Grand Committee Report of 25 March 2004

Official Report of the Grand Committee on the Companies (Audit, Investigations and Community Enterprise) Bill [H.L.]
(Fourth Day)
Thursday, 25 March 2004.
The Committee met at a quarter past three of the clock.
[The Deputy Chairman of Committees (Baroness Turner of Camden) in the Chair.]
Clause 23 [Community interest companies]:
Lord Phillips of Sudbury moved Amendment No. 100:
Page 26, line 18, at end insert "which shall be subject to all relevant provisions of the Companies Acts as affected by the provisions of this enactment"
The noble Lord said: First, I welcome this part of the Bill, which is, in effect, a separate Bill, into the debate, and I hope that on these Benches we shall be able to deal with the amendments with practicality and dispatch.
In this probing amendment, which I hope is helpful, I simply seek to put in the Bill at the beginning of the community interest companies section the statement that community interest companies—or CICs, if I may call them that—are part of the Companies Act structure. That will be of immense utility to the many people who will struggle through this legislation, when it is enacted. Given that we are referring to community interest companies, many lay people will try to make head or tail of it. I accept that to a parliamentary draftsman these are redundant words, but I believe that occasionally friendliness towards the potential consumer is not a bad thing. I beg to move.
The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville): It is difficult to know how to proceed, when the person who proposes an amendment admits at the start that the words are redundant. However, I believe that I can deal with it with practicality and dispatch.
We do not believe that the amendment is necessary, as it would do something which the Bill already does. Subsection (1) provides that the CIC is to be a new type of company. Clause 60 provides that the words used in this part of the Bill will have the same meaning as they have in the Companies Act 1985. That means that the word "company" in this clause means a company registered under the Companies Act 1985 or an earlier Companies Act. As a result, the Companies Act 1985 will apply to all CICs, as modified by the provisions of the Bill.
That reflects the policy stated in the Explanatory Notes on the Bill that CICs are to be subject to the general framework of company law. They will be
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registered as companies with the Registrar of Companies and will be subject to the usual regulatory constraints and powers that are associated with company status. The opportunity which the CIC will provide to use the well established and familiar framework of company law, combined with special features of the CIC, such as a statutory asset lock, is one of the major attractions of this new legal vehicle.
I agree that that does not totally deal with the noble Lord's point, which I think is one of presentation, but I believe that that is best taken care of in Explanatory Notes and other documents rather than the law itself.
Lord Glentoran: Having heard the noble Lord move the amendment and the Minister reply to it, it may be worth my while to make a general point about our approach to the Bill in this Grand Committee stage. I found the Bill far from straightforward and easy to understand, and I found it short on detail. The aim of most of our amendments will be to elicit clarity about the Government's thinking and to attempt to have more of the Bill clearly defined, either in the Bill, or, at least, in the schedules to it.
As I understand the Government's purpose in the Bill, the CIC is for people who are interested in community work and in doing good in the community. It is not for massive corporations which have bags of lawyers, company secretaries and goodness knows what else in a large organisation. This type of company needs to be understood by any group of people in a community who wish to form a community interest company. As I read the Bill at present, that is not the case. The Bill has schedules, regulations and schedules to the regulations. Some of the regulations are not there, and there are regulations about how people may do this or do that, and so on. The wording is far from clear or complete.
It will certainly be our objective to ensure that, by the time we finish with this part of the Bill, it will be in such a shape that the people to whom I have just referred who might want to form a CIC will be able to take something off the shelf, read it, perhaps obtain a little help from someone who knows about setting up a company and go ahead with it. If throughout the Bill I sound adverse, knocking or disapproving, it is not of the concept but of the detail in the small print.
Lord Phillips of Sudbury: I am grateful for the Minister's comments. None the less, I would ask him to give a second thought to this point. There is no difference between us as to effect of the words. At the end of his remarks, he said that people will have access to the Explanatory Notes and the Bill as a whole, and later in the Bill they will find reference to the Companies Act framework. That is true, except that in practical terms people will not have access to the Explanatory Notes or much else. I simply suggest that he keeps an open mind about bringing into Clause 23 the reference which comes later in the Bill, so that there is a convenient reference there right at the start of the Bill to make life easier. However, on that basis I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
The Deputy Chairman of Committees (Baroness Turner of Camden): I have to inform the Committee that if Amendment No. 101 is agreed to I cannot call Amendment No. 102 because of pre-emption.
Lord Phillips of Sudbury moved Amendment No. 101:
Page 26, line 25, leave out from "company" to end of line 29 and insert "may also be a charity"
The noble Lord said: This is the only amendment on which I feel it necessary to speak at any length. It is a point which I covered in my speech at Second Reading and, indeed, others referred to it. There has been quite a bit of consultation in the voluntary sector since Second Reading. Certainly, all the feedback of which I am aware is in favour of the amendment or of something like it.
If the amendment is accepted by the Government, it will mean that subsection (3) reads:
"A community interest company may also be a charity".
Very briefly, the reasons for the amendment and, I maintain, its wisdom, are, first, that it would allow what would be an eighth choice for charities of the best format. There has to be a strong reason for denying them that choice. Secondly, there has to be a powerful reason to abandon the age-old tradition of charity law in this country, where charity is judged by objects not by legal form.
I have discussed this with the two Law Lords who probably have the most experience of charities; that is, the noble and learned Lords, Lord Browne-Wilkinson and Lord Hoffmann. They both support the point and think that it is not a trivial one. The third point is that the argument that there may be confusion if CICs can also register as charities seems to me to be not only unproven but unsupported by the status quo, which is that there are these existing seven types, any one of which can be a charity. Indeed, there is no legal form that cannot be a charity. There can even be an oral charity. There is no confusion. For example, a company limited by shares which is also a charity does not cause any confusion, neither does a company limited by guarantee, and so forth.
The next point I make is that organisations which have large memberships, regional structures and/or large scale activities are unlikely to choose the proposed new corporate charity, which, as we understand it and as the Minister confirmed in a letter he kindly wrote me, is to be introduced in the forthcoming charities Bill. The proposed new corporate animal in the charities Bill is to be a light and easy structure, precisely so that charities without much, if any, professional support, can readily use the same. That is the point of the new "animal", if I can call it that.
Lawyers and accountants are very familiar with Companies Act entities and advise their business clientele on day-to-day issues relating to that type of corporate status. That familiarity will feed over into their advice to CICs, if they can be corporate charities
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as well as CICs. That, in turn, will lead to quicker, cheaper and more assured advice that would be much more readily available. If the amendment is carried, the sort of questions that sometimes crop up vis-à-vis the purely Companies Act aspect of running a corporate charity will be within the purview and ability of a non-charity law solicitor to advise upon.
At present, the big and complex charities have to select between a company limited by shares and a company limited by guarantee. If the CIC was the third option within the Companies Act framework, we would advise our clients—I have talked to many solicitors and to the Charity Law Association, which has the same view—to use the CIC format. That is because it is specifically for community benefit. It is a natural fit with charitable status, unlike the company limited by shares and unlike, to a lesser extent, the company limited by guarantee. It will mean that if a CIC is also a charity there will be extra constraints on its constitution and functioning, for example, prohibiting dividends being paid to members or prohibiting board members being remunerated without the express consent of the Charity Commissioners.
Grant-giving charities will find life much easier if CICs can register as charities because they will then have no inhibitions in being able to make grants to them. I believe that the Minister has received a letter from Nigel Siederer, dated 5 February, which he wrote on behalf of the Community Development Finance Association and the Association of Charitable Foundations, making this point very strongly, and another such letter directly from the Community Development Finance Association.
Making this change will considerably simplify and shorten the Bill. I have not made all the consequential amendments that would flow right through the Bill and clutter up Committee Stage because they will only be relevant if this amendment is accepted by the Government or if we have to fight it through at the next stage.
This is an issue that seems to have crept under the wire in the earlier consultation that was carried out by the Department of Trade and Industry. Although a few people did refer to it, it was not one of the proposals on which comment was invited—I refer to pages 24 and 25 of the DTI consultation paper of March of last year. It also escaped the Charity Law Association when it first looked at the Bill. It has now reconsidered and sent a memorandum to the Minister on 30 January, broadly but firmly supporting the point. I am reliably informed that the Social Enterprise Coalition, which receives significant government funding and is comprised of non-profit bodies of all kind, from co-ops to charities, also favours the option that this amendment will give. One example of bodies that would favour CIC status for their charitable spin-offs is local authorities. Over 100 local authorities have already hived off their leisure facilities into freestanding charities, which are currently either industrial and provident societies or companies limited by guarantee. But this is a much more appropriate format.
Finally, it would surely be bizarre if an entity that, but for Clause 23, would have to register as a charity cannot do so but can, in its publicity, go on saying that

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it has charitable objects. For all those reasons, I recommend this amendment to the Committee. I beg to move.
3.30 p.m.
Lord Glentoran: I support Amendment No. 101 in the name of the noble Lord, Lord Phillips. I wish to speak also to Amendment No. 102, which stands in my name, and to discuss the inclusion of Clauses 36, 37, 51 and 52.
I shall not embark at the moment on a general debate concerning our thoughts on CICs, as that will form the basis of my comments when speaking to the Question whether Clause 23 shall stand part of the Bill. For now, I wish to focus on one particular aspect of Clause 23 and the proposals for CICs; namely, that they should be prohibited from having charitable status. These amendments are put forward to probe what I see as a fundamental element of the new CICs.
As the noble Lord, Lord Phillips, has already pointed out, it is something of an anomaly for CICs to be denied charitable status. That is particularly so when subsection (3) of Clause 23 reads:
"A community interest company established for charitable purposes—
(a) is to be treated as not being a charity".
That is almost a paradoxical statement.
[The Sitting was suspended for a Division in the House from 3.31 p.m. to 3.40 p.m.]
Lord Glentoran: My Lords, I was referring to subsection (3), which says:
"A community interest company established for charitable purposes … is to be treated as not being a charity".
That is almost a paradoxical statement. We know that, under the current definition of charitable status, an organisation must fulfil two conditions to be charitable. It must have purposes that are recognised as exclusively charitable, and it must be established for the public benefit. A CIC, due to its community interest tests, as defined in regulations, must be able to show that the activities that it carries out are, as Clause 32(4) has it,
"for the benefit of the community".
Would that not be near enough in definition to the "public benefit" of charity law, which is enshrined in case law? If so, why should a CIC with charitable purposes as envisaged under Clause 23(3)(a) not be able to apply for charitable status? The situation appears nonsensical.
In paragraph 15.14 of the report on the public consultation, the Government conclude:
"It has been agreed with the Charity Commission and the Attorney General that where a CIC's objects are entirely charitable, it should nonetheless be deemed not to be a charity for legal purposes".
We are full of contradictions. I am not convinced by the arguments behind the decision and would welcome clarification from the Minister. Why not allow a CIC to choose whether it wishes, in addition, to have charitable status, which would mean that it had to abide by the added regulations of charity law? Why
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should such a company have to adopt the greater flexibility of being a CIC but bypass the tax breaks that charitable status brings? That point was made clearly in the sound argument advanced by the noble Lord. Lord Phillips of Sudbury, at Second Reading:
"This is the first time in English history that a body established for exclusively charitable purposes, with a constitution entirely in accordance with the requirements of charity law and which operates exclusively as a charity, is to be prohibited from registering as such".—[Official Report, 8/1/04; col. 276]
I turn to another point. I am concerned that, if the two are to be kept as separate entities and a company can be either a charity or a CIC, there will not be sufficient demands for a company to disregard the obvious benefits in tax breaks that come with charitable status in favour of forming a CIC. On page 12 of the government consultation document proposing CICs, it is made clear that,
"Whatever their legal form—company, IPS or unincorporated—social enterprises with exclusively charitable objects and which cannot distribute their assets to their members will have charitable status".
Why then would a CIC, which might be a company limited by guarantee and might not intend to have a share capital, choose CIC over charitable status? I revert to the previous argument: why, if it wanted to set up as a CIC and had no intention of distributing assets, should it be denied charitable status?
The Government make an attempt to answer those questions in their consultation document. Paragraph 11, on page 13, states:
"The CIC is an alternative to charitable status. If an enterprise has charitable objects but wishes to become a CIC, it will forego the benefits and obligations of charitable status. Both options will provide a lock on purposes, assets and profits, with regulatory supervision, but CICs will not be eligible for the tax relief available to charities. In choosing between charitable status and becoming a CIC, enterprises will weigh the relative benefits of charitable tax status and regulation on the one hand, and the flexibility of the CIC on the other".
I am not sure how, in the case of a company limited by guarantee which does not intend to trade shares, the CIC would seem a more beneficial model than the charitable status. What added flexibilities would induce a company to choose CIC status?
In the Explanatory Notes to the draft regulations under Regulation 9, it states:
"A CIC may wish to take advantage of the provision [to amend the provision in its memorandum and articles] if it wishes to establish itself with wholly charitable purposes, since the ability to transfer assets to another CIC would not necessarily be consistent with charitable purposes".
All the more reason, I would argue, to allow CICs to have charitable purposes if they so choose.
I have one further point, which deals with changing status between charity and CIC. When a company is setting up, it is faced with a range of models. We are aware that we are expecting an overhaul of charity law, including the setting up of a new form of incorporation for charities—the charitable incorporated organisation. There has also been talk of the reform of industrial and provident societies. With little to differentiate between these various models, companies or enterprises may well want to change status. I am not convinced that the

