Official Report of the Grand Committee on the Companies (Audit, Investigations and Community Enterprise) Bill [H.L.]

HL Deb 29 March 2004 vol 659 cc367-426GC

(Fifth Day)

Monday, 29 March 2004.

The Committee met at half past three of the clock.

[The Deputy Chairman of Committees (Lord Lyell) in the Chair.]

The Deputy Chairman of Committees (Lord Lyell)

If there is a Division we shall adjourn the Committee for 10 minutes. At the moment, it looks good.

Clause 27 [Cap on distributions on interest]:

The Deputy Chairman of Committees

Amendment No. 116 is grouped with Amendment No. 118. If Amendment No. 116 is agreed to, I shall not be able to call Amendment No. 117; and if Amendment No. 118 were agreed to, I would not be able to call Amendment No. 119, all in this group.

Lord Glentoran moved Amendment No. 116:

Page 28, line 8, leave out subsection (2) and insert— (2) The regulations must make provision for a central limit to be set by the Regulator, which may be varied in respect of individual community interest companies only on application to the Regulator.

The noble Lord said: In moving Amendment No. 116, I shall speak also to Amendment No. 118. Amendments Nos. 117 and 119 were spoken to the last time the Committee met.

The limit is a very contentious issue. As the provision is currently drafted, there will be no standard limit for community interest companies to follow, but different limits can be set for different companies; that is the cap. This strikes me as being a very unlevel playing field. When we raised the point with officials, they explained that some CICs would be more risky than others and that a differential cap was needed to encourage private investment.

I am not sure that there is much substance in that argument. I do not think that it is very encouraging. Our amendment would remove subsections (2) and (3) and replace them with a provision whereby there was a standard limit. If any company wanted to deviate from that limit, it could do so only by applying to the regulator and justifying its case.

We talked at Second Reading about the fact that the dividend cap will be variable, as is made clear in Clause 27(3)(b), which states: The Regulator … may set different limits for different cases".

That is an undue amount of discretion. As we have mentioned before, we have no idea of the regulator's qualification or who he or she will be. I accept that as a result of our discussions last week, we are a little wiser, but let us leave that where it is for the moment. We do not know what criteria the regulator should use. Will he have a series of "categories" of CICs'? I cannot believe that he will individually vary the cap for each specific application. We propose a much more sensible option of having a central limit. We believe that is fair and equitable and will not disadvantage some CICs. I would also like to know why there is no mention of a varying cap in the regulations.

On looking at the draft regulations I do, however, see the need for the regulator to be able to vary the dividend cap and adjust it in response to external factors. As is made clear in the Explanatory Notes, where the cap is set by reference to, an index such as the Bank of England base … rate". it is important that when the base rate changes the dividend cap changes proportionately. That is reflected in draft Regulation 17(2), which states: The Regulator may vary the dividend cap from time to time".

Although this is a necessary provision, the vagueness of "from time to time" is of some concern. Could that be drafted with more precision or to make it explicit that a change would occur only when the base rate changes, or to what it might be linked?

There is the same wording in draft Regulation 19. It states: (2) The Regulator shall from time to time set a limit on the amount of interest that may be payable on such debts or such debentures (the 'interest cap'). (3) The Regulator may vary the interest cap from time".

I am not entirely clear that the formula "from time to time" is particularly good legal terminology. It does not appear to give much guidance to the regulator. How often is he expected to change the cap?

I am also not happy with the role of the Secretary of State in this process. Clause 27(5) states: The regulations may include power for the Secretary of State to require the Regulator to review a limit or limits in a manner specified by the Secretary of State".

That is reflected in Regulation 20, which reads: The Secretary of State may from time to time require the Regulator to review the limits set under regulations 17 and 19 in such manner as shall be specified by the Secretary of State".

The explanatory notes to the regulations explain that it, allows the Secretary of State to require the Regulator to review the dividend and interest caps. The purpose of this draft regulation is to allow the Government to ask the Regulator to consider using his ability to set limits in particular ways, as noted in paragraph 181 of the Explanatory Notes to the Bill".

I find the concept of the Secretary of State's ability to coerce the regulator into, using his ability to set limits in particular ways quite sinister. It implies interference which I do not think is warranted. Can the Minister give us some examples of when and where that would be necessary? I beg to move.

Lord Phillips of Sudbury

I am largely supportive of the remarks made by the noble Lord, Lord Glentoran, about Clause 27 and the two amendments. It is a particularly important clause. I made considerable reference to it at Second Reading and expressed some of the concerns that have been expressed today. For example, Clause 27(3)(a) states: The Regulator— (a) may set a limit". I assume, incidentally, that the limits referred to here are confined to the limits referred to in subsection (1); namely, limits on the distribution of assets … limits on the payment of interest on debentures". As I say, Clause 27(3)(a) states: The Regulator— (a) may set a limit by reference to a rate determined by any other person". I should be grateful if the Minister would explain the full purport of that. Could it be literally any other person? Could he ask the Pope to do it? What are the bounds of the measure? I do not see any at all. Will the Minister give us some help in trying to construe the measure sensibly?

Further, I was struck by the fact that subsection (5) of Clause 27 states: The regulations may include power for the Secretary of State to require the Regulator to review a limit or limits in a manner specified by the Secretary of State". It would be helpful if the Minister would tell the Grand Committee what is meant by the words,

in a manner specified by the Secretary of State". For example, could the Secretary of State, being dissatisfied with the way in which the regulator set the limits or perhaps failed to set the limits, require the regulator to say that he was totally dissatisfied with the way in which limits were being set by a CIC—he might actually name the CIC—and that in future the regulator was required to set limits on the distribution of assets in the following manner—say, not more than 8 per cent, not less than 6 per cent and confined to different types of assets? The wording is obscure. I do not think that any of us is trying to do more than get to the bottom of it.

Lord Evans of Temple Guiting

We have already debated several amendments to Clause 27, which would have the effect of reducing the flexibility with which that clause can be made to work. Amendments Nos. 116 and 118 are rather different, in that they seek to change the way in which Clause 27 permits that flexibility.

The Bill allows the regulator to set different limits for different cases; that is, to impose a higher or lower limit for some CICs than for others. As my noble friend Lord Sainsbury said at Second Reading, our consultation on the CIC proposals confirmed the need for that flexibility. It is intended that Clause 27(3)(b) might be used, for instance, to raise the usual limit for CICs carrying out activities in a certain sector or area where there is a greater than usual need to encourage investment by third parties. Such a variation to the limit could be made only in accordance with subsection (4) of Clause 27, which requires the regulator to consult appropriately and to have regard to the impact of the limits that are set.

The amendments would have the effect of encouraging individual CICs to seek to negotiate variations to the limit with the regulator. That would be less fair and transparent than the system that the Government are proposing, as it would be likely to create a proliferation of separate limits and could easily lead to inequitable differences between the rates applying to different CICs in the same line of business.

Of course, subsection (3) already allows the regulator to set individual limits, but the amendment involves a change of emphasis. As currently envisaged, the regulator would set caps by reference to sectors, areas or other criteria so that caps would usually apply to many different CICs depending on which category they fell into. If necessary, the Secretary of State, whose name has been mentioned, would use her power under subsection (5) to encourage the regulator to review and set caps in that way. The amendments would change that, with the result that the variations on the normal limit would be negotiated on an individual basis and would apply to individual CICs. It is likely that almost every community interest company would seek to negotiate its own limit so that, in reality, there would be no central or normal limit.

When talking about the regulator, the noble Lord, Lord Glentoran, suggested that he or she had too much discretion. How will he or she know when, where and how to set the limits? The limits should be set with regard to their likely impact on community interest companies. Subsection (4) imposes such a requirement on the regulator. That should involve striking a balance between encouraging investments in CICs, on the one hand, and preserving confidence in the asset lock, on the other. The regulator will usually be the best person to strike that balance, as he is being created precisely in order to be the regulator of community interest groups. He will be independent of government and will be specifically required by Clause 27(4) to consult before setting limits and to consider the impact that limits will have on CICs. Finally, he will be in frequent contact with CICs and those with relevant experience of the sector and thus will be well placed to understand the issues and strike the right balance. Clause 24(4) requires him to have regard to the outcome of consultations with CICs and others with relevant experience.

One unfortunate effect of Amendment No. 118 is that it would remove the regulator's ability to set a limit 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.

A number of other issues were raised in our short debate. One is that there is no reference in the regulations to a varying cap. The regulations leave it to the regulator to pick a varying cap if he wants to do so. From time to time, there will be indications that the regulator can change the limit where he or she considers it appropriate.

The noble Lord, Lord Glentoran, argues that it is sinister that the Secretary of State can coerce the regulator into changing the limits. However, the power allows the Secretary of State only to ask for a review of limits. It could be used if the Secretary of State thought that a review was needed because of a lack of investment in a certain type of CIC.

