query

[numbersrule]

One of our Clients is considering converting their Private Limited by Shares Company to a NFP CIC.

Looking at Form CIC37 'Application to convert a company to a CIC', it seems the process involves changing the name of the company.

Is it normal for a CIC not to use the Limited word even though it would be Limited by Guarantee and would it be acceptable to drop the Limited as the only change for the required CIC37 name change?

Thanks in advance for any advice which would be greatly appreciated.

 

[eteb3]

Is it normal for a CIC not to use the Limited word...

By law, the name of a CIC cannot end with (or include anywhere, I think) "Ltd/Limited". It must end with "CIC/C.I.C./Community Interest Company".

I can dig up the regs/Act if you need, lmk.

...even though it would be Limited by Guarantee

This is your bigger difficulty: an ordinary company limited by shares can only become a CIC limited by shares (yes, they exist); an ordinary company limited by guarantee can only become a CIC limited by guarantee.

Are they sure they want to convert to CLG? If so, why? And why do they want to become CIC?
There is one other option that might suit them if you let us know the reason.

 

[numbersrule]

By law, the name of a CIC cannot end with (or include anywhere, I think) "Ltd/Limited". It must end with "CIC/C.I.C./Community Interest Company".

I can dig up the regs/Act if you need, lmk.


This is your bigger difficulty: an ordinary company limited by shares can only become a CIC limited by shares (yes, they exist); an ordinary company limited by guarantee can only become a CIC limited by guarantee.

Are they sure they want to convert to CLG? If so, why? And why do they want to become CIC?
There is one other option that might suit them if you let us know the reason.

They were under the impression that a CIC had to be a CLG.

Reason for CIC is because it is more appropriate for the aims of the company as it clearly is dedicated to benefitting a community or in fact communities as opposed to making a profit for shareholders. In addition they believe there may be advantages in CIC status when seeking funding / investment.

 

[eteb3]

They were under the impression that a CIC had to be a CLG.

Most people are!

Reason for CIC is because it is more appropriate for the aims of the company as it clearly is dedicated to benefitting a community or in fact communities as opposed to making a profit for shareholders.

Without knowing any more than you've said, I would think "CIC" at the end of the name will cover that, whether it's a CIC limited by shares or by guarantee.

In addition they believe there may be advantages in CIC status when seeking funding / investment.

What form is this "funding / investment" expected to take?

• If loans, including fancy performance-related debentures, it will make no odds - obviously.
• If equity investment then a Schedule 3 CIC would allow for 20pc of profits to be distributed as dividend on preference shares (or indeed any shares).
• If grants, a Schedule 2 CIC would be more appealing to funders who know their onions: no dividend is permitted, unless the shares are held by an "asset-locked body" (CIC, charity, or CBS). I think share buy-back and capital reduction would still be possible? You're the accountant, but I think that would qualify as "transfer of assets for full consideration", which is the primary test for CICs.

Note that the model articles for CICs can be varied extensively while still meeting the statutory requirements: only the terms in red need to be retained.

If there are (or could be) at least three shareholders, and owners are happy to accept one-member, one-vote, then conversion to a Community Benefit Society could be suitable. These are less well known, so get less funder recognition, but they are subject to an asset lock while still able to distribute some "profits" as interest on shares (yes, you read that right; and the distribution is before tax, since it's a cost of capital).

HTH

 

[eteb3]

PS if your client wants further advice on the options, I can highly recommend Charlie Cattell, "social economy consultant": please let him know I sent you.

Home | Charlie Cattell, Social Economy Consultancy

Charlie Cattell provides services for: voluntary and community organisations, charities, social enterprise, mutuals, co-operatives and the not-for-profit sector

www.charliecattell.net

 

[numbersrule]

Thanks eteb3
Thank you for taking the time to describe all that.
Very helpful.
The Grant route may be the most appropriate because a return on investment probably has a distant horizon.

 

[eteb3]

You're welcome. Always good to refresh ones memory.

In doing so it looks to me like a shares CIC can switch from being Schedule 3 to Schedule 2 as it pleases: regs say it must include provisions in its articles "either" as set out in Sch 2 "or" in Sch 3, with no exclusion on changing the articles. Would be interested to hear anyone else's read on that.

Be aware that a Sch 2 CIC can't distribute assets to shareholders even on a winding up. So swapping shares for debt, or reducing capital before conversion, might be a good idea.

 

[Paul Kelly ICHYB]

Start a separate CIC. Having a ltd co up your sleeve can sometimes be beneficial to the CIC.

 

[eteb3]

Having a ltd co up your sleeve can sometimes be beneficial to the CIC.

How?!

(It still may be sensible to start afresh for the CIC - I’ve assumed OP has been through that debate - but I can’t see how the old entity can help the new one)

 

[Paul Kelly ICHYB]

It is not uncommon for CIC's to have separate trading businesses.

 

[eteb3]

I guess so, just as any other company might run a group structure - though even then I wonder why the trading company wouldn’t also be a CIC, assuming you mean a wholly-owned subsidiary.

The structure is more or less required for charities, but the whole point of CIC legislation was to create an entity that was free of the restrictions charities endure - by law charities can’t allow their general funds to be risked in trade, whereas afaik a CIC has no such restriction. Or have I missed something?