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current proposals in the Bill make such a change in status easy—I think it will make it difficult. I fear that the process will be costly, administratively time-consuming and overly bureaucratic.
I fail to see where the Government are coming from in denying charitable status to CICs. I beg to move.
3.45 p.m.
Lord Sainsbury of Turville: Both these amendments oppose the policy that CICs which have charitable purposes should not be treated as charities. The various clause stand part debates relate to clauses which enable conversion from CIC to charity and vice versa. Clauses 36 and 37 would be redundant if either of the amendments were to succeed, but a modified version of Clauses 51 and 52 would still be necessary if a charitable CIC wanted to drop its CIC status.
The noble Lord, Lord Phillips of Sudbury, raised the issue of CICs and charitable status on Second Reading. Since then, he and I have corresponded and met to discuss the matter. I and my colleagues have considered very carefully the arguments that he has raised, but we have concluded that the policy expressed in the Bill is the right one. This is a very important issue and I will address the main arguments that the noble Lord, Lord Phillips, has raised in a moment. First, however, I should restate the reasons why we have adopted this policy and why we think, on reflection, that it is right to stick to it.
In a nutshell, the provision on CICs and charitable status in Clause 23 is intended to ensure that there will be a clear distinction between this new type of company on the one hand, and charities on the other. I should emphasise that the CIC is not designed for use by charities, and it is not a part of the revision of the charity law which our colleagues in the Home Office are preparing. However, it is part of the same overall process of modernising the legal environment for the voluntary and social enterprise sectors. It will certainly not remove any of the existing options for charities, which will of course be updated and improved in the forthcoming draft charities Bill.
The key point here is that the CIC has been designed as an alternative to charitable status. We expect that CICs will wish to use the freedom of company law to pursue a wide variety of purposes, some of which may be charitable, while others will not. CICs will certainly wish to trade and to behave as enterprises, in a way that is difficult for charities. They will have the freedom to pay their directors and to change the nature of their activities, subject to the requirements of this part of the Bill.
As we made clear in the consultation paper published last year, the Government intend organisations with charitable objects, which want to operate for the benefit of the community and with an asset lock, to have a new choice. They may adopt charitable status, which brings with it significant benefits, including favourable tax treatment, or they may opt to be a CIC, and so forego the benefits but also the obligations of charitable status. In practice, we believe that the large majority will opt to
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be charities, not least because of the financial benefits. But some may well find CIC status more appropriate to the way in which they want to operate—for instance, if they want to trade freely, or want to be able to change the way in which they benefit the community in future.
The consultation indicated that a clear distinction between CICs and charities was important. Indeed, there were some comments that the distinction between the two needed to be as firm as possible, to avoid any risk of inadvertently confusing the public understanding of what "charity" means. In that context, it is I hope clear why Clauses 36 and 37, and also Clauses 51 and 52, are needed. The last two permit the conversion of a CIC into a charity, under controlled conditions. We think it is quite possible that some organisations that begin life as CICs may, in time, find it desirable to become a charity instead. For instance, they may find that their activities fit entirely within the sphere of charity, and that the restrictions which charitable status imposes on their freedom to act commercially—to trade, or to pay their directors—are not a problem for them. In such cases, they will probably find it financially beneficial to become a charity.
It may be that far fewer organisations will consider a conversion the other way, from charity to CIC. The benefits of a move to a more lightly regulated form are likely to be outweighed by the requirement that their assets, at the time of conversion, will remain subject to charity regulation. Nonetheless, Clause 36 makes conversion possible should it be desired. Scottish charities are in any case presently unable to lose their charitable status, hence the need for special provision in Clause 37.
Let me return to the main issue. As I said just now, we have thought carefully about the arguments made by the noble Lord, Lord Phillips, and about their practical implications. We fully understand the view that charity should be judged by objects and activities, rather than legal form. But we believe that CICs will have only a limited impact on that principle and that there are good practical arguments for modifying the principle in this case. We have concluded that a change of policy, to allow CICs to have charitable status, would not be of benefit to the charitable sector. Nor would it carry any benefit for social enterprises which are not charitable, who are the intended users of the CIC. However, it could adversely affect the value of the CIC to that latter group. It would also be likely to raise increased concerns about confusion between CICs and charities.
That seems to me the nub of the argument—that in practice it is very difficult to see what the advantages of the amendment would be to charities. They have perfectly good forms in which to do what is needed, and it would require quite a distortion to the CIC form to make it charitable. Against that, one has to weigh the unpredictable, which is where confusion might come in. For those charities that wish to use the company form to incorporate—and the noble Lord, Lord Phillips, has said that there are many charities which welcome the certainty of company law—the CIC will offer no practical advantage over existing

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forms of company. The fact that it offers a statutory asset lock backed up by regulation will be of no value to charities, because charitable status already provides that.
The only practical difference that being a CIC would make is the new "badge" or "brand" of having the name CIC. But at the outset, that badge will of course be less established than, and in some important respects quite different from, the charity brand. I understand that there may be some charities, working in fields such as the arts or education, that do not feel that being a charity is their defining characteristic. Such organisations may in principle find some attraction in using the CIC name. However, we and the Home Office believe strongly that any change in the way in which such charities incorporate and describe themselves needs to be considered in the wider context of the forthcoming revisions to charity law.
The point was made that larger charities would want to be companies, so would not use the forthcoming charitable incorporated organisation, and that CIC was a better option for charities than normal companies. Developments in the legal form of charities are a matter for the forthcoming charities Bill, but I understand that the Home Office intends the new charitable incorporate organisation to be a suitable vehicle for all types of charity, not only small organisations with limited resources.
In practice, of course, a charity that wanted to use CIC status would face the prospect of meeting three new sets of requirements: first, the reporting and accounting requirements of being a company; secondly, the requirements of CIC status; and, finally, the charity regulation regime.
The CIC proposals are designed to avoid unnecessary or overlapping regulation. But surely all these requirements, coupled with a lack of practical benefit to a charity from being a CIC, will deter any charity that might find the CIC brand of interest.
The question was raised of local authorities which have set up charities to look after their leisure facilities. It is difficult to see what value such an organisation would get by the additional requirements that CIC status would bring. So, if we are talking about this from a pragmatic point of view, it is very difficult to see what benefit would come.
Set against the very limited benefits of a change of policy, we think there are clear risks. In particular, allowing CICs to be charitable would inevitably reduce the distinctiveness of this new vehicle as a clear new alternative for those who wish to operate in a commercial and enterprising way in order to benefit the community.
Finally, the noble Lord, Lord Phillips, raised the question of the fundamental principle that charitable status is determined by the purpose not the legal form, and said that to change that was unacceptable. While it may be unusual for legislation to prevent an organisation with charitable purposes being a charity, it is not unique. For example, Section 23 of the School Standards and Framework Act 1998 provides that the governing body of a community or community special
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school shall not be a charity. It also provides that the governing bodies of certain other types of school shall be charities even if they would not otherwise have been charitable.
So one again has the situation of very limited benefits for a change of policy and we think that there are clear risks. For all those reasons we cannot accept the amendment and would therefore ask the noble Lord to withdraw it.
Lord Phillips of Sudbury: I am grateful for the Minister's detailed rebuttal of the arguments put forward by the noble Lord, Lord Glentoran, and myself on this. In the politest way I have to say that they do not persuade me individually or collectively. As far as I am aware, the only representations that have been made since the Bill entered the House have been all one way. Although I accept that the number of charities wanting to adopt CIC status may be relatively small, they should not be denied that prospect. Although the Minister says that the benefits appear to be modest—I do not think that was his word, but it was the equivalent—why should not they have them.
I do not believe that the confusion argument is made. I do not think there will be any loss of distinctive status for CICs, not least because a charity that is also a CIC will go under the badge of charity, not CIC. It is the charitable status that will be the dominant and public face of any charity which adopts a CIC format.
I think that we may need to return to this issue at the next stage of the Bill.
4 p.m.
Lord Glentoran: I should like to pick up on one or two points the Minister made. First, established charities becoming CICs may have difficulties. I can see no difficulty with new companies on setting up becoming charities. I did not find any strength to the noble Lord's argument about choice, which I mentioned as part of my argument. Why not allow the management or whoever the promoters are of a CIC to have the choice whether they want to have charitable status?
I shall digress for a moment with personal experience. I am not an accountant or a lawyer, but I have had a significant amount of experience with companies that might have been CICs, had they been around—particularly those associated with the Millennium Commission. One of the positive things that I see about a CIC—perhaps it is the only positive thing, but it is certainly one of them—is the fact that there is a regulator. Those who put funds into a community interest company will undoubtedly get some comfort from the regulator.
Through the Millennium Commission we have funded a number of sizeable companies that have clearly been companies limited by guarantee and owned by trusts. However, often the biggest problem that we have is being able to sort out the management when things go wrong when the company has started from a smaller base and has grown. We are still

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pouring millions in and things need to be changed. Outside this Committee I could give people chapter and verse on the matter but I shall not do so now. Serious loss of revenue would result if those companies were unable to benefit from having charitable status. There is a sound case for social companies—trusts that are running organisations and companies for the public good—to be charities, to come within charities law and to do all the things that charities law expects them to do. They would also, to some extent, come under the auspices of the CIC because, as a funder—in my case public money has been involved going back to 1991 in Northern Ireland—the problem has always been to manage the business at arm's length.
I see tremendous advantages flowing from the involvement of the regulator. I still believe that CICs have a good role to play but I think it is wrong to debar them from charitable status—the argument that is made for that is weak—should they choose to seek that status. I do not wish to promote the idea that all CICs should be charities, but I believe that they should have the choice.
Lord Sainsbury of Turville: I just make the point that charities are not unregulated bodies. They are tightly regulated under the Charity Commission. The main burden of our argument is as follows. First, why confuse the issue? Secondly, what is there to be gained by subjecting an organisation to two sets of regulations? That is the argument in a nutshell.
Lord Phillips of Sudbury: I hope that I may return to the point as we are in Committee. The matter is up to the body concerned that wants to be a CIC as well as a charity. The Minister may be right. Many people may consider the matter and decide that they do not want three regulators—company regulator, CIC regulator and Charity Commission. But some will. Frankly, the CIC regulation will not add anything at all to the Charity Commission regulation. Therefore, if I may say so, the argument does not run very far.
Lord Sainsbury of Turville: It has to be a question of balance. I return to this fundamental point. If one could show that there was real advantage to having the option that we are discussing, one could override the issue of confusion. I am perfectly happy to admit that it is rather difficult to establish whether or not there will be confusion. In a situation where there appears to be virtually no benefit to having this option, it seems to me that it is better to stick with the clarity of having the two different forms.
Lord Phillips of Sudbury: I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 102 not moved.]
On Question, Whether Clause 23 shall stand part of the Bill?
Lord Glentoran: I rise to speak on a probing basis to our amendment that Clause 23 should not stand part. Part 2 of the Bill deals with a complete different aspect
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of company law. We move from the intricacies of the auditing and accountancy profession to the proposals for a new type of company, the community interest company.
I think it is important to preface my concerns about the proposal for CICs by emphasising that we on these Benches wholeheartedly support social enterprise. I think that I have done that. CICs are just one product of the consultation that has taken place. While we support the aim of establishing a new model of company intended to support social enterprise, our job here is to look at the detail of the proposals and to make sure that they are workable.
With this in mind, my first reaction upon seeing the proposals for CICs, was to question whether there really is a need for a new model. I have touched on this subject when speaking to the previous amendments. I commented that we are waiting for the reform of charity law, which, we understand, is intended to be a serious overhaul. It would have been much more sensible to have kept these proposals on CICs until we see how they will fit in to the whole picture of the new company law reform. However, we do not know what other new models will be proposed under charity law and we have already heard of the new charitable incorporated organisations that are anticipated.
The question here is one of take-up. We have spoken to the Bill team on this issue when they kindly agreed to talk through the proposals for CICs with us. One of my prime concerns was that, in setting up the administration for a new type of company, we should first be sure of the number of CICs likely to be created. Putting these proposals into place will be costly, financially and administratively. According to page 34 of their consultation document, the Government estimate a take-up of 100 to 300 CICs registering each year. On what basis has this estimate been made? If we are likely to have a reform of IPSs and an overhaul of charity law, including the introduction of CICs, not to mention the current models of company—BenComs, friendly societies, mutual, co-operatives and others—how can we predict the take-up in years to come?
We will have a number of different models from which a small organisation, which is looking to start up, will have to choose. I imagine that it will be a bewildering process. Can the Minister tell us what guidance on which model they should choose can be offered to those embarking on a new venture? Responses to the consultation documents included comments that there is scope for confusion between IPSs and CICs and suggestions that CICs should be introduced in parallel with the current updating and/ or the planned revision of charity law.
As we have discussed, CICs and charities will be able to swap from one status to the other under the Bill. I think that that will be rather more difficult than some people imagine. I have mentioned that it looks like an administrative nightmare, and the Government admit that they think it is unlikely to happen—see paragraphs 15 and 16 of the report on the consultation document.
We feel that there are still many problems inherent in this multitude of different forms. What proof is there that another corporate vehicle is really