The noble Lord, Lord Phillips of Sudbury, raised the question of the rate being set by reference to any other person, and he used the Pope as an example. The provision is intended to allow reference to a preexisting rate, such as the Bank of England base rate. I hope that, with that explanation, the noble Lord, Lord Glentoran, will be happy to withdraw the amendment.

3.45 p.m.

Lord Glentoran

I thank the Minister for that explanation. It has been a useful debate, as far as it has gone. While there are some points in here about which we feel strongly, the amendment is very much a probing amendment to see where the Government are coming from.

One or two interesting things have emerged from what the Minister said. We are not saying that there should be one standard cap and one standard cap only, but that there should be a standard cap which should be varied. The Minister said there would be different sectors. I do not think we would argue with the Government setting out clear sectors in which CICs would operate. I imagine they could be business sectors, types of company sectors, even geographical sectors. Within that grouping, we would start to achieve some structure in the way in which this cap might or should work.

At present, I still feel that the provision as drafted is too loose, too vague and too unspecific. I do not think it will be helpful to CICs. If CICs take off—which, of course, I hope they will—it will make the regulator's job quite impossible and the Government may be forced to legislate again on this matter because it will be so untidy. In general, my view is that the Government should rewrite the Bill regarding caps by Report stage so that it is clearer, more constructive, more comprehensible and much more transparent. I hear what the Minister said about having a standard cap—each CIC would do private deals. I do not believe that that will be so; I believe that it will be more transparent. If one does not have a standard, every CIC in the country will be trying to negotiate something, somewhere, from a different basis. I think it is one of the biggest weaknesses in the Bill as it stands.

Lord Phillips of Sudbury

If I could add my twopenn'orth, I wholly agree with the suggestion of the noble Lord, Lord Glentoran, that some rewording of the clause should be contemplated. For example, there is the reference to setting, different limits for different cases". Given what the Minister said and what was said on Second Reading, I should have thought that it would be better to substitute categories for cases. "Different cases" could mean an individual CIC. From everything that has been said today, that is not the intention—indeed, I hope it is not the intention. It would be invidious for a regulator to be able to pick a particular CIC and say, "You'll be allowed a 20 per cent dividend, while everybody else can have 7 or 4 per cent".

There is another point which could be reviewed if that were to happen. In response to one of my queries on subsection (5), the Minister said that the Secretary of State could "encourage" the regulator to review the caps. That is not how subsection (5) is worded. It says: The regulations may include power for the Secretary of State to require the Regulator to review … in a manner specified by the Secretary of State". That seems a far tighter and more dirigiste power on the part of the Secretary of State than the Minister indicated in his reply. On review, we might want to drop the words, in a manner specified by the Secretary of State", or change them. We must not forget that we will be dealing with a group of companies which will be heavily peopled by voluntary sector elements, who will not want to resort to expensive lawyers at every turn. Clause 27, which is crucial, could be and should be improved.

Lord Glentoran

I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 117 to 119 not moved.]

Clause 27 agreed to.

Clause 28 [Distribution of assets on winding up]:

The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville) moved Amendment No. 120: Page 28, line 22, leave out from "distribution" to "may" in line 23 and insert ", on the winding up of a community interest company, of any assets of the company which remain after satisfaction of the company's liabilities. ( ) The regulations

The noble Lord said: The Government have tabled this amendment to fulfil an undertaking that I gave to the noble the noble Lord, Lord Dahrendorf, on 29 January, in response to the report of the Delegated Powers and Regulatory Reform Committee. The purpose of Clause 28 is to ensure that when a CIC is wound up, any assets remaining after its creditors are satisfied will continue to be used for the benefit of the community.

On a winding-up of a company, the surplus or residual assets would normally be distributed to the members of the company, or otherwise as the articles of the company provide. However, if the CIC asset lock is to be preserved, there must be restrictions on the distribution of assets on a winding-up. The draft regulations which the Government published in February show how the power contained in Clause 28 is intended to be used to implement that aspect of the asset lock. The intention is only to change the way in which residual assets are treated in a winding-up. The creditors of a CIC that is being wound up should continue to have the same rights as the creditors of any other company.

The Delegated Powers Committee observed in its report that, as drafted, Clause 28 allowed regulations to do things which went beyond the Government's stated policy intentions. For instance, it could be used to affect the rights of creditors. The Government agree with the Committee's analysis, and are concerned to ensure that the power could not be used to modify the normal rules about the application of assets between creditors.

Any suggestion that the rights of the creditors on the winding-up of CICs could be undermined might reduce the willingness of people to invest in, and trade with, community interest companies. We had no intention of using the power in this way. The amendment is therefore intended to cut back the power provided by Clause 28, so that it can be used only to affect what happens to those assets remaining after all the creditors of the company have been paid. I beg to move.

Lord Phillips of Sudbury

I may be exceedingly thick in asking this question, but what is meant of the final hit of Amendment No. 120 when it says, after the brackets, "the regulations"? It seems to me that the amendment was comprehensible up to the words, "the company's liabilities".

Lord Sainsbury of Turville

I totally agree that it is necessary to explain why the amendment comes out this way. It means that the regulations, may make provision for and in connection with the distribution, on the winding up of a community interest company, of any assets of the company which remain after satisfaction of the company's liabilities". Then one moves down to the word "regulations", after which come the words, may, in particular, amend or modify the operation of any enactment or instrument". The second part of the original clause follows the word "regulations".

Lord Phillips of Sudbury

It is a wonderful world. Thank you very much.

Lord Glentoran

I thank the noble Lord, Lord Phillips, for the clarification that he got from the noble Lord, Lord Sainsbury. When we read Hansard, I am sure the matter will be clearer. The Government's amendment goes some way to meeting our concerns on the issue, but it does not go the whole way. We have touched on the issue before, when talking about the official property holder.

Clause 28 is extremely short. I gave notice of my intention to oppose the clause standing part early on in proceedings, when we had not yet seen the regulations. I was concerned in particular about whether the provision for transferral of assets on winding-up would take priority over satisfying creditors. We have now had a look at the regulations in draft form and my fears have been partially allayed.

Regulation 21 and also, to some extent, Regulations 7 and 8 and Schedules 1 to 3, give details of the asset lock in the case of winding up. Regulation 21 states: (1) Where a community interest company is wound up under the Insolvency Act 1986(a), so much of the property of the company as remains after satisfaction of the company's liabilities shall be distributed—

1. (a) to those members of the community interest company (if any) who are entitled to share in any distribution of assets on the winding-up of the company, provided that no amount may be distributed in respect of any share in the company which exceeds the amount by which the share has been paid up
2. (b) subject to the entitlement of those members (if any), to such community interest companies or charities and in such proportions or amounts as the Regulator may direct".

That does not give us much detail.

I am pleased to see that the company must first use its assets to settle any liabilities—presumably the paying-off of creditors, debts et cetera—but I have some reservations about the second arm of the regulation. Paragraph (1)(b) states that any residual assets will be transferred to, such community interest companies or charities and in such proportions or amounts as the Regulator may direct". That is a large amount of discretion for the regulator. As the regulations are drafted, it sounds as if the regulator can choose the CICs or charities to benefit from the distribution of assets. He can certainly decide the amounts to be doled out. Why cannot the directors of the company just decide for themselves how to distribute their remaining assets or, at least, have some form of consensus with the regulator?

It is not the light-touch regulation that we were promised. Can the Minister clarify for me how, he envisages, the distribution will work?

Lord Sainsbury of Turville

The purpose of Clause 28 is to ensure that, where a CIC is wound up, any residual assets remaining after its creditors are satisfied will continue to serve the community. Like Clause 27, this clause is another part of the asset lock, which is a key feature of the CIC.

When a non-charitable company is wound up, its assets are normally dealt with according to the laws of insolvency. The first priority is to satisfy the demands of the company's creditors. Any assets remaining after that are usually shared between the members of the company, unless the memorandum or articles of the company provide otherwise.

It is a principle of the CIC that the company's assets should not be used for the private gain of the company's members. Clause 28 therefore provides for regulations to make special provisions for the treatment of assets on winding-up. We have published dummy regulations that show how the power is intended to be used. First, assets will be used to meet the claims of creditors and any other liabilities of the company, in the usual way. It is important to stress that, on a winding-up, the creditors of a CIC, including investor shareholders to whom dividends are owed, will have the same rights as the creditors of companies that are not CICs. Secondly, if the CIC has shareholders who are entitled to have their original investment returned on winding-up, those shareholders will be paid. Any assets remaining after those steps will be used for a community benefit purpose. They will be distributed as directed by the regulator. The intention is that assets should go to another CIC or charity approved or nominated by the regulator.