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necessary? The primary issue is whether projects would wish to seek CIC status. It is not possible to discern clear advantages for such status from the Bill. What is in it for the recipients? At present, those organisations that currently have charitable status can establish trading companies. Such companies are not subject to the level of control that CICs would be, unless there are significant other incentives. It is difficult to see why such a company would seek CIC status.
I do not mean to sound negative, but implementing the proposals will be expensive and I am, frankly, not convinced that a need for CICs has been proven. The Government talk about the CIC as a trading company that has an asset lock which prevents assets being distributed for further profit and has a strict community interest test which must be fulfilled from the start and reported on in the community interest company report—see draft Regulation 24. It is quite possible for a company limited by guarantee, for example, to have not-for-profit shares which are locked into being used for public benefit by the constitution of the company itself. Asset locks can be prescribed in any company. I do not fully understand the need to have an "off the shelf" new company model if the only added benefit is to have an asset lock which could otherwise simply be written in to the constitution of the company. Furthermore, charities can still have trading companies as subsidiaries, while capitalising on tax breaks via the parent company and also having an asset lock directed by the trustees of the parent company.
The details of CICs are very much withheld from the Bill and relegated to regulations. I sincerely thank the Bill team for making a draft copy of the regulations available to us before Committee stage. As I understand it, they are not published publicly yet. However, there is much in the regulations, which we shall wish to probe during the course of our discussions on Part 2. I look forward to scrutinising the detail, but first it will be helpful to hear some justification from the Minister for introducing legislation on CICs, especially as this is being done in isolation from the reform of charity law. If charity law had been reformed first and CICs had fitted it, it would have made a great deal more sense and logic.
Lord Phillips of Sudbury: I hate to break ranks with the noble Lord, Lord Glentoran, especially after the Minister was so unresponsive to the last amendment. But truth will out: I believe that there is virtue to this part of the Bill and that CICs will add something of use in a number of important circumstances.
The fact is that no other watertight legal protection exists for the defence of public assets held within a private corporation. For non-charitable assets, there is no absolute bar against their subsequent privatisation, and any company or industrial or provident society or co-op can be converted or its assets transferred into a private shareholder company by the required resolution of its members, ordinarily by way of a 75 per cent majority of those voting. However high-minded the original concept behind the formation of a
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company that was designed to be, as a CIC must be, for community benefit, it is possible to break out in the manner that I have indicated. I have had examples in my own professional experience of a first-generation entity with a pure "CIC" character which, not long after the founders who had built it up had disappeared, was cashed in for private benefit.
The provision could have very useful applications, within the private sector, if I can call it that, the local government sector and the central government sector. Therefore, I am unable to support the noble Lord.
Lord Sainsbury of Turville: Clause 23 introduces the concept of the community interest company. or CIC. The CIC will be a company with additional features to ensure that it will work for the community benefit. We have developed this legislation in the light of substantial consultation: first, on the strategy unit's initial proposal for the CIC in 2002 and, subsequently, on more detailed proposals set out by the Government in March last year.
Consultation responses demonstrated that the CIC proposal will answer a real need. Current arrangements are not satisfactory for the many social enterprises that do not want to be charities but wish to use the company form as a vehicle for benefiting the community. It can be expensive to set up a company with a watertight asset lock, and such asset locks are not transparent to the users and funders of social enterprises.
As I said at Second Reading, many companies have expressed an interest in setting up CICs. For example, only last week it was announced in the London Social Enterprise Network newsletter that ECT—the Ealing Community Transport Group—which responded favourably to the consultation, has announced its intention to become one of the first CICs. The ECT Group is a well established social enterprise which, among other activities, runs recycling projects and bus services, and provides community transport. This week, we received a letter from a new company, Get Well UK, which intends to use the CIC form when the option becomes available. Throughout the consultation process and since, our officials have received correspondence from a wide range of organisations that have shown interest in using the CIC form.
Subsection (2) sets out how CICs may be created. It will be possible to incorporate as a CIC from scratch, using the company limited by guarantee or company limited by share forms. Existing companies may also become CICs, including companies limited by guarantee with share capital. This last company form has been unavailable as a form for new companies since 1980 but any existing company having this form will be able to become a CIC.
Subsection (3) prevents CICs being treated as charities in England and Wales and being recognised as charities in Scotland, even where their purposes are charitable. We have discussed this provision in the context of amendments Nos. 101 and 102, and I do not propose to detail the Government's position again. I simply repeat that we have carefully considered whether CICs should have access to charitable status. We have concluded that the value of the CIC is that it

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offers a clear alternative to charitable status, offering greater flexibility and freedom to trade, and, in return, forgoing tax relief available to charities.
Perhaps I may say that I thought the noble Lord, Lord Glentoran, wanted to have things both ways. He found the array of institutions confusing, but put forward a proposal in the last amendment to make it more confusing by having CICs which also have charitable status. He also said that there will be many charities that want CIC status, then queried under clause stand part whether anyone wants CIC status.
One has to choose between these two situations. We think that there will be a definable number of people who want CIC status, and the evidence suggests that they will do so. At the same time, we want to keep the situation as simple as possible so that there is no confusion.
As I said, many consultation responses indicate that many charities might find the CIC form attractive as a trading arm for some of their more commercial activities. There will be no barrier to charities using CICs for this purpose.
Clause 23 lays the foundations for Part 2 of the Bill and for the creation of the CIC. I hope that I have explained clearly our thinking behind the clause.
Clause 23 agreed to.
4.15 p.m.
Clause 24 [Regulator]:
Lord Glentoran moved Amendment No. 103:
Page 26, line 33, leave out subsection (2).
The noble Lord said: In moving Amendment No. 103, I shall also speak to Amendments Nos. 107 and 108. Amendment No. 103 is purely a probing amendment. Clause 24 introduces the role of the regulator and some further details contained in Schedule 3. The regulator has a highly important role within the framework of the new CIC model. I hope noble Lords will forgive me if I list the possible functions of a regulator, as set out in the Bill. I will go through these quickly—they will be in Hansard.
The functions include: the provision of guidance and assistance; the setting of caps and limits on distributions and interest—although the Secretary of State appears to have quite broad powers to intervene; the determination of the eligibility of bodies to become, or cease to be, CICs; investigating the affairs of a CIC or appointing another to do so on his behalf; requiring a CIC to submit its accounts to an auditor appointed by the regulator; bringing civil proceedings in the name and on behalf of the CIC, for which he must indemnify the CIC against costs; appointing a director of a CIC by order, which cannot be removed by the company; removing or suspending a director of a CIC; appointing a manager of a CIC and supervising him; transferring CIC property to the official property holder or requiring a CIC to do so; preventing disposals of CIC assets; preventing debtors making payments to CICs; restricting by order the transactions which may be entered into by a CIC and
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the nature and amount of payments they may make, including the ability to inhibit any payment or transaction made without the consent of the regulator; transferring shares in a CIC by order; removing members of a CIC company limited by guarantee, or appointing new ones; petitioning for the winding up of a CIC; applying to have a dissolution or striking-off in relation to a CIC withdrawn; and releasing any information received to any other public authority for use in connection with its duties. That is 18, which we have listed. The exercise of powers 4 to 18 is limited by the requirement that the regulator should make use of them,
"only to the extent necessary to maintain confidence in CICs".
There is an additional restriction on the use of powers 7 to 13, which can be used only when the CIC has met "the company default condition". That is, first, that there has been misconduct or mismanagement; secondly, the CIC's property, or its proper application, must be secured; thirdly, the CIC is not satisfying community interest tests, or if the company has community interest objects but is not carrying them out; and, finally, powers 14 and 15 may be used only when the CIC appears to the regulator to be an excluded company, ie ineligible for the status of CIC.
I borrowed this synopsis of the regulator's role from a briefing I received from the Millennium Commission. I declared an interest, before Second Reading, as a member of the Millennium Commission.
That is a massive amount of responsibility and involvement. I might even go so far as to say that the success or failure of CICs is based on the competence of the regulator in steering the right course between light-touch regulation and unwarranted interference. There may be reference to good regulatory practice under Clause 24(4) when describing how the regulator should discharge his functions, but there is no mention of the sort of proportionality which I believe is at the heart of the regulator's role.
I turn to the exercise of the regulator's power under Clauses 39 to 48. Under Clause 38(1) there is the provision that the regulator must exercise his powers,
"only to the extent necessary to maintain confidence in community interest companies".
That is a particularly vague provision. I do not think that one could call it a safeguard. I am sure that the regulator could very easily claim that he was interfering in order to "maintain confidence" in a CIC. It is a subjective statement that is open to interpretation of many kinds.
I tabled the amendment because I was seriously concerned about the failure in the Bill to provide criteria by which the Secretary of State should appoint someone to the role of regulator. We do not even have regulations which will set out such criteria. As the Bill is currently drafted, anyone could be appointed at the discretion of the Secretary of State. They do not have to have any particular experience or qualification. Can the Minister give some guidance on how the person to be appointed regulator will be chosen and what sort of selection process there will be? Can the Minister give details of what the salary bracket will be for the

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regulator? If it is too low it will not attract the type of candidates we would expect. Given the responsibility of the role, that is a real worry. If it is intended to be quite substantial, has that been worked into the cost of the regulator as estimated in the Explanatory Notes?
My other two amendments in this group deal with the two specific areas of detail in Schedule 2. First, there is no provision for how long the terms of office will be for the regulator; it is left to the discretion of the Secretary of State. The Government claim that it will be in line with Nolan requirements; that is, one three-year period with one additional further term as the norm, not two. If that is the case, why not state that explicitly on the face of the Bill as our amendment would? That would allay many of our concerns.
There is a precedent for putting the details in Schedule 1 of the Children Bill, which states explicitly the length of the term for which the children's commissioner will be appointed and his eligibility for reappointment.
We have a few problems with paragraph 1(2) of Schedule 3. That makes provision for the resignation and removal of the regulator. Paragraph 1(2)(a) states that he may resign by writing to the Secretary of State. Paragraph 1(2)(b) states:
"the Secretary of State may at any time remove the Regulator on the ground of incapacity or misbehaviour".
How would the Minister define misbehaviour? It is important to know the grounds on which the regulator could be ejected from office. I can understand "incapacity", but "misbehaviour" is open to many interpretations. It is a subjective term that relies on the discretion of the Secretary of State. I am not accusing the Secretary of State of being unable to exercise such discretion wisely; I merely think that we might benefit from some examples of the sort of misbehaviour that would warrant the regulator's removal by the Secretary of State. I beg to move.
Lord Phillips of Sudbury: I hope that the Minister will tell us what precedents there are in respect of comparable offices for the length of appointment and for leaving some power to remove a senior official for misbehaviour. I shall await what he says on that before proffering any further thoughts.
[The Sitting was suspended for a Division in the House from 4.26 to 4.36 p.m.]
Lord Evans of Temple Guiting: We are delighted that the noble Lord, Lord Glentoran, welcomes the role and appointment of the regulator. The proposal was outlined in the consultation document of March last year. As my noble friend Lord Sainsbury of Turville said at Second Reading, the Government, having explored a number of alternatives, decided to create a new regulator. We have concluded and the public consultation has confirmed that a small independent regulator of CICs would be the most effective way of ensuring that CICs continued to operate for the public benefit and of building public confidence in that new type of company.
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The Bill provides for the Secretary of State to appoint the regulator, and the appointment will, of course, be conducted in accordance with the code of practice for ministerial appointments to public bodies published by the Commissioner for Public Appointments. Perhaps I should declare an interest, in that I am on the panel of interviewers for the Commissioner for Public Appointments. I might find myself interviewing the new regulator. There are various issues related to the appointment, and I will come to them in a moment.
The provisions of subsection (2) are sufficient to ensure that the regulator will be appointed under the proper procedure. There are many precedents in legislation for the provision, including, quite recently, the independent regulator of NHS foundation trusts. Similar provision is made for the appointment of members of the Housing Corporation and the appointment of the Charity Commissioners.
For the avoidance of doubt, I should say that the regulator will be independent of government. The Secretary of State will have no power to direct the regulator on the performance of his functions, save as permitted or provided for in the Bill. It is for that reason, for instance, that subsection (5) of Clause 24 has to make express provision empowering the Secretary to State to require the regulator to issue guidance.
The fact that the code of practice on ministerial appointments will apply makes Amendment No. 107 redundant. The code provides that appointees should serve for no more than two terms of office, which must not exceed 10 years in total. The amendment would be incompatible with the code.
The noble Lord, Lord Phillips of Sudbury, asked about the period for such an appointment. The most common period is three years. However, a statutory requirement for a fixed period of office for a regulator may limit negotiations with candidates, with the result that the Government will not be able to recruit the best candidate. For instance, it may reduce the scope for flexibility in appointing an appropriate candidate for a shorter term by mutual agreement. In view of those points, the Government believe that paragraph 1(1) of Schedule 3, as currently drafted, is the appropriate way of providing for the regulator's appointment.
I should say a few words about the fact that Amendment No. 108 would prevent the Secretary of State removing the regulator on the grounds of misbehaviour, leaving incapacity as the only ground on which the regulator could be dismissed.
I am a little puzzled by the suggestion that misbehaviour should not be a ground for removing the regulator from office, as suggested by the amendment but as not suggested by the speech of the noble Lord, Lord Glentoran.
Lord Glentoran: I thank the Minister for giving way. I missed the last part of what he said. I wanted some clarification on what "misbehaviour" might mean.
Lord Evans of Temple Guiting: So I am not a little puzzled; I know exactly what the situation is