The noble Lord, Lord Glentoran, asked on what basis the regulator would make the decision. He thought that that was giving the regulator rather too much power. If the memorandum or articles of a CIC specify any recipient, the regulator is likely to follow that, unless he has good reasons not to. A CIC may identify in its constitution the CIC or charity beneficiaries that it would like to receive any residual assets in the event of winding-up. However, the regulator will have the final say in deciding where such assets go. That is because CICs will be able to change the nature of their activities relatively easily in comparison to charities, so that, over time, a CIC may become a less suitable beneficiary for a particular purpose. Otherwise, the regulator will be likely to consult the CIC, and the regulations propose a right of appeal, if the members of the CIC disagree with the decision.

It should also be emphasised that the assets will not pass to any other type of organisation because at present only CICs and charities provide the twin assurance of a community interest purpose and a lock on assets. However, the Government intend to consult later this year on the introduction of an asset lock for certain industrial and provident societies. If a suitable lock is introduced, we intend that regulations should also allow the assets of a wound-up CIC to pass to such organisations. This clause represents an important part of the asset lock that we propose to apply to community interest companies.

4 p.m.

Lord Phillips of Sudbury

The Minister mentioned putting, ab initio, into the articles that in the event of a winding-up, a surplus should go to X, Y, Z CIC or X, Y, Z charity. The Minister makes a fair point that times move on and that such organisations may become unsuitable. Surely, the suggestion of the noble Lord, Lord Glentoran, is a good one and is likely to be favoured—certainly by me as a lawyer—that in the winding-up clause the destination of any surplus assets would be a CIC or a charity as selected by either the members or the directors at the time, subject to the approval of the regulator. I hope that the Minister will be able to say that that sounds like a good idea.

Lord Sainsbury of Turville

I assumed that the noble Lord wanted to ask that question. I feel that I am on shaky ground as regards what happens in that situation and on why the members of a CIC are simply not asked. It could be a winding-up of a company which happened for reasons that did not reflect well on the members of the CIC. It seems to me that the regulator should protect the public interest. As I have said, in normal circumstances he will consult the members of a CIC on where a surplus should go.

Lord Phillips of Sudbury

I understand the Minister's point where there is a deficit, but there is not likely to be any adverse or disreputable consideration where there is a surplus. That means that all creditors will have been satisfied. In charity law, the norm in a winding-up provision is precisely that: to say that on a winding-up if there is a surplus the members and/or the directors should decide on the destination, provided it is within one or other category. I believe that that would be a much better way and a much less bureaucratically heavy way than rushing off to the regulator and saying, "Mr Regulator, what do you suggest?"

Lord Sainsbury of Turville

One of the bases of this matter is that there is a public interest in such companies. In those circumstances, that should be exercised by the regulator. Of course, there are other reasons why there may be a surplus, such as the CIC is not using assets for the community benefit, but is storing them up for itself. Again, it seems to me to be essential that there is some kind of public interest imposed before it simply hands it over to a cause of its own.

Lord Phillips of Sudbury

I do not want to make a meal of this point, but there is no such provision vis-a-vis winding up a charity. The Charity Commissioners do not have to be consulted; they do not have a power to say where the net assets of a charity should go. A charity is more of a public interest vehicle than a CIC. Perhaps the Minister should contemplate the point. It seems to me that if there is a surplus and provided that it goes to another CIC or a charity, the regulator should not have to worry his or her head about it.

Lord Sainsbury of Turville

I shall consider that point. The comparison with a charity is one that we should bear in mind.

Lord Glentoran

I thank the Minister for those comments. The Government have gone a long way to satisfy our concerns on this issue. I think that the Minister is clear that the noble Lord, Lord Phillips, and I are thinking down the same route for Clause 28. We shall return to the matter on Report.

On Question, amendment agreed to.

Clause 28, as amended, agreed to.

Clause 29 [Memorandum and articles]:

The Deputy Chairman of Committees

If Amendment No. 120A were to be agreed to, I should not be able to call Amendments Nos. 121 and 122.

Lord Glentoran moved Amendment No. 120A: Page 28, line 31, leave out subsection (3).

The noble Lord said: In moving Amendment No. 120A, I shall speak also to Amendments Nos. 121 and 122 and on the Question of whether Clause 29 shall stand part. We feel that there is a certain superfluity to some of the amendments. Clause 29 makes clear the memorandum and articles that a CIC must provide. Each CIC will be required to register a memorandum and articles of association, which together will form its constitution. The majority of the detail is confined in draft Regulations 7, 8 and 10 and Schedules 1 to 3 which relate to them. These are intended to provide the basis for the comprehensive asset lock, in conjunction with Clause 27 and its relevant regulations.

Clause 29(3) provides for regulations to set out provisions, which must be included in the constitution of each CIC. Subsection (4) gives more detail on the sort of things to be required. These include provisions about the transfer and distribution of assets. I appreciate that the Minister will argue that it is proper for regulations to set out the nitty-gritty of the constitution, and that this sort of technical detail would be out of place on the face of the Bill. We, however, are not entirely convinced of that.

Amendment No. 120A probes leaving out subsection (3). I tabled the amendment because I took offence to the fact that all the details of the memorandum and articles would be contained in regulations rather than being on the face of the Bill. Now that we have the regulations in draft which give effect to subsection (3), why can we not have these on the face of the Bill as a schedule? The relevant draft regulations, which relate to this subsection—Regulations 7 and 8 and Schedules 1, 2 and 3—are complicated, but have been drafted. Why can they not be on the face of the Bill rather than confined to secondary legislation, particularly when it relates to regulations and schedules to regulations?

Amendments Nos. 121 and 122 are aimed at a slightly different issue. However, paragraph (b) of Clause 29(3) states that memorandum and articles of a CIC, must not include such provisions as regulations require not to be so included".

We find that paragraph—dare I say it?—superfluous. If the content of the regulations spells out how the memorandum and articles of a CIC are to be drawn up, what is the need for paragraph (b) to state that the memorandum should not include such provisions as regulations require not to be included? Perhaps the drafting could merely be simplified to say that, regulations will make provision for how the memorandum and articles of a CIC are to be drawn up".

On a further note, I should like to say that I find the technical detail contained in the regulations confusing. Legislation is difficult to get to grips with when one has to turn to regulations to find out the detail of a provision. However, in the case of draft Regulations 7 and 8, we are simply referred again to Schedules 1, 2 and 3. They make clear that there are actually three different types of constitution that a CIC can choose from, depending on whether it wants to be a CIC limited by guarantee without share capital—Schedule 1—a CIC limited by shares or a CIC limited by guarantee with a share capital—Schedule 2—or a CIC with share capital which wants to make payments of dividends to shareholders—Schedule 3.

Apparently Schedules 1 and 2 contain the same provisions in respect of distribution and treatment of assets on winding up and the same provisions in respect of voting but differ in respect of membership because Schedule 2 has shareholders. Schedule 3 is different from the former two because it contains different provisions on membership and voting, distinguishes between investor and non-profit shares and has different rules on the distribution of assets and payments to shareholders. Perhaps the Minister could also shed some light on the provision in paragraph 6(1) of Schedule 3 which reads: The total number of votes that may be cast by the holders of investor shares in respect of such shares at a general meeting of the company shall not exceed [24%] of the total number of votes that may be cast at the meeting".

I notice that the figure of 24 per cent is in square brackets in the draft regulations. Can the Minister tell us on what basis he arrived at that figure and whether, as it appears likely, he is open to changing the figure if there is appropriate demand?

CICs are either one thing or the other. The Government have talked about an "off the shelf" model for a company which wants to have an asset lock and to benefit the community. This, they have argued, is highly preferable to leaving it to individual companies to be formed normally under the Companies Act but which have to write such provisions into each individual constitution. But such is the need to allow CICs to be "flexible" that we have three different models as set out under Schedules 1 to 3 from which a CIC has to choose. Furthermore, Regulation 9 gives another possibility that allows a CIC to amend the provisions inserted in its memorandum and articles in terms of the distribution of assets only to charities and not to other CICs.

I suggest to any new social enterprise wishing to set itself up that the multitude of options contained in the schedules to regulations to the Bill itself will be confusing. I am concerned that such a company will need to seek legal advice which will be costly, which will take up time and which in certain parts of the country may not even be available. Moreover, it has been claimed that currently there is a real lack of provision of good sound legal advice on the less well known models for organisations. For example, according to the government document which reviews charities and the not-for-profit sector, Private Action, Public Benefit: The social enterprise business model in general is poorly understood. In particular, the Industrial & Provident Society is not well recognised, and I&PS law is not as well developed as company law. This lack of knowledge impedes the creation of new social enterprises".

Can we be sure that legal advice will be readily available to help CICs to pick the best of these multifarious options to suit their needs? Faced with so many different prescriptive models of constitution, a company looking to have an asset lock might be tempted to write its own asset lock into a constitution as set up under the simple, more familiar formula provided by the Companies Bill.

I believe that these rather lengthy comments of mine show the variety, complexity and difficulty of finding a way through this maze. The purpose of the amendment is to try to encourage the Government to improve the situation and create further clarity. I beg to move.

[The Sitting was suspended for a Division in the House from 4.14 to 4.24 p.m.]

Lord Phillips of Sudbury

Will the Minister confirm that, given the way in which Clause 29 is drafted, particularly subsection (3), there is no limit to what could be insisted upon by any government by way of regulations in respect of the memorandum and articles of a CIC? There is no constraint whatever on what they could provide. The only constraint could be having to get an affirmative resolution of both Houses before it would come into effect, but, as we all know, defeating such resolutions is as rare as white sea eagles, and I am anxious that there is no framework for regulations prescribed by the clause. I have a certain sympathy, therefore, with the amendment.

Lord Evans of Temple Guiting

The amendments relate to powers contained in Clause 29 to make regulations about what must and must not be in the constitution of CICs. Since the earlier amendments were tabled, the Government have published draft regulations showing how that power and other powers contained in Part 2 of the Bill are intended to be used. While the draft regulations are simply indicative and will be considered further before they are finalised, they reflect the Government's policy intentions. I will therefore refer to them when explaining why the Government are resisting the amendments.

May I make one point about consultation on the draft regulations? They were published in order to assist Parliament's consideration of the Bill and will be discussed with interested parties before any final version is laid before both Houses for approval. I say that because Members of the Committee have talked about how the regulations do not go far enough and are not clear. They will have an opportunity, as will any other interested party, to work on the regulations before they are laid before both Houses.

The amendments would remove the powers to make regulations to require or prevent particular provisions being included in a CIC's constitution. The powers are a significant element of CIC structure. The draft regulations give a number of examples of why we believe they are needed and how we intend that they should be used.

The power in subsection (3)(a) is the means by which important provisions on the distribution of assets and on company membership and voting rights are included in the constitution of each CIC. Draft Regulations 7 to 9, together with the schedules in the draft regulations, show the sort of provisions we have in mind. The key advantage of putting these things into the constitution of each CIC, rather than simply stating them in legislation, is that it will enable the CIC to demonstrate clearly to all its stakeholders the key provisions that apply to it simply by referring to its constitution.

As an example of the use of the power in subsection (3)(b)—and as an answer to one of the points raised by the noble Lord, Lord Glentoran—-draft Regulation 10(1) provides that, except as provided in the remainder of the regulation, a CIC must not include in its memorandum the independent object of disposing of assets for less than full consideration. CICs must not set themselves up with the purpose of giving away assets for less than full value, as an end in itself, except where the purpose is to give the assets to another CIC or charity. Of course, this does not affect the power of a CIC to dispose of assets for less than full value in pursuit of the community benefit. This provision is a central part of the asset lock. Without the power contained in subsection (3)(b) of Clause 29, it could not be included in the regulations.

The noble Lord, Lord Glentoran, asked why the provisions were not set out in the Bill. As with other delegated powers in this part of the Bill, it is vital to ensure that legislation is flexible enough to deal with the developments in the sectors where CICs are expected to be used. For example, it would be possible to introduce or amend provisions under the clause if that were judged necessary to deal with attempts to avoid the requirements of CIC status. The noble Lord, Lord Glentoran, also asked what was magical about the 24 per cent of votes in Schedule 3 to the regulations. That provision comes as a result of our consultations, during which there were very strong indications that investor shareholders should have less than 25 per cent of the total voting rights, so that they could not block special resolutions at a meeting of the company.

The noble Lord, Lord Glentoran, also argues that CICs can have only what the regulations let them have in their memorandum. However, CICs are free to add other things to their memorandum and articles, as long as they also include what the regulations require. The noble Lord talked about the absolute importance of legal advice. That important issue was covered in the paper, Private Action, Public Benefit. The CIC is intended to help to bring clarity to the legal forms for social enterprises. We have already discussed the need for good quality advice in this Committee, and I do not believe that I can add to what we have said.

The noble Lord, Lord Phillips, asked whether there was a limit to the regulations that could be imposed on the memorandum and articles of each CIC. Subsection (3) must be read with the list in subsection (4), which may have a limiting effect on the width of the power. With that answer, I hope that the noble Lord will withdraw his amendment.

4.30 p.m.

Lord Phillips of Sudbury

Perhaps I may take up the final point very quickly. The Minister said that subsection (4) might have a constricting effect on the construction of subsection (3). I should be grateful if he would consider that after this sitting, because I do not see it. Subsection (4) simply says that the regulations required under subsection (3) "may … include". It does not use the word "must".

In addition, the noble Lord, Lord Glentoran, raised the issue of the limit of 24 per cent on investor shareholders. That in itself will be wholly ineffectual in the terms that the Minister described as justifying the limit. It will be the norm, as it is in business, for investor shareholders to have simply as a matter of contract a prohibition on the passage of resolutions that they do not like. I point that out because I do not believe that the provision will work.

Lord Glentoran

I thank the Minister for his, again, detailed response. We have again moved forward quite a long way. I shall certainly take advice, having been prompted to by what the noble Lord, Lord Phillips, has just said about the limit of 24 per cent. Perhaps we shall return to that.

The clause states: The memorandum and articles of a community interest company … must not include such provisions as regulations require not to be so included". Do we really need that in the Bill? Is there a specific reason? Having said what should be there, must we say what should not? It seems to be an extra bit of gobbledegook. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 121 and 122 not moved.]

Lord Glentoran moved Amendment No. 123: Page 29, line 4, after first "the" insert "holding of meetings and

The noble Lord said: In moving Amendment No. 123, I shall speak also to Amendment No. 125. Again, they cover a fairly small but, I believe, important point. As I mentioned previously, subsection (4) gives details of provisions that regulations may specify must be included in the memorandum and articles of all CICs. They include provisions about the transfer and distribution of assets; the payment of interest on debentures and debts; the membership and voting rights of members; and the appointment, removal and voting at meetings of directors. That is merely a sketch of some of the most relevant details to be included in the regulations.

However, I believe that some important features which would normally be included in the constitution of a company have been left off the list. Paragraph (d) states that there should be, provisions about the voting rights of members of the [CIC]", but there is no mention of the need to hold meetings. When I first looked at the Bill without the benefit of the draft regulations which we now have, I was a little surprised by that omission. Should the memorandum and articles of a CIC include details of the payment of interest on debentures but have nothing to say about the CIC having an obligation to hold meetings both of its members and directors? How could members under paragraph (d), or directors under paragraph (f), vote on anything without having a meeting?

I was glad to see that the Law Society shared my concerns. It commented: We suggest that the (admittedly non-exhaustive) list of provisions which regulations made under clause 29(4) may require to be included in the memorandum and articles of a CIC should include a reference to the calling of meetings of members of the CIC as well as the voting rights of members".

The draft regulations—for example, at paragraph 5(1) of Schedule 1—mention the rights of members, to vote at a general meeting of the company", but there is still no explicit reference to having to hold meetings.

It is an old ruse of small organisations—for example, clubs, charities and so on—never to hold a meeting, so that one cannot be voted out and things cannot be changed. Those of us who have been involved in that world know that, unless one is forced to hold a meeting, often people will find good reasons not to do so. I beg to move.

Lord Evans of Temple Guiting

Once again, the draft regulations which the Government published in February, after these amendments were tabled, are relevant to a discussion on the amendments. The amendments would add to the list in Clause 29(4) of what regulations made under subsection (3)(a) may include. I stress that that list is not exhaustive. It would be possible for regulations made under the clause to deal with other things as well as, or instead of, those listed in subsection (4).

Although subsection (4) is intended to be merely an illustrative list, the Government are resisting the amendments for three reasons. First, we do not believe that the provisions that they cover are necessary in this clause, and I shall explain why in a moment. Secondly, and consequently, we are a little concerned that including them would lengthen an already long list. Thirdly, it could create false expectations of what will be covered by regulations made under the clause.

The new references are to the holding of meetings. We do not believe that they are necessary as CICs will have to meet the same company law requirements about the holding of meetings as other companies. Our public consultation on the CIC proposals in 2003 did not suggest that additional provisions on meetings were necessary.

In contrast, subsection (4) indicates that regulations under this clause may contain provisions about voting rights. We intend that CICs will include special provisions about voting rights in their constitution, so that the majority of votes will belong to shares which carry no rights to dividends or a return of capital on the winding-up of the company. That is to ensure that shares that provide a right to private gain from the activities of the company will not carry sufficient votes to control the company to the detriment of its pursuit of community interest. That proposal was supported in our consultation, and draft provisions on those lines are contained in the draft regulations.

Before I sit down, perhaps I may simply say to the noble Lord, Lord Glentoran, that each CIC can put into its memorandum and articles any matter that it wishes, and one could certainly be provisions relating to the number of meetings of directors, senior staff or the management team. There is no bar to that. I hope that the noble Lord is satisfied with my explanation and will withdraw the amendment.

Lord Glentoran

I thank the noble Lord for that. In principle, the answer is "Yes". I have one question: can the regulator require a meeting to be held, if he hears or fears that a company has not called the requisite meeting? Can he insist that it happen?