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It is a well used legislative basis for removal from office. For instance, the Courts Act 2003 enables the Lord Chancellor to remove a lay justice from office on the ground of incapacity or misbehaviour. Likewise, the independent regulator of NHS foundation trusts may be removed by the Secretary of State on those grounds.
What counts as misbehaviour justifying removal will of course depend on the particular circumstances of any situation. Its ordinary meaning is to behave badly, or to conduct oneself improperly. It has been said in this House that "misbehaviour" could include, for example, a conviction for drink-driving; any offence involving violence, dishonesty or moral turpitude; or behaviour likely to cause offence on religious or racial grounds or that amounts to sexual harassment.
It should cover any misbehaviour which threatens confidence in the regulator. It is sensible to give the Secretary of State the power to act in the event of such misbehaviour on the part of the regulator. That would be important, to maintain confidence in the position and therefore in CICs in general. If a regulator who had lost credibility as a result of misbehaviour were able to remain in office, that would undermine his or her authority and that of the office.
Finally, I should like to advise the Committee that following discussions with the National Audit Office, the Government are considering an amendment to Schedule 3. That will allow the Secretary of State to require the regulator to produce accounts as well as reports. The regulator will initially be accounted for through the department's accounts, but it seems sensible to provide for separate accounts to be required if necessary. We intend to table an amendment before Report.
A number of additional questions were asked which I should attempt to answer. On the question of proportionality, common law already provides for powers to be exercised in a way that is procedurally fair and not unreasonable or irrational. The requirement for decisions not to be excessively onerous, harsh or oppressive when less restrictive measures are available is part of the general requirement for reasonableness in decision making. That, with the other provisions in the Bill on how powers are to be exercised, should provide reassurance that the regulator's actions will be proportionate.
The noble Lord, Lord Glentoran, asked about the regulator's proposed salary. We have not decided that at this point, but we are taking soundings with recruitment specialists. Our current thinking is that the post should be remunerated at around the same level as senior—but not the most senior—civil servants. I have no idea what that figure may be, but we can find out.
The noble Lord asked about the selection process. I think I have said that it will be handled in the Nolan way. We have already committed ourselves to involving the social enterprise sector in the establishment of a
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regulator. It is in everybody's interest for the selection process to be as professional as possible so that we get the best person.
The noble Lord, Lord Glentoran, was also interested in the onerous powers that the regulator would have. It is our view that the regulator will operate with a light touch. We will set up a small-scale operation that will primarily register CICs, receive copies of the community interest company reports and investigate where there are stakeholder concerns.
The manner in which the regulator can discharge his functions and exercise his powers is restricted by the requirements set out in subsection (4) and by the general principles of administrative law. The supervisory powers are further restricted by the requirements in Clause 38, in particular the requirement that the regulator must only exercise those powers to the extent necessary to maintain confidence in CICs. The powers available to the regulator are necessary to ensure that the asset lock has integrity and that CICs can be made to comply with their obligations under the Bill. This is vital to ensure confidence in CICs and the protection of the community interest.
I think that that answers all the questions, with the exception of why the regulator does not have statutory objectives relating to transparency, accountability and consistency. The regulator has an overarching obligation to discharge his functions in a manner that is based on good regulatory practice. In addition, the regulator will be accountable to Parliament and to the courts. The publication of guidance will ensure that the regulator's processes are transparent to users and his consistency will be contestable in court. All those who exercise public functions are required to do so in a manner that is not unreasonable and that is procedurally fair. This is a general principle of administrative law and includes a requirement for consistency and impartiality.
4.45 p.m.
Lord Glentoran: I thank the Minister for that detailed response. It is certainly, to some extent, comforting. However, I shall probably come back on Report and attempt to get some of what he has said onto the face of the Bill, probably in a schedule. I think that there are some significant gaps that would not be difficult to fill in. The Minister has filled most of them in now and, with thought and careful drafting, they could usefully be included in a schedule to the Bill. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Phillips of Sudbury moved Amendment No. 104:
Page 27, line 3, leave out "most efficient and economic way" and insert "way which best advances the community interest objects of the companies."
The noble Lord said: This amendment is designed to provide a better set of objectives for the regulator under Clause 24(4), given that the provisions of that subjection will control and inform the way in which he

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carries out his function. The third yardstick by which he must operate is the desirability of using resources in the:
"most efficient and economic way".
My amendment would change that to the:
"way which best advances the community interest objects of the companies".
I hope that this commends itself to the Government. The words "efficient" and "economic" are quite limited in scope. One overloads "efficient" and "economic" if one tries to say that all virtue can we found within them. I would have hoped to have seen "effectiveness" here. It is a more variable and three-dimensional concept that would embrace some of the things that the regulator ought to take account of. For example, I believe one could imagine a CIC which was certainly efficient and economic but which was fairly ineffective and unadventurous in the way that it carried on its affairs, missing opportunities to promote its community interest objects—for example, by recruiting volunteers or involving the community. I believe that my formulation will cover the concept of efficiency and economy and that it will deal also with those wider aspects. I beg to move.
Lord Hodgson of Astley Abbotts: The noble Lord, Lord Phillips, has made a very interesting and, in some ways, a powerful case. As I understand it, the heart of his argument is that the words "efficient and economic" are too narrow in the circumstances of the Bill. I see the force of that argument but, equally, I believe that narrowness does not necessarily mean "irrelevant". We should be more attracted to the amendment if his wider drafting about advancing the community interest objects of the companies nevertheless encompassed some "efficient and economic" test.
I do not believe that CICs should be a non-economic, non-efficient free-for-all. Therefore, while I consider that the noble Lord's amendment has much to commend it, it would be a pity if some of the underlying purposes that I read into the current drafting in the words "efficient and economic" were lost.
Lord Evans of Temple Guiting: I start by clearing up a small misunderstanding. The words "efficient and economic" refer to the regulator and not to the CICs.
Lord Phillips of Sudbury: Really?
Lord Evans of Temple Guiting: Yes. The Government do not welcome the removal of the wording deleted by the amendment. It seems wholly desirable for the new regulator to be required to use his resources in an efficient and effective way. Similar statutory requirements have been imposed on other independent regulators, such as the Financial Services Authority, and I cannot see any reason why the CIC regulator should be under less of an obligation to behave efficiently, even though the budget at his disposal will of course be very much smaller than that of the FSA.
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The requirement for efficiency and economy is intended to influence the way in which the regulator allocates and deploys his resources. When addressing a specific risk or carrying out a particular function, the regulator should consider which of the options are most efficient and economic. But, of course, that is not the only factor that the regulator must keep in mind. He must balance that with the need to consider the likely impact on those who may be affected and the outcome of consultations. He must also properly fulfil his obligations under the Bill and perform his functions in a manner which complies with the common law.
Over time, we expect the regulator's fee income to move towards covering his costs. It would not be in the interests of either the taxpayer or the social enterprise sector for the regulator to be unconstrained in his use of the resources that are available to him.
Nor do we see the need for the alternative wording proposed by the amendment. The functions of the regulator fall into two broad categories: the giving of the routine approvals and consents necessary for the formation and operation of CICs envisaged by the Bill and regulations made under it; and the exercise of the supervisory powers which will help to build and maintain public confidence in CICs. It will not be his job to devote his own resources to pursuing the purposes of individual CICs. For those reasons, I ask the noble Lord to withdraw the amendment.
Lord Phillips of Sudbury: I shall not say that I was thunderstruck to hear that subsection (4)(c) referred only to the use by the regulator of his or her resources because it reads perfectly ambiguously. I read it as referring to the use of resources by community interest companies. That ambiguity should be dealt with, and it can easily be dealt with.
In addition, in relation to the regulator, I take the point that efficiency and an economic way of dealing is important. I take the point made by the noble Lord, Lord Hodgson of Astley Abbotts, on that matter, too. However, I still believe that it is worth the Minister contemplating the question of effectiveness. It would be an important additional yardstick against which the regulator should operate—largely for the reasons that I advanced when considering that word in relation to the operations of community interest companies themselves. If the Minister will consider those two points, I am happy to beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Glentoran moved Amendment No. 105:
Page 27, line 4, at end insert ", and
(d) the need to provide advice when requested o any community interest company as to the permissibility of an action."
The noble Lord said: The amendment looks at the statutory requirements of the regulator for carrying out his functions as prescribed in the Bill in subsection (4), specifically in relation to the regulator giving free advice. Our amendment would add a further

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paragraph to the subsection, with the effect that in carrying out his functions based on good regulatory practice, the regulator must have regard to,
"the need to provide advice when requested to any community interest company as to the permissibility of an action"—
yes or no.
This is one further important issue with which we believe the regulator should always comply when exercising his powers under the Bill. As the Bill is currently drafted, he must think about the impact on CICs and others affected by the exercise of his power, he must consult and he must be economical with his resources. We want to include the obligation for the free provision of advice to any CIC when requested. That scope would clearly be limited to straight, objective yes-or-no answers and interpretation of the rules.
Noble Lords may ask why this is important. I have had several discussions with my noble friend Lord Hodgson, on the matter. He has a great deal of experience in working for a regulatory body, as he was on the board of the SIB for many years. His advice to me was that it was enormously frustrating to be unable to provide advice to businesses that came within the SIB's scope for regulation. It was not possible to point companies along the right track, only to admonish and criticise them when things went wrong and they failed to comply.
It looks to me as if we have a similar situation here. The regulator is designed as a check on CICs. The Minister and the Bill team have already remarked to me that the regulator will undoubtedly, due to the numbers of CICs that start up, have a reactive rather than proactive role. That is all well and good except that, as I have mentioned before, take-up on CICs is likely to be predominantly by small social enterprises. This is a new company vehicle and the Bill is a framework Bill; the regulations are complex, particularly in terms of caps on assets and payments on debts, debentures and interest.
We believe that it is perfectly reasonable for a small company, when applying to become a CIC, to be able to seek advice from the regulator. However, we have put some limit on this advice: companies can only query whether an action is permissible or not. That would help to anticipate any infringement of the compliance that the regulator has to monitor. Companies would be less likely to break the rules because they would be better informed of their obligations as CICs. We believe that the regulator should be more of an overseer than simply a figure to chastise CICs that run into problems. In the interests of transparency and efficiency, and with the hope of having a new model of company which is successful and has a significant take-up, we think that the provision of advice about permissibility should be mandatory. It might encourage more companies to apply to be CICs and it would be a sure sign of a more light touch regulation, which is what the Minister promised all along.
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I shall finish by briefly commenting on Amendment No. 106 tabled by the noble Lord, Lord Phillips, which is grouped with our Amendment No. 105. Amendment No. 106 focuses on subsection (5) which states:
"The Secretary of State may require the Regulator to issue guidance, or otherwise provide assistance, about any matter relating to community interest companies which is specified by the Secretary of State; and the Regulator may provide guidance, or otherwise provide assistance, about any other matter relating to community interest companies".
It would insert at the end of the subsection the words,
"in all cases without charge".
We certainly agree with the amendment as far as it goes. The regulator will not be able to charge for the provision of guidance or assistance as Clause 54(3) might suggest. We shall focus on that when speaking to a later amendment. However, our amendment puts the provision of advice and assistance as a compulsory factor for the regulator when discharging his functions.
The problem with subsection (5) on guidance and assistance is that it is too permissive. The Secretary of State "may" ask the regulator to issue guidance and provide assistance or he may not. The regulator may provide guidance or assistance or he may not. That is not good enough. CICs which are just starting out need more support from the regulator and it should be his statutory duty to provide it. I beg to move.
5 p.m.
Lord Phillips of Sudbury: I shall speak to Amendment No. 106 in this group. As I look again at Clause 24(5) I am not sure that I am certain of its effect. The first part of that subsection, which the noble Lord, Lord Glentoran, just read out, states that the Secretary of State may require the regulator to issue guidance or otherwise provide assistance. The second part states that the regulator may provide guidance or otherwise provide assistance. If he is required to do so, is he then left only in a discretionary position, and may provide assistance? Either way, if this is a requirement emanating from the Secretary of State, I fail to see why those to whom that guidance or assistance refers should have to pay for it, but no doubt we shall soon hear.
I should have added that the Minister said in response to the last group of amendments that the function of the regulator was to become selffinancing—I think that is what I heard him say. If that is correct, that will be bad news for those who are contemplating CIC status. It will be a major role with a significant staff, the official property holder and the appeal officer. If all that will have to be paid for out of fees, one begins to wonder just how much damage that will do to the concept which the Government are promoting.
Lord Hodgson of Astley Abbotts: I urge the Government to listen carefully to what my noble friend Lord Glentoran said on this occasion. I promise the Minister I shall intervene rarely, if again, this afternoon. He has had to listen to me for three solid afternoons. I shall not go on for long.

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The Securities and Investments Board, of which I was a member, was a product of the Financial Services Act, which took investment firms under the law for the first time. They were mostly small firms. Many had perfectly good intentions. They sought to do their best and to follow the law. Here, we are all M25-centric but many smaller firms operate well away from London and the sophistication of the metropolis. They would go and see their solicitor, who would say, "Well, it's a very new piece of law and it is not very clear what the position is. There are no precedents. Why don't you go and ask the Securities and Investments Board? They should tell you. They are administering the law". We were always told that we could not do that; that we were a regulator and that our powers did not include the ability to give advice. I am concerned that we shall have a similar situation here. We have a new legal framework and relatively unsophisticated quite small bodies, corporations and companies, operating well away from London. There will be no precedents. It will be difficult for them in the early days to see exactly how the floor will bed down and to get advice from provincial solicitors. If we are going to make this thing a success—and I assume that the Government do want to make it a success—some midwifery is needed.
The purpose behind the amendment is to provide a midwifery service. I am sure that over time the midwifery service will die away because there will be precedents; practice will become established; people will know where to go; and solicitors will become familiar with the legislation.
Therefore, I hope that the Government will consider my noble friend's amendment and, indeed, the additional amendment of the noble Lord, Lord Phillips. I hope that they will not fall back on subsection (5). As my noble friend has pointed out, "may" is permissive and if we want to be successful with this issue we need a bit of compulsion in the provision of the midwifery service.
Lord Evans of Temple Guiting: The noble Lord, Lord Hodgson, urges me to listen to his noble friend Lord Glentoran. I have listened with enormous interest to the noble Lord, Lord Hodgson, for three days—I mean that—and I shall continue to listen to his colleague.
We want to see high-quality guidance and help being made available to CICs and to those who wish to set up CICs. This will of course help to encourage take-up of this new kind of company, which is what the Government want, and will make it easier for people to comply with their legal obligations. Good information is obviously very important so that people set up a CIC only if that is the right solution for them because when they do so they will be putting a permanent lock on their assets and profits. The noble Lord, Lord Hodgson, made that point during the Second Reading debate.
There will be several sources of this advice. They range from the regulator himself, through other information sources supported by the Government, such as Business Link, to the various social enterprise groups and professional advisers who specialise in this field. The Government are also engaged in wider work
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to improve access to good-quality advice and signposting towards specialist information providers for social enterprises generally, through the Business Link operator network, and of course CICs will benefit from this.
On the first day of Grand Committee I made a point about non-executive directors. The noble Baroness, Lady Noakes, said I was completely out-of-date and that things had changed a great deal over the past few years. At this stage I should like to quote from an article in today's Daily Telegraph. The timing is perfect and I think it is reassuring. The headline is:
"There's nothing woolly about a social conscience. A growing band of social entrepreneurs are lending business brains to social aims … Oxford's Said Business School is launching its Skoll Centre of Social Entrepreneurship with a grand-sounding world forum … Hyperbole, perhaps. But social entrepreuneurship is in danger of becoming business flavour of the month".
That suggests that perhaps the notion that people setting up CICs will have nowhere to go for advice is wrong. If this kind of initiative is becoming part of the academic establishment that should be tremendously reassuring to noble Lords who are worried about the matter.
Lord Phillips of Sudbury: I am most grateful to the noble Lord. I am interested: does the noble Lord go to academics for advice? I go to them for all sorts of things, but not for advice on new pieces of legislation.
Lord Evans of Temple Guiting: I know a little about the Said Business School. A great part of it is nonacademic and is aimed very specifically at giving practical advice to people who wish to set up businesses, both businesses that make profits and those which do not, which is what we are talking about today.
Clause 24 specifically recognises the role that the regulator will play in providing guidance. It empowers him to provide such assistance—
Lord Glentoran: I want to correct something. The noble Lord said that we were talking about businesses that were not set up to make profits. As I understand it, CICs are set up to make profits but it is a question of how the profits are to be used.
Lord Evans of Temple Guiting: That is a perfectly fair correction. I am grateful to the noble Lord, Lord Glentoran, for making that clear.
As I said, Clause 24 specifically recognises the role that the regulator will play in providing guidance. It empowers him to provide such assistance and guidance about CICs as he wishes. It also gives the Secretary of State a power to require him to provide guidance about any matter relating to CICs that she might specify.
During the consultation last year, we proposed that the regulator should issue advice on a range of topics, including the legal requirements of CIC status, such as the registration and annual reporting processes, and on good practice in areas such as working with stakeholders. That remains the Government's intention. In particular, the power in Clause 24 to

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require the regulator to provide guidance will be used, if necessary, to ensure that all the appropriate advice and guidance is produced.
Except where he is directed to provide advice or assistance by the Secretary of State, we believe that the regulator should be able to exercise discretion over the assistance that he provides. Amendment No. 105 would make that impossible. A requirement to advise on the permissibility of any action would, in effect, require the regulator to provide free legal advice not only on the special requirements of CIC status but on all aspects of the law and the proposed action. It would be bound to generate large numbers of queries, including many that were merely speculative, irrelevant or simply over-cautious. In all probability the regulator would find it very difficult to respond to such queries without investigating the precise circumstances in detail. It is noteworthy that, for example, the Charity Commission retains a discretion as to whether or not it provides that kind of advice to charities.
Such a requirement would, of course, require a larger regulator's office with an increased staff and budget, perhaps particularly for lawyers. The scope for additional costs would increase hugely if the number of CICs increased substantially. A small but effective regulator is a key factor in keeping costs low for CIC registration initially and in the future.
Amendment No. 106 would aggravate those difficulties. The Government intend that, over time, the regulator should move towards covering its own costs from its fee income, although we fully appreciate that it will be some while before the take-up of the CIC form is high enough to make that possible. But, if this is ever to work, and if we want the regulator to be able to provide advice and related services to CICs, it will not be realistic to provide that he may never charge for doing so. It will be important that the core guidance is made freely available. That is the practice of many existing bodies. We expect the regulator to adopt the same approach. But why should we prevent the regulator from developing other services, and charging for them, if people would find them valuable and would be willing to pay for them?
The regulator will be given sufficient resources to carry out the various functions that we have set out in the Bill. As I said, we expect him to use those resources to provide appropriate and useful guidance to CICs and those dealing with them as an important part of those functions. The Bill provides for him to do that.
The point was made that, by not providing advice on the permissibility of actions, we may deter the formation of CICs. They will be very small entities and will need help from the regulator such as guidance in all kinds of forms. We fully intend that the regulator will give guidance on all the major issues and that will be a very important function. We do not see the need for a general obligation on the regulator to provide individual advice on the permissibility of specific actions. As I said, the Charity Commission does not
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give advice on everything. It is highly selective and our consultation process did not suggest that the sector needs a regulator to provide advice at every level.
5.15 p.m.
Lord Glentoran: I thank the Minster for that lengthy and detailed explanation. We will certainly wish to read carefully what he said in Hansard. One thing was omitted. I can see where the sort of advice for which I was looking, which is whether something is permissible or not, would be extremely helpful. I also support the points about midwifery made by my noble friend Lord Hodgson. It seems very selective and I would like to see something on the face of the Bill in relation to that selection.
[The Sitting was suspended for a Division in the House from 5.16 to 5.26 p.m.]
Lord Glentoran: The noble Lord, Lord Phillips, has not returned yet. I shall resume the remarks that I cut short when responding to the Minister on the last point. Much of what he said was very helpful. However, I believe that there is room for clarification. One of the most important points in the debate was that raised by my noble friend Lord Hodgson concerning the midwifery role for perhaps the first three years. I shall read Hansard and shall give considerable thought to returning to this subject on Report. Even following discussions that I have had recently with officials, it would be helpful if, perhaps in a schedule, further clarification were provided on how those who wish to set up a CIC can obtain answers to questions about legal rights and wrongs.
Lord Phillips of Sudbury: I thank the Minister for his reply. Before the next stage of the Bill, I should like him to consider an amendment that would at least require what he called "core guidance", or what might be called "general guidance", to be provided without charge. I shall leave it at that and communicate with the Minister later.
Lord Glentoran: I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Fyfe of Fairfield moved Amendment No. 105A:
Page 27, line 4, at end insert—
"( ) The regulator must make or maintain effective arrangements for consulting practitioners and consumers on the extent to which its practices are consistent with its general duties under this section."
The noble Lord said: In moving Amendment No. 105A, I shall speak also to Amendment No. 106A because they are of a piece. At this point, I declare an interest in that I am chairman of the Unity Trust Bank, which is jointly owned by the Co-operative Bank and the trade union movement and does extensive business with the voluntary and mutual sectors. I also take the opportunity to apologise for the absence of my noble friend Lady Thornton, who has a long-standing Co-operative engagement in Manchester today which she could not avoid.

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These amendments concern how best to provide an input from consumers and practitioners both into the establishment of the community interest companies regulator and into the way in which the regulator undertakes the necessary work.
The genesis of the Bill was, in many ways, the model of how a consultation process leading to legislation should work. I believe that the DTI is to be congratulated on its accessibility and openness to the social, co-operative and community enterprise sector in the drafting of the Bill. Indeed, the Bill has benefited from the consultation process, which involved practitioners and other experts. Therefore, the amendments seek to find an expression of that practitioner expertise in the Bill itself.
Amendment No. 105A seeks to ensure that the regulator of the CIC makes practical arrangements to consult practitioners and consumers. The amendment does not seek to be prescriptive about how that should be done. The details would be required to be laid out in the regulations that accompany the Bill, but it could give great credibility to the regulator among his customers, so to speak, and be a very valuable and useful resource in his work.
Amendment No. 106A seeks to ensure the establishment and maintenance of a panel that, in many ways, could be used by the regulator as his reality check. This is not a new idea. The FSA has a financial services practitioners panel whose remit is to provide input to the FSA from the industry, in order to help it to meet its statutory objectives and comply with the seven principles of good regulation and to represent the interests of practitioners. The panel received statutory status under the Financial Services and Markets Act 2000. The goal was to create a high-level body that would represent the views and interests of regulated firms and monitor the regulator's effectiveness. While the aim of creating the community interest company is to have a vehicle that is easy to sue and has light regulation, the principle of practitioner advice still holds good. I beg to move.
5.30 p.m.
Lord Phillips of Sudbury: I simply add to what the noble Lord, Lord Fyfe of Fairfield, said regarding the possibility that if Amendment No. 106A—the appointment of the practitioners panel—does not appeal to the Government as a requirement, it might be a matter that could be placed within the discretion of the Secretary of State, in the light of experience, to set up. It could be that, two or three years downstream, it is felt by all concerned to be a helpful addition to the armoury of provisions in the Bill in rather the same way that, somewhat late in the day, the charity world decided that an appeals body should be set up vis-à-vis the work of the Charity Commission.
Lord Sainsbury of Turville: Clause 24 provides that when deciding what approach to adopt to his functions, the regulator must have regard to the outcome of consultations with CICs and with others with relevant experience. This is one of a number of statutory obligations that Clause 24 imposes on the regulator. We think it is an important one.
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In order to develop his role effectively and to help to make the CIC form a success, the regulator will clearly need to be able to draw on the understanding and expertise of those who are familiar with social enterprise. It is also worth observing that there is a specific requirement in Clause 27 for the regulator to consult before setting limits on distributions.
In practice, the regulator will need to take some steps to enable this consultation to take place effectively. We have no doubt that that will involve the use of some sort of group or panel of experts from the sector—perhaps more than one, given the range of issues that the regulator will need to consider. The need for advice and assistance from the sector will perhaps be greatest in the initial stages, as the regulator will certainly want to obtain expert input into aspects of his role, such as the production of guidance material. Over time, it may be appropriate for the consultation process to become more of a means of providing feedback on issues arising in the course of the regulator's work.
The Bill does not provide for a formal structure for these consultation processes, because it does not need to. The regulator will be able to assemble whatever structures he regards as necessary to help in his work. If it seems appropriate to do so, it would certainly be possible for one or more groups or panels to be given formal recognition, perhaps as advisory non-departmental public bodies. But in the Bill itself we have been concerned to maintain proportionality and flexibility. That is why we have gone down the route of requiring the regulator to have regard to the outcome of consultations with CICs and experts in the sector, without specifying how he should do so.
The first amendment runs the risk of formalising the consultation process too much. We fully intend that the regulator should consult, but in keeping with the small size of the regulator's operations, the arrangements should be kept as flexible and informal as possible. The second amendment, by requiring one particular panel to be established, reduces that flexibility even further, and perhaps raises more questions than it answers. For instance, what is a "practitioner" in this context? Any attempt to specify possible ways of organising the regulator's consultation processes in primary legislation is likely to suffer from similar problems.
My noble friend also raised the FSA precedent—if it is good enough for the FSA, why not for the CIC regulator? The consultation arrangements applying to the FSA reflect the very complex sectors within which it operates and its wide range of technical responsibilities. The FSA is also, of course, a very large organisation compared with our proposed regulator, so is able to support highly formalised consultation.
We would like to keep the provision as flexible and proportional as possible. On that basis, I ask my noble friend to withdraw the amendment.
Lord Fyfe of Fairfield: That is a very helpful reply from my noble friend. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 106 not moved.]
[Amendment No. 106A not moved.]
Clause 24 agreed to.
Schedule 3 [Regulator of Community Interest Companies]:
[Amendments Nos. 107 and 108 not moved.]
Schedule 3 agreed to.
Clause 25 [Appeal Officer]:
Lord Glentoran moved Amendment No. 109:
Page 27, line 25, at end insert "or there has been a change in the facts"
The noble Lord said: Amendment No. 109 focuses on the role of the appeal officer, as set out in Clause 25. The appeal officer occupies a vital role. It is his responsibility to determine appeals against decisions and orders of the regulator. Since we know that the regulator is to have a significant power to intervene in CICs at his discretion, it is surely of fundamental importance to have an appeal officer to hear any challenges against decisions taken by the regulator.
However, Clause 25 is currently limited in relation to circumstances when an appeal can be made against the regulator's decision. Subsection (4) reads:
"An appeal to the Appeal Officer against a decision or order of the Regulator may be brought only on the ground that the Regulator made a material error as to the facts".
This means that decisions by the regulator cannot be challenged except where he was in error as to the facts—in other words, where he made a mistake. However, in many of the circumstances where it is envisaged that the regulator might step in, we are not talking about hard facts, I suggest. Rather, the regulator has to weigh up the situation and decide whether things have got sufficiently serious to merit his involvement.
From the list of 18 powers of the regulator that I referred to when speaking to the previous amendment, the Committee will remember that I made it clear that the exercise of powers 4 to 18 was limited by the requirement that the regulator should make use of them,
"only to the extent necessary to maintain confidence in CICs".
This suggests a company whose affairs are fluctuating.
Our amendment would insert the words,
"or there has been a change in the facts"
at the end of subsection (4). It reflects a scenario in which the CIC in question sorts itself out and therefore believes that its affairs are not in sufficient jeopardy to warrant the continued involvement of the regulator. In such a case, the facts will have changed and the intervention of the regulator would no longer be necessary.
It seems that the noble Lord, Lord Phillips, is of the same mind on this matter, although his amendment is drafted slightly differently. Nevertheless, it is certainly worth looking at this clause in more detail.
We have had important representations from the Law Society on this point. It has gone further than us in its criticism. It comments:
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"Clause 25(4) restricts the grounds on which an appeal to the Appeal Officer against a decision or order of the Regulator to a material error on the part of the Regulator as to the facts: we query whether such a restriction is justified given the likely circumstances of any appeal by (for example) a subscriber under clause 33(10) or the CIC under clause 35(10), when matters of law (such as the interpretation of the Bill or regulations made under it) may be highly relevant".
I look forward to hearing the response of the Minister on these points, which seem to me to be entirely pertinent, especially when we are dealing with a wholly new company model. I beg to move.
Lord Phillips of Sudbury: I shall speak to Amendment No. 110, which would add to Clause 25(4) the right to appeal, not only on the ground that the regulator had made a material error of fact, but on the ground that the regulator has acted erroneously as to law or circumstances.
The Charity Law Association is also in favour of an extension of the grounds of appeal if, as that association puts it, the regulator has acted unreasonably or made a mistake as to the law. It seems to me, as the noble Lord, Lord Glentoran said, that this is too narrowly drawn. I shall be interested to hear from the Minister whether the Government believe that the situation vis-à-vis a mistake of law is adequately dealt with by reference to remedy by judicial review, for example.
What is beyond doubt is that, as the Bill is drafted, there is a conflict between the provisions of Clause 25(4) and those of Clause 33(10) and Clause 42(13). I apologise for not giving notice of these points, so that the Minister could take advice. I shall briefly refer to those subsections. Clause 33(10) states:
"If the Regulator decides that the company is not eligible to be formed as a community interest company, any subscriber to the memorandum may appeal to the Appeal Officer against the decision".
There is no restriction in subsection (10) on the grounds of appeal. That is one inconsistency.
The second appears in Clause 42(13). Clause 42 gives the regulator power to appoint a director of a community interest company against the wishes of the company. Subsection (13) states:
"The company may appeal to the Appeal Officer against an order under this section".
Again, there is no inhibition on the grounds of that appeal. Indeed, both subsections to which I have referred could not be practically operated if they are to be confined by Clause 25(4) to circumstances where there is a material error of fact. One need not be a soothsayer, let alone a lawyer, to see that if one is appealing against the discretion exercised by the regulator to appoint a director of a CIC, there are many issues which would be relevant to the rightness and wrongness of that appeal way beyond a material error of fact. Indeed, facts may not be the relevant ground of the appointment.