Lord Evans of Temple Guiting

I am informed that the regulator cannot. However, like any other company, a CIC will have to hold an AGM, unless, in the case of a CIC that is a private company, the members have unanimously passed an elective resolution to dispense with the holding of an AGM. Even in that case, any member can still insist that an AGM be held. Members with 10 per cent or more of the paid-up capital of the company with voting rights—or, if the company does not have share capital, members with 10 per cent or more of the voting rights—may requisition an extraordinary general meeting of the company. The answer to the noble Lord's question is that the regulator cannot enforce it, but members of the company can.

Lord Glentoran

I thank the noble Lord for that explanation, and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 124 and 125 not moved.]

Lord Glentoran moved Amendment No. 126: Page 29, line 7, at end insert ", and (g) provisions about how the company will benefit the community

The noble Lord said: The amendment relates to Clause 29 and to Regulation 24. We are considering how we might state in the Bill what regulations should require to be contained in the memorandum and articles of a CIC. I tabled the amendment before the draft regulations were published.

The Explanatory Notes make it clear that, Each CIC will be required to register a memorandum and articles of association, which together form its constitution".

Our amendment would make sure that regulations required the memorandum and articles of each CIC to include provisions about how the company benefited the community. That should go without saying. It must be right for the memorandum and articles of a CIC to give some detail about how the company intends to benefit the community. If it has had to fulfil a community interest test—whatever that is—it should be no problem to give a brief outline of how the company benefits the community.

We have already heard that the stakeholders of a CIC are to be the eyes and ears of the regulator and will report to him instances where, they think, there has been mismanagement of a CIC. That includes not fulfilling the community interest test, I suggest. The regulator is then meant to react to the reports and kick into action appropriately. If the system is to the best of its ability, the CIC should state clearly in its memorandum how, it believes, it achieves its community benefit role.

I see from draft Regulation 24 that a justification of the community interest aspect of a CIC must be included in the annual report, as provided for by Clause 31(3). Again, the inclusion in the annual report of a statement of how the CIC's activities have benefited the community is a new development since the consultation process and a fundamental one. However, I ask the Minister again why it must appear in the annual report of a CIC, rather than in its memorandum and articles, which effectively draw up its constitution and the foundation principles on which the CIC is based.

The consultation paper, Private Action, Public Benefit, mentioned, a clause in the constitution"— of a CIC— setting out the objects of the company".

For that reason, it would be more suitable to include a statement of community interest that would set out the objects of the company in the memorandum and articles. I beg to move.

4.45 p.m.

Lord Evans of Temple Guiting

This amendment, like Amendments Nos. 123 and 125, which we have just discussed, adds further provisions to the list of what regulations made under subsection (3)(a) may include. As we have already discussed, the list is not exhaustive. Therefore, it would be possible for regulations made under this clause to deal with other things as well as, or instead of, those listed in subsection (4). As with Amendments Nos. 123 and 125, the Government are resisting this amendment because it is unnecessary and may be confusing.

The amendment would insert a reference in subsection (4) to provisions concerning how the CIC will benefit the community. The Government expect that some CICs will wish to set out their activities in their constitution, but they do not intend to make that compulsory. The results of our consultation last year highlighted the importance of giving CICs the freedom to change their purposes over time, to benefit their communities in different ways and to meet changing needs. The Bill therefore provides for a flexible approach to that in the constitution of the company. It is not our intention to tell community interest companies how they should benefit the community, provided that whatever activities they carry on are for the benefit of the community.

Where a CIC chooses to commit itself to specific objects in its constitution and the statement of objects is so precise that a reasonable person might consider that the carrying on of activities in furtherance of that object is for the benefit of the community, the regulator will be able to take supervisory action if the CIC fails to carry on any activities in furtherance of those objects. Clause 32 of the Bill calls these "community interest objects". An example might be where a CIC sets itself up with the object of providing care and shelter for the homeless.

However, a CIC will also be able to establish itself with wider objects in its constitution, such as general trading objects. In such cases, the CIC will be able to pursue whatever activities it wishes for the benefit of the community. The regulator will still be able to take action if he concludes that such a CIC is not satisfying the community interest test. This flexible approach means that a provision such as that contained in the amendment is not needed.

The noble Lord, Lord Glentoran, asked about the possibility of a reporting requirement and whether that should be included in the memorandum and articles. The aim is to ensure that CICs can adapt their activities to serve the community in new ways over time. It is more appropriate to require a report each year on what has been done than to enshrine what the CIC intends to do in its memorandum and articles. The provision in the Bill for very direct annual reporting is, in our view, of more significance than a statement on what a CIC plans to do as it is set up. It is a question of practice against theory. With that explanation, I hope that the noble Lord will feel able to withdraw the amendment.

Lord Glentoran

Once again, I thank the noble Lord for the explanation. I certainly agree with what he said; namely, that the reporting process is a high priority. However, I find it strange that the Government resist putting the community interest objective within the constitution of the company. I shall certainly think about that. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 127 not moved.]

Lord Phillips of Sudbury moved Amendment No. 128:

Page 29, line 8, leave out subsection (5).

The noble Lord said: I had forgotten about Amendment No. 128. I tabled the amendment because it struck me that subsection (5) was superfluous. I suggest to the Government that it is superfluous. I beg to move.

Lord Glentoran

I was all prepared to agree with the argument of the noble Lord, Lord Phillips. We feel that the drafting is extraordinary. Not only is it confusing, but it almost ties down CICs into a straitjacket in terms of what can and cannot be included in their memorandum and articles, which will form their constitution. It is hardly flexible. It says that anything included in the memorandum, which is not obligatory as required by regulations under subsection (3)(a), has no effect. This seems restrictive and unnecessary. I support the amendment.

Lord Evans of Temple Guiting

The amendment would remove subsection (5) of Clause 29, which makes it clear that the regulations under this clause override any inconsistent or conflicting provisions in the constitution of the CIC.

The constitution of a CIC should comply with the regulations made under this clause. But if it does not, the amendment would lead to confusion as to whether the provisions of the constitution apply or the regulations. If, as a consequence of this amendment, the constitution of a CIC can override the regulations, then it would become possible for CICs to evade the asset lock simply by changing their constitution.

We thought the point of the noble Lord, Lord Phillips, was going to be whether there was any precedent for subsection (5). He did not mention that, but he may be interested in the reply. The answer is in paragraph 2(4) of Part 1 of Schedule 3 to the Commonhold and Leasehold Reform Act 2002, concerning the memorandum and articles of commonhold associations.

The regulator has no powers to prevent such changes to a CIC's constitution, apart from changes in the memorandum to the objects clause under subsection (6) of Clause 29. We feel that it would be inappropriately restrictive and bureaucratic to give the regulator such powers. In short, the amendment would open the way for CICs to avoid the fundamental requirements of CIC status. The Government cannot accept that.

The noble Lord, Lord Glentoran, raised a point about subsection (5) meaning that anything not required by the Bill is therefore of no effect. The answer is: no, it does not. Things are of no effect only if they conflict with one of the terms required under this clause.

Lord Phillips of Sudbury

I am grateful for the Minister's response to arguments that I never advanced. However, it seems to me to be belt and braces of the most blatant kind because Clause 29(3) states that one shall not include these regulations, but those regulations you must have. So if one does have regulations in conflict with subsection (3), they must be unlawful and of no effect. I am not going to press the matter. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 29 agreed to.

Clause 30 [Names]:

Lord Glentoran moved Amendment No. 129: Page 29, line 31, leave out ""community interest" and insert

The noble Lord said: This is a small idea perhaps rather than an amendment. I shall try to be brief. It is probably a mistake on my part, but never mind. I think that there may be a discrepancy in Clause 30, which deals with names and their abbreviations. Subsection (1) states: The name of a community interest company which is not a public company must end with—…`community interest company', or … `c.i.'".

Subsection (3) states that a community interest company which is a public company, must end its name with "community interest public limited company" or "community interest plc". Why is the abbreviated ending for a community interest company which is a public limited company not simply "CIPLC'? That would be in line with the abbreviation under subsection (1). Is such an acronym thought to be too cumbersome to handle? Our amendment would provide for the ending of a CIC that is a plc to be "CI PLC". I beg to move.

Lord Phillips of Sudbury

Perhaps I can use this amendment as a hook on which to make the point that, as the Bill is drafted and in particular Clause 30, on the notepaper or on anything else of a CIC that is not a public company there will be no indication that it is of limited liability status. If I am right in that conjecture, I suggest that that is not in the public interest, particularly as this will be a new legal animal. I remember the arguments that we had at the time of the Limited Liability Partnerships Act which provided for a similar arrangement. After I had raised the matter, the Government agreed that if one were to use the abbreviation "LLP", the fact that a company had limited liability should appear on the notepaper. It would be wrong for members of the public not to have the right to see on all notepaper that a CIC has limited liability. I do not mind how that is achieved. It may need to be a provision under part of the Companies Act.

Lord Evans of Temple Guiting

The intention that underlies the amendment—to abbreviate still further one of the abbreviated names for a CIC which the clause permits—is very welcome. We agree that the abbreviation proposed in the Bill for a "community interest plc", is rather unwieldy. However, on balance I think that the longer form set out in the Bill is preferable.

That is partly because, in practice, we do not expect that many CICs will be public limited companies, at least in the early days. For those that are, the abbreviation "CIC" will not of course be appropriate, as it will not convey—the point made by the noble Lord, Lord Phillips—that the company is a public company. That is why Clause 30 provides another formula. But, I fear that the abbreviation resulting from this amendment, "c.i.p.l.c.", will be something of a mystery to those dealing with the company. Unlike "CIC", it is unlikely to be used frequently enough to be associated in the public mind with the context of community interest. It is for that reason that we think it is necessary to maintain the words "community interest" even in the abbreviated form.

In answer to the question posed by the noble Lord, Lord Phillips, Section 351 of the Companies Act is amended by paragraph 7 of Schedule 6 so that CICs must say that they are limited if indeed they are to be limited. I hope that with that explanation of how many angels dance on the head of a pin, the amendment will be withdrawn.

5 p.m.

Lord Glentoran

I thank the noble Lord for that explanation. I thought that the recommendation was a thoroughly good one. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 30 agreed to.

Schedule 6 agreed to.

Lord Glentoran moved Amendment No. 129A:

After Schedule 6, insert the following new schedule—

"SCHEDULE

COMMUNITY INTEREST COMPANY REPORTS

1 (1) The community interest company report shall contain—

1. (a) a statement describing the manner in which the company's activities during the financial year have benefited the community;
2. (b) a statement describing the steps, if any, which the company has taken during the financial year to consult persons affected by the company's activities. and the outcome of any such consultation;
3. (c) where the company has at any time during the financial year declared a dividend on any of its shares—
1. (i) the amount of dividend so declared on each share, as a percentage of the amount paid up on each share; and
2. (ii) the applicable dividend cap applying to each share (set in accordance with regulations).
4. (d) where the company has at any time during the financial year a debt outstanding on which it has agreed to pay interest at a performance related rate, or a debenture in issue on which such a rate is payable—
1. (i) the rate of interest payable on debt or debenture as calculated over a 12 month period ending with the most recent date on which interest became payable in respect of that debt or debenture during the financial year; and
2. (ii) the applicable interest cap applying to that debt or debenture (set in accordance with regulations).
5. (e) the information specified in paragraphs 1 to 14 of Part 1 of Schedule 6 to the 1985 Act (chairman's and director's emoluments, pensions and compensation for loss of office) save that the information specified in paragraphs 2 to 14 shall be given only in the case of a company which is not a quoted company.

(2) Where a community interest company has provided the information required by sub-paragraph (1)(e) in its copy of the annual accounts for the year delivered to the registrar under section 242(1) of the 1985 Act, the community interest company report need not contain the information required by subparagraph (1)(e) provided that the community interest company report contains instead a statement that details of the remuneration of the directors of the company during the financial year may be found in the notes to the annual accounts of the company.

2 (1) The following provisions of the 1985 Act shall apply to the community interest company report as they apply to the directors' report.

(2) The provisions of the 1985 Act which so apply are—

• section 234A(b) (approval and signing of direct ors' report);
• section 238(c) (persons entitled to receive copies of accounts and reports);
• section 239(d) (right to demand copies of accounts and reports);
GC 389
• section 241(e) (accounts and reports to be laid before company in general meeting);
• section 244(f) (period allowed for laying and delivering accounts and reports); and
• section 245(1) and (2)(g) (voluntary revision of accounts or directors' reports)."

The noble Lord said: I rise to speak to Amendments Nos. 129A and 129B. These amendments seek to alter subsection (3) of Clause 31 which makes provision for community interest company reports. At the moment it reads: Regulations may—

1. (a) make provision as to the form of, and the information to be included in, a community interest company report, and
2. (b) apply provisions of the Companies Act 1985 relating to directors' reports to community interest company reports (with any appropriate modifications)".

We have now had the benefit of seeing these regulations which appear as draft regulations 24 and 25. Believe it or not—it is true—having read them in detail I see no reason why they cannot be transferred to become a schedule on the face of the Bill. It is not unusual to give statutory force to the report that directors should prepare every year. There is ample precedent for that. Our Amendment No. 129A would fully transfer the detail of draft regulations 24 and 25 into a schedule. This includes statements about how the CIC's activities have benefited the community, what consultation has taken place and detailed statements about how the asset lock has operated. We are happy with the criteria for the CIC report as set out in the draft regulations. Why not give it more prominence, therefore, by putting it in the Bill as a schedule?

At any rate, the amendments I have tabled today give us an opportunity to discuss the format and content of the annual report for CICs. These are a different and specific class of company and we agree with the Government that they should therefore have some prescription in regard to the report which they produce. If nothing else, this will aid the regulator in making sure that all CICs comply with the provisions in the Bill. I feel strongly about this, particularly having gone through the regulations and so on. They are exactly as we would like to see them but I am constantly looking for simplicity of presentation of the Bill. If the regulations were included as a schedule to the Bill, it would make life easier and clearer. I beg to move.

Lord Sainsbury of Turville

When the Government published draft regulations as though made under the powers contained in Part 2 of the Bill in February, we did so to assist debate on the provisions in the Bill. It was a pleasant surprise to see that two of the draft regulations have now materialised in these amendments as a proposed new schedule to the Bill.

The noble Lord, Lord Glentoran, asked, why not give the measure more force by including it on the face of the Bill? I shall try to explain why we think that the measures are better contained in the regulations. Perhaps I may quote from the memorandum which the department provided to the Select Committee of this House on Delegated Powers and Regulatory Reform in December last year. That document said: The use of delegated powers will allow both the contents of the report and the procedures applying to it to be changed relatively quickly, either to expand reporting requirements if this is judged to be appropriate, or to reduce or amend them in order to reduce the regulatory burden. For instance, as the social enterprise sector grows more sophisticated, it may be appropriate for the minimum reporting requirement to be increased, e.g. to create links to the practice of social audit. At the same time, it will be important to ensure that the reporting obligation does not impose an unnecessary burden on CICs. The regulations are subject to the affirmative procedure, since any change to the requirements would impact on a significant number of people—both CICs and their stakeholders". The amendments also fix in primary legislation the various Companies Act provisions relating to the directors' report which are also applied to the community interest company report. In my view, this is a level of technical detail better left to regulations. This power should not be contentious because it is strictly limited to applying the same provisions, which already apply to directors' reports, to CIC reports. The flexibility provided by leaving this to regulations is important, because not all the procedures and rules applying to directors' reports need to apply to the CIC report, and views as to the appropriate level of formality and process to be applied to the CIC report may change over time.

The amendments would remove the flexibility I have described. It would mean that if any of the provisions that we intend to include in regulations turn out to be unnecessary or overly burdensome, primary legislation would be needed to deal with the problem. It would also be needed to shore up the reporting requirements if we conclude in the light of experience that they are inadequate. That is why the Government are unwilling to accept the amendment and why I ask the noble Lord to withdraw it.

Lord Glentoran

I thank the Minister for that explanation; I can see where the Government are coming from. My strength of feeling about it was, as we moved through the Bill, that it was still a framework Bill. I am still trying to persuade the Government to consolidate and clarify it more. I felt that by getting rid of two sizeable chunks of regulations and putting them in the Bill as schedules would tidy it up. But I take the point that this is a new form of company which may need modifying to go through the affirmative procedure and primary legislation. To change them would not be a sensible approach. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 31 [Community interest company reports]:

[Amendment No. 129B not moved.]

Clause 31 agreed to.

Clause 32 [Community interest test and excluded companies]:

Lord Glentoran moved Amendment No. 130:

Page 30, line 19, leave out from "if to end of line 20 and insert "it meets the requirements of the regulations as provided for in subsection (5A)"

The noble Lord said: In moving Amendment No. 130, I should also like to speak to Amendments Nos. 130A and 132 to Clause 32, which deals with the community interest test.

As we all know, companies are not to be eligible as CICs unless they can satisfy the community interest test. The whole point of the CIC as a company model is to lock in assets in businesses which fulfil some kind of public benefit. We know this is not the same as the public benefit test for charities—we have had that debate already. How, then, are we to ascertain what is meant by this "community interest test"?

Clause 32(2) states: A company satisfies the community interest test if a reasonable person might consider that its activities are being carried on for the benefit of the community".

I am concerned about this "reasonable person" test. As far as I can see, what one person considers is an activity which is being carried on to benefit the community may be very different from what someone else thinks. This rather vague definition is augmented by subsection (4), which reads: Regulations may provide that activities of a description prescribed by the regulations are to be treated as being, or as not being, activities which a reasonable person might consider are activities carried on for the benefit of the community".