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I should be interested to hear what the Minister says. I apologise again for not giving advance notice of my argument. At least, there may be some correspondence and/or communication before the next stage.
Lord Sainsbury of Turville: I do not believe these amendments are necessary, as the law provides more appropriate ways of dealing with the situations that they seek to address.
Amendment No. 109 is concerned with changes in the facts. In most instances where the facts of the case change after the regulator has taken a decision, the CIC will be able to resubmit its case to the regulator for a new decision to be made, based on the new set of facts.
For decisions on applications to form a CIC, change objects or cease being a CIC, this would naturally take the form of a fresh application to the regulator, updated to reflect the change in the facts. This is quite consistent with what currently happens on a failed application to form a company. Companies House returns the application papers and the application fee can be used against the later resubmitted application. In other cases, such as those relating to supervisory action, the CIC could inform the regulator of the changed facts and ask him to review the decision. Following the exercise of certain supervisory powers, the Bill provides for such reviews to be carried out by the regulator from time to time in any case.
5.45 p.m.
The Deputy Chairman of Committees (Viscount Simon): A Division has been called.
Lord Phillips of Sudbury: Might I humbly suggest that, if the Minister can finish what he has to say in the next two minutes we might hear him out, given that we have eight minutes in which to vote?
The Deputy Chairman of Committees: No, I am sorry, the Committee must adjourn. The Committee stands adjourned until 5.55 p.m.
[The Sitting was suspended for a Division in the House from 5.45 p.m. to 5.55 p.m.]
Lord Sainsbury of Turville: As I was saying, a provision for changes of fact to be considered by the appeal officer would add no value to these processes. All that the appeal officer would be able to do under this amendment would be to report to the regulator that the facts had changed, and that is something that it will be open to CICs to do themselves.
Amendment No. 110 is rather wider, in that it would allow an appeal to the appeal officer on the grounds that the regulator had been wrong about the law. The Government's intention, in creating the role of the appeal officer, is to provide a simple and quick procedure for finding the facts. The appeal officer is not intended to hear appeals on matters of law. The courts are the appropriate forum for settling disputes on the law. In instances where the legal basis of the regulator's decisions is disputed, a judicial review should be sought. Giving the appeal officer the right to
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hear appeals on matters of law would simply acid an additional layer of appeal or review on questions of law, because the appeal officer's decisions would be as susceptible to judicial review as the regulator's.
The noble Lord, Lord Phillips, asked about the appeal provisions in Clauses 33(10) and 42(13). They are governed by the grounds of appeal set out in Clause 25(4). It is not correct that the appeals under Clauses 33 and 42 are not subject to the limitations in Clause 25; they are subject to those limitations, so the appeal officer in those cases may consider only matters of fact. In different ways, matters of law and fact may both be concerned, but that would happen within that framework, ensuring that there was not an additional layer of appeal. On the basis of that reassurance, I hope that the noble Lord is happy to withdraw the amendment.
Lord Phillips of Sudbury: I do not believe that the Minister's apprehension of the effect of Clauses 42(13) and 33(10) is right. Clause 42(13) relates to the right of the company to appeal to the appeal officer against an order for the appointment of a director of a CIC. I cannot see how a mistake just of fact can ever be the basis on which an appeal would be made. I do not see in Clause 42 the requirement for the regulator, when appointing a director, to give a factual background of the basis on which he has done it. He has to give details of the terms on which the director is to hold office—that is in Clause 42(4). But I cannot see that there is any obligation on the regulator when exercising his discretion to give a justification, so I cannot see how subsection (13) has any effect whatever.
The other point that I draw to the Minister's attention is that the following clause, Clause 43, deals with the removal of the director. The remedy there is not an appeal to the appeal officer but, specifically, an appeal to the High Court. The way in which the Bill is constructed treats the removal of the director, rightly, as a more profound and important matter than the appointment of a director. If one is chucking someone out on his ear, it has all sorts of implications for the individual. In that case, one goes to the High Court, whereas under Clause 42 one goes to the appeal officer—but on the Minister's assessment the grounds on which one can go to the appeal officer are not likely to be relevant. That means that one is then cast back into the High Court on a judicial review. Since one does not have the background against which the decision of the regulator was made, I do not know how one would mount a judicial review. Normally judicial review takes place where one has the factual basis—the circumstances in which and on which a decision is made which you can assess against judicial review criteria. So I am a little bamboozled by this. Unless the Minister is totally sure of his ground, I would recommend further thought. If he is sure of his ground, I should be most grateful if he could write to me and answer the points I have perhaps fallaciously raised, but points which seem to me to be good.
6 p.m.
Lord Sainsbury of Turville: We are certain that appeals would be subject to Clause 25(4). Obviously, we have not had time to consider this issue in depth. I would very much like to take it away. We shall look at the matter in depth and come back with a carefully reasoned argument for the noble Lord.
Lord Glentoran: I accept the Minister's agreement to take the matter away. We are certainly very unhappy with it. The noble Lord, Lord Phillips, is much more able than I am to enunciate our discomfort. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 110 not moved.]
Clause 25 agreed to.
Schedule 4 [Appeal Officer for Community Interest Companies]:
Lord Glentoran moved Amendment No. 110A:
Page 64, line 16, leave out paragraph 4.
The noble Lord said: Amendment No. 110A is a brief point, but it is a point of principle which I need not spend too long outlining. In the previous group of amendments we talked about the role of the appeal officer. Further details are contained in Schedule 4. However, when one turns to Schedule 4, there is a paragraph entitled "Procedure". It states:
"4(1) Regulations may make provision about the practice and procedure to be followed by the Appeal Officer.
(2) Regulations under this paragraph may in particular impose time limits for bringing appeals".
Your Lordships will not be surprised to hear that I continue to be frustrated when told that I must turn to regulations to disclose the actual technicalities of how a provision on the face of a Bill will work. Why can we not have the details upfront rather than having to search them out in regulations?
However, in this case, what has frustrated me most about paragraph 4 of Schedule 4 is that there is no mention of regulations covering this point in the draft set of regulations to which we have all had access. I finally managed to track down a mention of them on the front page of the Explanatory Notes, which accompany the regulations. They tell me that,
"powers to set the procedures to be followed by the Appeal Officer (Schedule 4 to the Bill), will be drafted at a later stage, again in discussion with the social enterprise sector".
Frankly, I do not think that is good enough. It makes the Bill incomplete. It is bad enough if we are to be faced with a framework Bill where we have to turn to draft regulations for detail, but I take affront to finding that some of the regulations supporting the Bill have not even been drafted. We need to have some idea of how the procedure for the appeal officer will work and especially what time limits will be imposed. This is a seriously important point. We need to be convinced that the time limits will be fair and reasonable and procedures up to scratch.
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I have to ask the Minister whether by the Report stage we could have a complete Bill that we can read, understand and debate. I beg to move.
Lord Sainsbury of Turville: When the Government published draft regulations in February, setting out the sort of provisions we expect to introduce under the powers in this part of the Bill, we did not include any provisions relating to this power. We admitted as much in the notes that accompanied the draft, and said that suitable provisions would be prepared at a later stage in discussion with the social enterprise sector.
I can reassure the Committee that the absence of draft provisions under this power, to date, does not mean that we think the power is redundant. It simply reflected our view that this is one of the simpler delegated powers in this part of the Bill, at least for the purposes of your Lordships' consideration of the Bill. The department's memorandum to the Delegated Powers and Regulatory Reform Committee commented that the procedures to be set out using this power will be technical and should not be contentious.
In view of the amendment, I should like to set out briefly what we think those procedures will cover, and why the power is needed. Our intention is that the appeal officer will be free to establish his own procedures within the parameters laid down by regulations. In other words, this power will enable a degree of statutory control over the practice and procedure to be followed by the appeal officer.
Such a power is not an attack on the independence of the appeal officer. The power cannot be used to influence or direct the appeal officer as to what his findings should be. Instead, the power exists to ensure that the appeal process is subject to rules and properly established procedures. This will help to ensure that it is consistent and fair for everyone who makes use of it.
The Bill specifically refers to the power to impose time limits for appeals. That is obviously an important area because in a sense deadlines have a limiting effect on the right to appeal itself. It is important that it is possible to set a time limit as otherwise there would always remain a degree of uncertainty over the status of the regulator's decisions and orders. The more time that passes, the more impracticable a rehearing of the facts becomes.
It therefore seems appropriate to make provision for appeal time limits, but as the appropriate deadline will depend on several factors, including the type of decision or order that is being appealed, this is too detailed and technical a topic for the Bill. Leaving it to regulations will also allow flexibility for the time limits to be adjusted in the light of experience. The time limits should not be too short to cause injustice to those who wish to appeal by making it difficult to meet the deadline or to prepare for the appeal, but they should not be so long as to cause intolerable uncertainty and difficulty for CICs and those who deal with them.
At this point I am not in a position to hazard a guess at what the finalised regulations will say on these points—that is, what the time limits might be, and so on. As I have said, we intend that the detail will be

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finalised in discussion with the social enterprise sector. We shall want also to look at precedents under other appeal procedures so that the procedures of the appeal officer are based on what is regarded as good practice.
I cannot see any reason why these procedures should not be in the regulations. It seems to me entirely right to have that flexibility in regulations, which will obviously be considered when they come before the House. On that basis, I ask the noble Lord to withdraw the amendment.
Lord Glentoran: I thank the noble Lord for that explanation. However, it is not right that we should pass regulations that do not exist. I shall certainly return to the matter on Report. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Schedule 4 agreed to.
Clause 26 [Official Property Holder]:
On Question, Whether Clause 26 shall stand part of the Bill?
Lord Glentoran: I wish to speak to Clause 26 and Amendment No. 111, which stands in my name and pertains to Schedule 5.
I am bemused by this new role of the official property holder. We already have a regulator and an appeal officer. Now we are to have a third official who is designated as a "property holder". I fail to see what the role of this "property holder" is.
I understand correctly that if a CIC is winding up or has become insolvent there is a statutory requirement for any residual assets to be transferred to another charity or CIC. I presumed that this would be a matter of having the assets frozen so that they could not be distributed by an unscrupulous director or cashed in for personal profit. This would be one of the conditions or obligations for any company signed up as a CIC. I fail to see, then, why there needs to be an actual position of official property holder to oversee that. This seems to me to be needless bureaucracy.
Can the Minister clarify what the actual role of the official property holder is? Why can the regulator not simply hold property on behalf of a CIC? That would seem only logical given paragraph 4(1) of Schedule 5 which reads:
"The Official Property Holder holds property vested in or transferred to him on trust for the community interest company by which (or in trust for which) the property was held before it was vested or transferred.
(2) But he may not release or deal with the property except in accordance with directions given by the Regulator".
If he cannot act without the authority of the regulator, why cannot the regulator himself simply hold the property?
This paragraph is also extremely vague. We are given no circumstances under which property will be vested in, or transferred to, the official property holder. Can the noble Lord provide us with some examples? I am not certain that the measure is intended solely for situations where a CIC is winding up or going insolvent.
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I seem to remember the Bill team explaining to me—I am not entirely sure and therefore I hope that I shall be forgiven if I am wrong—that property can be transferred to the official property holder in other circumstances; for example, where a dodgy director of the CIC is accused of misconduct, perhaps in the appropriation of assets. The Bill gives no clue as to how the practicalities of such a case would work, how long the property would be held in trust by the official property holder, at what stage it is envisaged that it would be returned, and so on. It was my understanding that a CIC could simply ensure that its assets were safeguarded in the event of mismanagement by having a lock on assets in-built within the constitution of a company.
Our Amendment No. 111 focuses on one final issue. We have grave concerns that, due to the lock on assets, there may be circumstances where, when a CIC goes insolvent, its assets cannot be used to pay back debts or to satisfy creditors but can be appropriated by another CIC or charity. That would be highly unsatisfactory. In terms of community interest, the special circumstances of a CIC which constrain the distribution of its assets must not, under any circumstances, overcome the mandatory obligation of a CIC to satisfy its creditors before handing over its remaining assets to another CIC. We have received some assurances that that goes without saying, but it is nowhere on the face of the Bill and we would feel happier if it were made explicit.
Lord Phillips of Sudbury: I support the opposition to Clause 26 standing part of the Bill—again, on a speculative basis. It is interesting and important that the Charity Law Association, which, after all, represents virtually all the lawyers who will have a mainstream practice in dealing with these entities, is firmly against the whole institution of the official property holder.
It follows that if Clause 26 goes, so will Clause 45. Clause 45 spells out what the regulator may ask or require the official property holder to do. That amounts to a draconian set of powers. The main reasons for the Charity Law Association being sceptical about this set of provisions—as, indeed, am I—are as follows: it hugely complicates the whole regime without a worthwhile return, so to speak, in terms of improvement to the regime; it will possibly, if not probably, deter investors if they have to confront the powers given to the regulator vis-à-vis the property holder; and it is also, in my view, egging the already wide powers of the regulator to an unnecessary degree. The regulator will have powers to carry out formal investigations, to control dividend interest, and so on, to appoint and remove directors, and to appoint a manager. The regulator will have the power, as will the members, to institute civil proceedings against the directors. All in all, unless there is some justification that has not yet been understood, I am sympathetic to the opposition to the clause.
6.15 p.m.
Lord Sainsbury of Turville: Clause 26 creates the office of the official property holder, who will be a member of the regulator's staff. It also introduces Schedule 5, which contains detailed provisions about the official property holder.
I shall deal with a basic point, which is why we need an official property holder. The noble Lord, Lord Glentoran, asked why that could not be vested in the regulator. The reason for that is that the official property holder is a corporation sole, which means that there is no need to transfer the property held by the official property holder when the office holder changes. In addition, the corporation continues to exist and hold property, even if the office if not continuously occupied.
The regulator is not a corporation sole, so there may be situations where there is no regulator in place, for example where the regulator has resigned, and a replacement has not yet been appointed. In such cases, the absence of the regulator would mean that vested property is not properly protected.
The second question on which the noble Lord, Lord Glentoran, focused is what that would be used for. The answer is that the appointment of a manager or director, or the removal of a director, will not always be appropriate to protect property, particularly if there is an immediate risk to CIC property. In such circumstances the regulator can use his powers under Clause 45 to protect the property until management changes are in place.
Where the regulator wishes only to protect specific items, the appointment of a manager or director or the removal of a director may be an excessive reaction to what can be achieved more simply by temporarily vesting the property in the official property holder.
The function of that person is to protect the property of CICs where it is at risk of abuse, in accordance with the powers to vest property that the regulator is given by Clause 45.
Where the regulator maintains that it is necessary to maintain confidence in CICs, perhaps because the property of a CIC is at risk, and where the company default condition set out in Clause 38 is satisfied, he will be able to make an order vesting the property in the official property holder. That will enable the regulator to take immediate action to safeguard assets for the community interest.
It will be appropriate for the regulator to use this power where other powers, such as appointing a director, may not fully ensure that the property is quickly or sufficiently protected. Property which belonged to the CIC before it was transferred to the official property holder will continue to belong to the CIC. The official property holder will hold the property on behalf of the CIC as trustee.
The regulator will use the different supervisory powers where appropriate. The power to vest property in the official property holder allows the regulator to take immediate action to secure the assets. That enables the regulator to take quicker action to
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safeguard the property for the community interest than would be the case in removing directors or appointing a manager. That is vital to maintain public confidence in CICs where there is the risk of abuse of assets.
At this point I need to say a few words about how the official property holder will interact with the company insolvency regime. This is a point which Amendment No. 111 addresses. One of the principles underlying this part of the Bill is that CICs should resemble other companies as far as possible in terms of the way in which company law applies to them. In the particular case of insolvency, the Government intend that company insolvency law should apply to CICs in exactly the same way as it does to other companies, except in the case of the treatment of residual assets, which is governed by Clause 28. This parity of treatment is important, because it is vital that third parties feel confident that they can trade with CICs with the full protection that company law provides to creditors in the event of insolvency.
Amendment No. 111 seeks to ensure that the regulator's ability to transfer property to the official property holder and to give him instructions does not undermine the normal processes that take place on insolvency. I am grateful to the proposers of the amendment for identifying the possible need for a refinement to the drafting in this area, which has also been identified by others including the Charity Law Association.
However, the amendment does not appear to us to address all the issues. In particular, on insolvency, it is the liquidator rather than the CIC or its directors, who is responsible for winding up the company's affairs and distributing its assets.
It is our intention that, in the event of the insolvency of a CIC, the regulator will direct that any assets that the official property holder is holding on trust for the CIC should be released so that they can be used to satisfy the CIC's liabilities. Indeed, the assets could not be used in any other way as no one else would have a right to them. However, there is currently no express obligation in the Bill requiring the official property holder to release such assets in that situation. We are actively considering whether that point needs to be clarified in the Bill.
I should add that we are also considering whether it would be helpful to clarify the relationship between the company insolvency regime and the power that Clause 44 gives the regulator to appoint a manager to a CIC. I shall touch on that when we discuss Clause 44.
Finally, I should like to advise the Committee that, after discussions with the National Audit Office, we are considering an amendment to Schedule 5 in order to make it clear that the official property holder must provide the regulator with reports on the exercise of his functions. Those reports will be laid before Parliament.

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To summarise, Clause 26 and its associated schedule help to give effect to one of the supervisory powers that will ensure that the property of CICs is used for the community rather than for private gain.
Lord Glentoran: I thank the Minister for what he has said. Some of it is encouraging. I am particularly interested in what he said about the relationship between the assets of a CIC, the official property holder and the potential liquidator at the time of liquidation. I shall read that carefully. I am sure that the Government have tidied that up. There are still some details that I should like to take another look at when I have read Hansard. I am encouraged to hear the Minister talking about further clarification of a number of points in this area. That is very necessary. I look forward to seeing amendments coming forward and to giving further consideration to certain issues.
Clause 26 agreed to.
Schedule 5 [Official Property Holder for Community Interest Companies]:
[Amendment No. 111 not moved.]
Schedule 5 agreed to.
Clause 27 [Cap on distributions and interest]:
Lord Glentoran moved Amendment No. 112:
Page 28. line 3, leave out "may" and insert "must"
The noble Lord said: In moving Amendment No. 112, I shall speak also to Amendments Nos. 117 and 119 and Clause 27. The Government's proposals for a community interest company, published as a consultation document in March 2003, identified certain key features of the proposed community interest company. One feature was that there should be an asset lock. On page 18 of the document at paragraph 3, it was suggested that:
"It would be critical to acceptance by charitable and ethical investors that those who set up CICs should commit to lock profits and assets into the company irrevocably, and that they should be seen to do so".
Related to this feature were certain other elements, such as the proposal for there to be a cap on dividends, mentioned in paragraph 28 of the consultation document; a restriction on the return to be made to investor shareholders on a liquidation, mentioned in paragraph 29; a requirement for approval from the regulator for changes to the CIC's purposes, mentioned in paragraph 21; and a permission for surplus assets to be gifted to other suitable organisations, such as CICs or charities, mentioned in paragraph 40. As CICs are designed for community interest and public benefit, a cap on the distribution of assets is fundamental to their purposes.
Clause 27 gives us only the outline of the legislation. The technical details appear, once again, in regulations. The relevant regulations relating to Clause 27 are numbers 17 to 20 and 22 to 23. These are complex and require detailed scrutiny. Regulations 17 to 20 provide for a cap to be placed on dividend payments and on certain interest payments related to the performance of the CIC. Regulations 22 and 23
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place limits on payments made by a CIC on the redemption or purchase of its own shares and on payments made by way of a reduction of share capital.
We have no problem with the concept of having an asset lock, but we need to ensure that the detail of the regulations is tightly drafted enough. At the moment, the drafting of Clause 27 is loose. I am not sure whether this is merely a semantic point or whether it is significant, but the clause uses the formula that "regulations may" do x, y and z. We have seen the regulations but they are only in draft format.
We do not want to hear what might or might not be contained in regulation; we want certainty that the regulations will prohibit or impose limits on the distribution of assets, and so on. To this end, we have tabled amendments to remove "may" and insert "must"—an old chestnut for the Opposition. I am sure the Minister will assure me that "may" has the necessary degree of certainty but, to be honest, it is no guarantee. It is almost as if, when the Bill was being drafted, the actual details of how regulations would work to lock assets was unclear, so the use of "may" gave some flexibility. We now have draft regulations, and it might be good to tighten up the drafting to reflect the content of these regulations more closely.
I know that officials love the use of "may"; Opposition politicians love the use of "must" and hate the use of "may". I beg to move.
Lord Phillips of Sudbury: I simply wish to support the old chestnut—by which I do not mean the noble Lord, Lord Glentoran. In this instance, he has a good point.
Lord Evans of Temple Guiting: These amendments, as we have been told by the noble Lord, Lord Glentoran, are concerned with the asset lock for community interest companies, which is one of the most important features of this part of the Bill. Clause 27 provides powers to use regulations to set various caps on distributions and interest, and the draft regulations published on 12 February, mentioned by the noble Lord—in particular, draft regulations 17 to 20, 22 and 23—show how the Government in tend to use those powers. I shall therefore describe why the Government are resisting the amendments in the context of the draft regulations.
All these amendments turn the word "may" to "must" in different parts of the clause. This change would require—rather than allow—various limits to be set. First, let me assure the Committee that it is our intention that there should be limits on the distribution of assets by community interest companies. We fully intend to use this power, as the draft regulations demonstrate. However, it is necessary to frame the powers in this clause in discretionary rather than mandatory terms. This is because we do not intend to impose limits on everything.
For instance, we do not intend that there should be limits on the interest payable on the debts of community interest companies, except in special circumstances where the rate of return on the debt is

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linked to the performance of the company. That is why draft regulation 18 provides for a cap on such payments, but not on debt payments generally.
Other types of interest payments might be limited in the future if it was found that they were being used to evade the restrictions on distributions to members. That is why the detail of what is limited is left to regulations. It retains that flexibility so that the caps can be targeted at just those transactions that damage the asset lock. The amendments would harm the current ability to leave it for regulations to determine what should be limited, what should be prohibited, and how. This flexibility, we believe, is important if community interest companies are to remain an up-to-date and adaptable form.
[The Sitting was suspended for a Division in the House from 6.30 to 6.40 p.m.]
Lord Evans of Temple Guiting: I thought that I had dealt with Amendment No. 112 and was moving on to Amendment No. 117, which has the particular effect of requiring the regulator, rather than anyone else, to set the limits. Again, this is a limitation of flexibility. The draft regulations show that it is our intention that the level of all limits imposed by regulations under this clause should be set by the regulator. However, in time it may be more appropriate for certain limits for certain community interest companies to be set by someone other than the regulator. For example, it might be better for those community interest companies in England and Wales that are housing associations to have their limits set by the Housing Corporation. Any such change in regulations would be subject to the affirmative procedure in both Houses.
Amendment No. 119 will remove the ability to develop the limits regime in a way that responds to the needs of the social enterprise sector. Clause 27(3)(a) allows limits to be set by reference to a rate set by a third party, such as the Bank of England base rate. Our consultation confirmed that the ability to link the limits on CIC dividend payments to such a rate would be a useful additional flexibility. However, Amendment No. 119 would require the regulator to set all limits by reference to such an ambulatory rate. This may be inappropriate in some circumstances. For example, community interest companies in certain sectors may prefer the simplicity and certainty of a limit that remains fixed, rather than one that is regularly changed. We therefore think that this clause currently strikes the right balance by allowing the regulator to set limits by reference to rates determined by others, but not requiring him to do so. With that explanation, I hope that the noble Lords will feel able to withdraw their amendments.
Lord Glentoran: With all respect to the Minister, I do not accept the explanation. My concern in Clause 27 is where "may" is used in lines 3, 8 and 10. As I understand it, if "may" was taken away there would be no regulations at all. If "they may prohibit" was not there, there would be nothing. What I want is that "regulations must prohibit". The regulator "may set a limit". He may not. I want to be sure that he will set a limit. The regulations,
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"may include power for the Secretary of State".
That may be debatable but I would still like to feel that they must. It is terribly woolly. Nothing might happen at all. There might not be a cap set; there might not be a limit set; there might not be any power given for the regulator to review limits. It is there. "May" means "may", which, I suggest, means "may not" as well. However, as we are unable to divide in Committee, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Glentoran moved Amendment No. 113:
Page 28, line 4, after "assets" insert "or other transactions"
The noble Lord said: Amendments Nos. 113 and 114 were suggested to us by a senior company law barrister who saw a potential loophole in the drafting of Clause 27. The problem is that the consultation paper did not specifically address the question of the extent to which the asset lock should be structured so as to preclude the removal of profits or surplus assets from CICs by transfer-pricing or other devices short of the making of distributions to members. It is suggested that the rule-making power to be given by Clause 27 of the Bill—a power that will authorise the regulations to be made that will provide the asset lock—limits the scope of the regulations in a way that may prevent the regulations from being able to impose an effective asset lock. Not only should there be regulation of the distribution of assets to members, but there should be regulation of the class of persons who may receive benefit from CICs and of the type of benefits which may be received. I beg to move.
6.45 p.m.
Lord Evans of Temple Guiting: Amendments Nos. 113 and 114 seek to widen the scope of this clause so that the regulations to be made under it can prohibit or impose limits on transactions other than simple distributions of assets to members of the company. The wider protection that the amendments aim to provide is already provided by the powers contained in Clause 29, which allow for restrictions on transactions and distributions to be placed in the memorandum and articles of each community interest company.
The restrictions that the Government intend to impose under Clause 29 are indicated by draft Regulations 7 to 10 in the set of draft regulations, published in February, and their associated schedules. The restrictions include a bar on community interest companies making a distribution or transfer except for full consideration, other than in the narrow circumstances set out in the draft regulations. Therefore, regulations under Clause 29 will implement most of the key provisions of the asset lock by placing restrictions on transactions and distributions into the memorandum and articles of each community interest company. We believe that that is the most effective way of creating the asset lock.
The fact that the restrictions will be set out in the constitution of each CIC and not just in the small print of legislation will make it easier for CICs, and for those who deal with them, to be aware of and to understand