Amendment No. 131A proposes to leave out this subsection. The simple reason is that the drafting of the subsection has made it sound, to some extent, like nonsense. If one looks only at the second arm of the subsection, it says that regulations may provide that specific activities are to be treated as not being activities, which a reasonable person might consider are activities carried on for the benefit of the community".

Is this gobbledegook? Is there no better way in which this could be drafted?

On another point, subsection (4) says that regulations will set out what activities should and should not be thought by a reasonable person to be activities carried on for the benefit of the community. However, when one turns to the regulations, draft regulation 4 simply deals with the second arm of subsection (4)—that is, a description of the activities which are treated as not being activities which a reasonable person might consider to be carried on for the benefit of the community. They include activities in connection with a political party, elections, campaigning against the government or activities purely for private gain. We shall probe this issue further when we speak to the next group of amendments on "excluded companies". But my concern in relation to our amendments in this group is that the regulations give no further guidance at all about what a reasonable person should consider to be, activities …carried on for the benefit of the community".

Subsection (5) and regulation 3 expand on the definition of "community". According to subsection (5), this can include, a section of the community". Regulation 3 picks up on this, explaining that. a section of the community includes a section of the community consisting only of the employees of a single employer or the members of a particular body".

I suggest that that is helpful to a very limited extent. It makes it clear that social enterprises which are ultimately accountable to their users, members and staff, rather than, as is the norm with most private companies, to their providers of capital, can still satisfy the community interest test. This would include co-operatives and so on.

However, apart from that regulation, we are left none the wiser about the situation. Can the Minister tell us why the regulations go no further in giving guidelines or criteria for what a reasonable person should think are activities carried on for the benefit of the community? Can he give us some examples? We know that the Charity Commission provides guidance on the definition of "public benefit" by listing particular characteristics which it believes to be indicative of public benefit. The consultation paper, Private Action, Public Benefit, states at paragraph 5.29: The test of whether an organisation is in the public interest would not be as onerous as the test for charitable status—largely because CICs, unlike charities, would not have tax advantages. It would be more akin to the current test applied at the point of registration to Industrial & Provident Societies for the Benefit of the Community".

Perhaps the Minister can tell me whether that is still the case. It seems to me that, with the publication of the regulations, we are no nearer to knowing what the community interest test means beyond the fact that it introduces the notion of a "reasonable person".

According to the response to the government consultation paper on CICs, published in October 2003, it is for the regulator to apply a "reasonable person" test of community interest and to issue guidance on the test. Yet, from the responses, it appears that those concerned thought that such a test would be too onerous and would therefore be discouraged from applying for CIC status. There were queries about a possible confusion with the charitable test. Others commented that the criteria for the test would need to be transparent to ensure a consistent approach.

At this stage in our discussion of the Bill, I thought it sensible to suggest that regulations should make clear the definition of "community interest". Our amendments would remove the reasonable person test, which I believe is too subjective. Instead, they propose secondary legislation to contain a clear set of criteria which would attempt to define community interest. I expect the Minister to tell me that that is far too inflexible an approach and that leaving it to the discretion of the regulator would be much more attractive. I would not agree with that wholeheartedly.

"Community interest" may be hard to define and may encompass a range of diverse characteristics, but surely we could consider trying to put our finger on what all the different possible activities which one might consider to be in the community interest have in common. For example, in the consultation paper put out to consult on CICs in March 2003, page 17 mentions a Japanese law of 1988 to promote nonprofit activities. It specified the following categories:promotion of health and medical care or welfare; promotion of social education; promotion of community development; promotion of culture, the arts or sport; activities to protect the environment; disaster relief; ensuring community safety; protecting human rights and promoting peace; international cooperation; promotion of the creation of a gender-equal society; and advice and support relating to any of the activities listed.

I am not saying that we should adopt those criteria, but it seems possible to put forward some criteria for identifying what is or is not considered to be in the community interest, for the purposes of the Bill. It is certainly a worthwhile debate for Grand Committee, otherwise we will find ourselves hoping that a lot of companies will take up the CIC model, even though they have no clear idea whether their company would satisfy the community interest test. There has been no attempt yet to define the test or even to give examples. I beg to move.

5.15 p.m.

The Deputy Chairman of Committees (Lord Hogg of Cumbernauld)

I must advise the Committee that, if Amendment No. 130 is agreed to, I cannot call Amendments Nos. 131 and 131ZA, owing to preemption.

Lord Phillips of Sudbury

I have two amendments in the next group that relate closely to these amendments. It would be appropriate for me to comment, if I may, on some of the underlying unease identified by the noble Lord, Lord Glentoran.

I must confess that it was only today, when I listened to an earlier response from the noble Lord, Lord Evans of Temple Guiting, that I became aware of what seems, if I am correct, to be a wholly unsatisfactory framework for the legislation. The Charity Law Association has not picked up what, I think, I now detect: first, the so-called community interest test relates to activities, not objects. Clause 38(3)(d) says: if the company has community interest objects". I now realise that a CIC will not be required to have community interest objects. If that is so, we are in a deep and bottomless hole.

Judging the nature of a CIC solely by reference to activities, not objects, could lead us into all sorts of problems. I suspect that, in the early days, most CICs will be formed as CICs de novo, and we will not have an objects test because the company will not have to have what are described in Clause 32(3) as community interest objects. When the company presents its paperwork to the regulator for registration as a CIC, it will not have to have community interest objects, and it will not have any activities—the test by which CICs will be judged—to look to, because it will not yet have been formed.

Clause 33(5)(b) says that, on presentation of the document, a company will be considered eligible if, the Regulator … considers that the company will satisfy the community interest test". The community interest test is solely about activities, as set out in Clause 32(2). That must be an extraordinary state of affairs. The regulator will have to look into a crystal ball and decide, in advance, whether the activities of the enterprise will or will not comply with the test, the test being that a reasonable person would consider the activities being carried on to be for the benefit of the community. I hope deeply that I have got this wrong, but I rather fear that I have got it right. If I have, the noble Lord, Lord Glentoran, has, if not isolated the fact, used his twelve-bore, and a few of the slugs have hit the target. I shall say no more at this stage, until we have moved on to my own set of amendments, but the Minister might like to enlighten us.

Lord Sainsbury of Turville

Perhaps I should enlighten the noble Lord, Lord Phillips, right away on that point, because it is rather fundamental. When we reach a later group of amendments, we shall address how activities can be judged. In putting forward a CIC, one presents what the activities will be, and it is on that basis that the regulator must make a judgment. As Members of the Committee can see from the Bill, it refers to the activities that a company will do. I believe that that covers the point that a company does not have to be doing the activities before the regulator can judge them. Therefore, the test can be done on the basis of activities without there having to be objects in the memorandum and articles.

I also make a general point for the noble Lord, Lord Glentoran. Some 69 per cent of those who commented supported the test; only 6 per cent were opposed to it. The concerns raised in the consultation have been taken into account in drafting the Bill, by ensuring that the test is wide and not overly bureaucratic. That is what people were concerned about.

Lord Glentoran

Among those consulted, was there a group of people who might be regulators, as opposed to simply those from the social enterprise sector?

Lord Sainsbury of Turville

I believe that the consultation was very wide. Obviously, the number of people who could consider themselves to be regulators are rather few. The important thing is that, in this context, the people who might be running the social enterprises or involved in the social enterprise movement, said that they did not want the provision to be overly bureaucratic. That is something I believe we would all wish to support. I know it is close to the noble Lord's heart that we should not make the provision too bureaucratic.

We cannot accept the amendments. They relate to the community interest test, which is one of the key provisions of Part 2 of the Bill. Clause 32 gives a definition of the test in subsection (2), and then provides various powers to further define and clarify aspects of the test in regulations. The draft regulations published in February show how we intend the powers to be used. We have provided for regulations to do that, since we think it is important to preserve a degree of flexibility in respect of the detailed application of the test. The use of regulations will allow the test to reflect changing views of what is in the community interest. It will also allow future governments to deal with any attempt to get round the test, and to use the CIC form as a "flag of convenience". Our consultation last year highlighted the importance of that flexibility.

Amendments Nos. 130 and 132 would provide even more flexibility. They would have the effect of removing the definition of the test from the Bill and leaving it to regulations to define what the community interest is. I believed that that was something that the noble Lord, Lord Glentoran, was against in principle. In this particular case, he is arguing for removing from the Bill one of the key tests of a CIC and putting it into regulations, whereas previously he has argued for taking things out of regulations and putting them in the Bill. In the short term, the change might have little effect on the substance of the test, since the present Clause 32(2) could simply be transposed into regulations. However, it would leave it open to this or a future government to alter quite fundamentally the way in which the community interest test works for the purposes of CICs, through secondary legislation.