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what the asset lock means. It is particularly important that the asset lock should be transparent and easily understood.
Clause 27 is also an important part of the asset lock but is intended to cover only those matters where a complete prohibition is intended or where limits are to be set by the regulator or some other person. Subsection (1) already sets out a complete list of the matters that we wish to prohibit or limit in that way.
I was asked whether there were potential loopholes, such as transfer pricing. When there is any concern that a CIC is breaching prohibitions on distributions that are set out in regulations, the regulator will be able to investigate. If he concludes that the company default condition set out in Clause 38 is satisfied, he can take supervisory action. I hope that, with those reassurances, the noble Lord will withdraw his amendment.
Lord Glentoran: I thank the Minister for that response. The purpose of the amendment was to point out a legal loophole. I do not pretend to be an "eagle beagle" legal man, and I leave it with the Government to decide whether or not my legal adviser had occasion to give his advice. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 114 not moved.]
Lord Phillips of Sudbury moved Amendment No. 115:
Page 28, line 7, at end insert
"( ) impose limits on the payment of remuneration or other benefits to members and directors of community interest companies"
The noble Lord said: The amendment would entitle regulations to be made with regard to the imposition of limits on the payment of remuneration or other benefits to members and directors of CICs. The second amendment in the group in my name—Amendment No. 117—would add a subsection to the end of Clause 29(4), which in turn sets out provisions that can be promulgated under Clause 29 and included in the memorandum and articles of a CIC.
Both amendments are designed to control what seems to me a gaping gap—I suppose that gaps are, of necessity, gaping—or a hole through which a coach and horses might go. As the Government have said, rightly and at length on many occasions, the central purpose of the CIC is to constrain the prospect that accumulated assets and profits should be got out for private benefit, so to speak. Hence the provisions of Clause 27 vis-à-vis caps. However, they do not extend to remuneration. I raised this on Second Reading. The fact that at no time, then or since, have the Government pretended that the prohibition on distributions of assets is intended to include remuneration levels makes me confident that Amendments Nos. 115 and 117 are necessary.
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When Roger Warren Evans and Stephen Lloyd, the two architects of the CIC, produced their first working paper, they proposed,
"that statutory provision should be made for barring another manifestation of the improper disbursement of public assets, namely the payment of excessive Board or management remuneration. Without a statutory mechanism for the containment of this loophole, widely seen as a defect of prevailing company law, the credibility of the PIC sector could be rapidly eroded".
They also said:
"Competitive salaries and fees will have to be paid".
Given the extent to which private companies these days utilise remuneration levels as the most common means of withdrawing profit from their companies, I hope that the Government will listen to this and, if they find these amendments unacceptable, they will put forward others in their place. They are not covered, either, by the provisions of Clause 29(4)(a), which refers to the transfer and distribution of the company's assets. Nor, indeed, is the situation remotely satisfactorily dealt with by the publicity requirements vis-a-vis salaries. There will be CICs, just as there are charities, with a sort of closed membership, where members of the CIC and members of the board of directors will be coterminous. It is written into the memorandum and articles that you cannot be a director unless you are a member and you cannot be a member unless you are a director. In those circumstances, it is extremely dangerous not to have any ability on the part of the regulator to take direct action.
Amendment No. 115 is quite adept, in that it does not say what the limits shall be. It can then be built on, or utilised, in the context of Clause 27(2), which makes provision for limits to be set by the regulator and, in subsection (3), allows the regulator to set a limit. That would then include my limit on remuneration for different types of cases. Although I was unhappy with the notion that the regulator could impose different limits for different cases, and still am, none the less, I suspect that will find its way into the Act.
We have here a mechanism that does not force the regulator to do anything, but at least gives him or her the power, where there is serious public discontent at an abuse, to do something about it. Without such an amendment, I do not believe he or she has that power, and it could undermine the very purpose and integrity of CICs. I beg to move.
The Deputy Chairman of Committees (Lord Geddes): It might be helpful for the Committee and, more particularly, for the official record, if I say that I think the noble Lord, Lord Phillips, meant to refer to Amendment No. 127 rather than Amendment No. 117.
Lord Phillips of Sudbury: He did, and how grateful I am.
Lord Glentoran: I would like to speak to Amendment No. 124, which is included in this group. I support the noble Lord, Lord Phillips, in his amendments. I, like the noble Lord, have grave concerns that the failure to mention directors'

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remuneration in the Bill would undermine the asset lock which Clause 27 hopes to achieve. I tabled this amendment without the benefit of having seen the draft regulations and in reference to what should be included on the face of the Bill under Clause 29(4) as a likely requirement for the regulations detailing the constitution of CICs as contained in their memorandum and articles. We have already said that the memorandum and articles of a CIC are meant to reinforce the principle of an asset lock by filling in the technical details. Our concerns were that there was no mention of directors' remuneration. There would be no good in having a lock on the distribution of assets, payment of interest to members, and so forth, if there was no regulation which put a limit or constraint on the amount directors were paid.
In such a situation directors could receive inflated salaries to get round the interest cap in Clause 27 and the lock on assets except for community interest. We felt that directors' remuneration should be included as an obligatory requirement in the memorandum and articles of a CIC. CICs are designed for public benefit. Profits which should be ploughed into public benefit and community interest projects could get siphoned off to line the pockets of directors. In the interests of transparency we believe that the memorandum and articles of every CIC should give details about all directors' remuneration. Our amendment would guarantee such a provision.
However, having looked at the regulations, I notice that there is a requirement for details of directors' remuneration to be disclosed. That is to be contained in the CIC annual report in regulations under Clause 31(3). Details of those regulations are contained in draft regulation 24 at paragraph 1(e).
The Explanatory Notes make clear that the inclusion of information on directors' remuneration was newly inserted under regulations for the CIC report as a direct result of responses to the consultation process. That is an encouraging sign. It shows that those who responded to the consultation were on the same wavelength as us; that is, they appreciated that there might be a conflict between the lack of constraint on directors' pay and the public benefit asset lock.
The regulations make clear that the information required under the draft regulation is the same as that which the Companies Act 1985 already requires medium and large unlisted companies to include in the accounts they deliver to the registrar of companies, but will apply to all CICs whatever their size. That means that all CICs will be required to make public information including the total aggregate pay of their directors; the details of the highest paid director if the total aggregate pay of their directors exceeds £200,000; and the number of directors who have received share benefits.
I am happy that that information is to be disclosed. However, I wonder whether the Minister has any thoughts about where that should be included. The noble Lord, Lord Phillips, would prefer it to come in under Clause 27, while our proposal includes a
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constraint into the constitution of each CIC within their memorandum and articles rather than as information which must be provided for the annual report.
Lord Phillips of Sudbury: Before the Minister replies, perhaps I may add in response to the last point made by the noble Lord, Lord Glentoran, that the advantage of putting this in Clause 27 is that it gives discretion to the regulator to act on this matter if there is abuse which is causing problems. It gives that flexibility.
7 p.m.
Lord Sainsbury of Turville: These three amendments would provide the power to make regulations setting limits on what CICs could pay to their directors. Some of the amendments go even further by providing for regulations to limit the remuneration that could be paid to people who are members of the company, or any other benefits that the members or directors could receive from the company.
We debated the principles underlying these amendments at Second Reading, at which I explained the reasoning behind the Government's approach. In short, we recognise the need for transparency on the level of remuneration paid to the directors of CICs, particularly given the long tradition of voluntary service in some parts of the social enterprise sector. It is for that reason that we propose to require the annual community interest company report to provide information on this subject, which will be made available to the public via the companies register. So, there is already a mechanism for making that information available. It does not provide information just to the members; it provides information generally. The draft regulations published in February contain a provision which deals with this in draft Regulation 24.
Where there are concerns that the scale of payment is inappropriate, the regulator will be able to investigate. If the concerns are well founded, for instance, because directors have colluded to pay themselves deliberately excessive remuneration, the regulator may have a number of courses of action open to him. What he does will depend on the circumstances of the case. For instance, that kind of behaviour by directors will be a breach of their duties to the company, which could leave the company with a claim against the directors. The regulator will have powers under Clause 41 to take action to enforce that claim.
Alternatively, if the regulator concludes that there has been misconduct in the CIC, abuse of the company's property or failure to satisfy the community interest test, sufficient to trigger the conditions for the use of the supervisory powers under Clause 38, he will be able to use those powers to address the problem. For instance, he could remove the directors concerned. Those directors would still be able to enforce their contractual rights against the company but only if the exercising of those rights was consistent with their duties to the company.
The amendments clearly envisage a more prescriptive approach in which the Government would lay down in regulations what it is appropriate for CICs

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to pay their directors. As I said at Second Reading, the Government do not think that that is the right approach. CICs will be companies, not arms of the state. They will be in competition with commercial companies, and that will include competing for the best staff. It is not for government to dictate to companies in general what they should pay their directors. That is the position we take uniformly whenever the issue of directors' salaries is raised. If you depart from that principle, you get into very difficult and dangerous waters. Of course, if we were to try, and got it wrong, we could hamstring the ability of CICs to grow, thrive and compete. That is a matter of principle.
There is also the practical matter of how limits might be set. The range of activities of potential CICs is very wide indeed, and so, therefore, is the range of abilities that their directors may require. How will any government be in a position to draw up meaningful limits?
I do not mean to dismiss the concerns that underlie these amendments. As I have said, the Government take the risk of abuse of the asset lock through directors' pay and benefits seriously, and are open to ideas about how best to address that risk within the framework we have proposed.
As I have said, some of the amendments would also impose limits on the remuneration of people who are members of the company, even though they are not directors. We consider that this is a matter best left for the directors of the company to determine. Clause 27 already contains a power to limit the distribution of assets to members. The payment of remuneration is a different matter, and where an employee happens also to be a member of the company, we do not think that he should be singled out for different treatment from all the other employees of the company.
Some of the amendments provide for limits to be imposed on the benefits that may be paid to directors or members of the company. We consider that directors and members of the company should be able to be beneficiaries of the CIC as well. Sometimes it might be coincidental that a director or member also derives a benefit from the community interest activities of the CIC, and we see no problem with this. But it is also possible that a CIC might be set up to benefit its members, which may include its directors. This is acceptable provided that a reasonable person would consider that the activities of the CIC are being carried on for the benefit of the community.
The draft regulations published in February make some additional provision in this area by providing that where the benefits are restricted to the members or employees of the CIC, the activities of the CIC must not be carried on solely for reasons of private gain. We have indicated that this is a particular area where we are seeking the views of the social enterprise sector. However, we think it is right that, for example, a company set up to provide employment for the disabled or a company set up to provide social housing or care for its members should be able to become a CIC. Therefore, it is not appropriate to impose limits
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on the benefits that may be paid to members or directors. This is a matter for the CICs themselves, provided they continue to satisfy the community interest test.
I hope I have reassured the Committee that we also perceive a potential gap but that we have taken action to enable the regulator to deal with such a situation without getting into the very dangerous area of trying to set a limit on salaries.
Lord Phillips of Sudbury: I am grateful to the Minister for that careful consideration of these amendments. These are difficult matters; let us make no bones about it. On the other hand, it is a red herring to talk of problems with housing charities or charities for the disabled where a member is also a beneficiary. Plainly, under my amendment the regulator would not begin to interfere with bona fide arrangements of that kind. I drafted the amendment in terms of exceptional circumstances where the regulator would need to take action to reassure the public and to maintain the integrity of the sector.
I refer to a second matter that I am not convinced about although I shall obviously study carefully what the Minister said. He referred to Clause 41 as a potential weapon that the regulator could utilise to bring civil proceedings in the name of, and on behalf of, the community interest company. I just do not see that. On what basis would the regulator do that? As the Minister said, the issue of remuneration is extremely contentious in the private sector. He went on to say that, in that respect, he wants CICs to be no different from the private sector and that he wants them to be able to operate on the same basis as the private sector. I put it to him that I do not consider that to be a real remedy.
Lord Sainsbury of Turville: I hoped that I had explained that there were exceptions where a breach of the duties of the company was involved. In extreme cases where that occurs, the regulator can take action. I agree that that is different from saying that if a certain level is breached, by definition, the regulator should take action. However, I believe that the only way that it makes sense is if, in terms, the directors of a company have a very general responsibility. Otherwise, the regulator and, indeed, the state will determine precisely what level of salaries should be paid to which directors.
Lord Phillips of Sudbury: Again, I thank the Minister for that. In the view of an old lawyer like me who has seen the way that the world works in reality, it is improbable that the remedies referred to by the Minister would be activated because of the huge difficulties of a regulator—who, as has been indicated, will have a tiny staff—managing an action which is based on highly speculative grounds with no rock or foundation to it but only grounds of excess.
I was merely trying to give some practical leverage to the regulator so that he could go to a company that was, so far as any normal person was concerned, paying over the odds and say, "Look, either you give me an explanation that is acceptable or I may be forced

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to use the powers that I have to set remuneration levels in a specific case". That is what the clause currently allows. I am looking at this matter from a practical standpoint. I want this regime to succeed. However, if there is to be—as there will be, as is the case now with charities—a coterminous board and membership, the membership will cease to be constrained by the board and, because the members are the same as the board, the only interest in the functioning of the company will be destroyed in terms of public accountability.
I believe that, by relying on these vague remedies in appointing a manager or civil proceedings, the Government are undermining their own case. I emphasise that the powers given by the first of my amendments would be discretionary. The nature of regulation is such that there are so many other things to do that one will not act unless there is a strong and sound case. I shall leave it at that and ask the Minister kindly to give the matter further consideration.
Lord Glentoran: My amendment is somewhat different, although it is in the same group as those of the noble Lord, Lord Phillips. We are suggesting that in Clause 29—on page 29, line 5 of the Bill—we should change the wording of paragraph (e) from,
"provisions about the appointment and removal of directors",
so that the words "and removal" are substituted with the words "removal and remuneration". That would then bring the whole business of directors'
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remuneration into the world of the community interest companies' memorandum and articles, and the matter would be up for grabs and easily transparent.
Lord Sainsbury of Turville: That is a different issue. We come back to the question of whether we want to put in a limit of some sort. If it is in general terms, it will not add anything.
Lord Glentoran: We are not recommending a limit. We are recommending a situation in which the salary or remuneration package is transparent. We hope that that will look after itself, as those involved will know and the public will know.
Lord Sainsbury of Turville: I hoped that I had made it clear that that situation already exists. As the noble Lord explained, it will be in the company's report.
Lord Phillips of Sudbury: I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Evans of Temple Guiting: This may be a convenient moment for the Committee to adjourn until Monday at 3.30 p.m.
The Deputy Chairman of Committees: The Committee stands adjourned until Monday 29th March at 3.30 p.m.
The Committee adjourned at twelve minutes past seven o'clock.