Noble Lords may be surprised to hear me say this, after our debates on other amendments to this part of the Bill, but I believe that this is a flexibility too far. For the CIC to develop into a well recognised and meaningful form, as we hope it will, it is important that all community interest companies should have a fixed and clear defining characteristic. That is provided by the community interest test. All companies must pass that test before they can become CICs, and all CICs must continue to satisfy the test or risk supervisory action by the regulator. As I said, the Government want to build a measure of flexibility into the definition. However, it seems sensible to have the definition itself on the face of the Bill, although the details are left to regulations.

Alternatively, perhaps the purpose of the amendments is to define a narrower test in regulations on the basis that the current test is too wide. However, subsections (4) and (5) already allow regulations to narrow or broaden the test by describing activities which may or may not pass the test and by defining what does or does not count as a section of the community for the purposes of the test. Our aim here is to ensure sufficient flexibility to respond to changes in the social enterprise sector and to attempts to misuse the CIC form. The current structure of Clause 32 provides the necessary flexibility while setting out the essential meaning of the test on the face of the Bill. It seems to me that that is how it should be. I agree that the Bill expresses the test in very wide and general terms. That is deliberate as we would like to make it as easy as possible for companies to pass the test if they want to and if they could reasonably be considered to benefit the community.

Amendment No. 13I A, of course, would remove a measure of the flexibility that is built into the structure of the test by deleting the power to make regulations specifying activities that do and do not satisfy the test. The draft regulations that were published in February show how we intend that power to be used.

Draft regulation 4 provides that various political activities do not satisfy the test. It also rules out activities that benefit only the employees of a single employer or the members of a particular body, unless the activities in question are not being conducted solely for private gain. These provisions are important. When they published the draft regulations, the Government emphasised that they would want to consult the social enterprise sector before finalising the regulations to ensure that the exclusions were appropriately framed. With that explanation of the balance that we are trying to create by putting the community interest in the main part of the Bill, but having regulations to broaden or to narrow it, I hope that the noble Lord will feel able to withdraw the amendment.

Lord Glentoran

I thank the noble Lord for that explanation. As he and I have said, it is a crux of ensuring that the Bill is right. I heard what the noble Lord said about consultation, as I did his quip that I am trying to get more on to the face of the Bill but that this time I am suggesting that something should not be on the face of the Bill. That was not my intention. Amendment No. 132 proposes that page 30, line 31, should read: (5A) 'Community interest' is to be defined in regulations made by the Secretary of State". The fact that that is to be defined by the Secretary of State was to be put on to the face of the Bill, whereas it would be entirely appropriate for the regulations to be in a schedule. I accept the previous argument made by the noble Lord. At this stage of the Bill, where community interest companies are brought into being, I have some sympathy with the Government's argument about using regulations in various parts, and therefore I can use that in my argument as well.

I am still concerned about the community interest test. I shall read what has been said carefully. I am particularly interested in the point made by the noble Lord, Lord Phillips, about the regulator having to make the decision without any evidence of whether a company will or will not fulfil the community interest test. In some ways—perhaps it is my nature—I like the formality of the Japanese example that I quoted. I am sure that it is not beyond the wit of man and the brains of those in Committee to put something together that will give a little more guidance than we have at the moment. In the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

5.30 p.m.

Lord Phillips of Sudbury moved Amendment No. 131:

Page 30, line 20, after "activities" insert "(if any)"

The noble Lord said: I wonder if it would be acceptable to the Committee to group Amendment No. 131ZA with Amendment No. 131. As they are both amendments to Clause 32(2), it might save a little time.

The amendments are self-explanatory. I now realise, to my shock and horror, that activities are to be looked at futuristically by the regulator when a CIC is coming for registration newborn. On any basis, subsection (2) needs altering because it says that the activities, are being carried on for".

It has to be either "are being" or "will be" carried on. That would be an alternative to my suggestion of "if any". It is a simple issue of clarification.

The "wholly or mainly" suggestion in Amendment No. 131ZA is designed to cover the fact that, as has been identified by the Charity Law Association, social enterprises of one kind or other quite often have marginal activities that are not within the mainstream of the social activity. For example, it might run a cafe in association with a communal garden. However, I now realise—which I did not when preparing the amendments—that a CIC does not have to have community interest objects. That seems bizarre to me, but that is how it now appears. Therefore, I accept that it is unnecessary to worry about whether the activities are "wholly or mainly" for the benefit of the community.

I am slightly thrown by my latter-day realisation. I would at least like the Minister to assure me that if the amendment is superfluous, the formulation will not penalise a CIC that has some activities that one might say are not being carried on for the benefit of the community at large because there is a café for the benefit of the people working on a communal garden, for example. On the other hand, he may tell me that the amendments are helpful additions to the subsection. I beg to move.

Lord Sainsbury of Turville

I shall speak to Amendments Nos. 131 and 131ZA. I appreciate the helpful intention behind Amendment No. 131, but I do not think that it is necessary and I believe that it might even have some unintended and unhelpful consequences.

The amendment appears to address the concern that Clause 32(2) of the Bill will not work in the case of an organisation applying to become a CIC. The question is, if the organisation has not yet incorporated, and so is not yet active, how will the regulator be able to decide whether its activities, are being carried on for the benefit of the community"? The answer lies in Clauses 33 and 35 of the Bill, which set out the way in which the test is to be applied to organisations that are applying to incorporate as a CIC, or to convert from another type of company to a CIC. For instance, Clause 33(5)(b) provides that a body seeking to be formed as a CIC is eligible to do so if, among other things, the regulator considers that the company "will satisfy" the test.

The future tense in that provision means that the regulator must take a decision based on what he knows about the applicant's intentions, as set out in the "prescribed formation documents". Those documents are to be specified in regulations. The draft regulations published in February provide for the formation documents to include a "community interest statement", which must contain a declaration that the company will pursue activities for the benefit of the community.

We have used this approach precisely because at the point of incorporation the applicant will not be carrying out any activities so a declaration is the simplest way of applying the test at that point. Subsequently, of course, the test will be applied to the activities that the CIC actually carries on. In other words, on an application to become a CIC, it is not necessary for the company to be already satisfying the test at the time of the application, just that the regulator considers that it will satisfy the test.

For completeness, I should add that a similar approach applies to conversion from an existing company to a CIC, under Clause 35. Again, the regulator must decide if the company "will satisfy" the test if it becomes a CIC.

For those reasons, we do not think that the amendment is necessary to make the test work. We are also concerned that it would allow a completely dormant CIC, whose directors had no intention of doing anything to benefit the community, to continue in that state of inactivity indefinitely and to satisfy the community interest test while doing so. That does not seem likely to help to build the credibility of the CIC form.

It is one of the defining characteristics of CICs that they are companies carrying on their activities for the benefit of the community and that their assets are to be used for the benefit of the community. We would not expect the regulator to take action in cases of temporary or short-term inactivity, but where a CIC is completely inactive for a long period of time, this may be of legitimate concern for the regulator because the CIC will not be carrying on any activity for the benefit of the community or using its assets for the benefit of the community.

On Amendment No. 131 ZA, once again I appreciate the evident intention behind the amendment of improving the drafting of the community interest test. The Government are resisting the amendment because, in our view, it is not necessary, and I will attempt to explain why.

In short, the amendment seeks to address a perceived failing in Clause 32(2)—namely, that all of a CIC's activities must benefit the community. That is not in fact the case. Instead, the test applies to the purpose for which those activities are being carried on. If a reasonable person can conclude that they are being carried on for the benefit of the community, then they will pass the test.

Let me give an example. It was, in fact, suggested by the Charity Law Association, which has raised this concern. The association suggested that if a vegetable-growing co-operative was set up to help the residents of a particular estate, but happened to run a bar as well, then the activity of running the bar might not pass the test. The association queried whether this meant that such an organisation, if it became a CIC, would have to set up a subsidiary which was not a CIC to run the bar. It suggested—and I have every sympathy with this—that such an arrangement would not encourage enterprise.

However, I can assure Members of the Committee that this is not how Clause 32 will work. In a case such as the example which I have borrowed, the regulator will apply the community interest test by asking whether a reasonable person could regard the organisation's activities as being for the benefit of the community. This does not mean that every single activity of the organisation must, in itself, provide direct benefit to the community. That would not make sense. In many cases, CICs will carry on activities, such as trading, that may have no intrinsic community benefit but will allow the CIC to achieve its overall aim of helping the community.

In this case, of course, the vegetable growing would be very likely to satisfy the test. But the activity of running a bar would also be expected to satisfy the test, provided that it is one of the things that the organisation does in order to achieve its purposes as an organisation. If the bar is helping to raise funds which are then used to benefit the community, or is simply providing a means of bringing the community together, that should not pose a problem in terms of satisfying the test.

Let me give another example. If an organisation exists to provide childcare facilities and, in the course of that activity, it provides refreshments to its staff or to the children's parents, or both, that would not be a problem in terms of satisfying the test. It might do so at a subsidy, or at cost, or even to make a surplus, providing the surplus is then used to benefit the community. The supply of refreshments in that way may or may not in itself be of benefit to the community, but the activity would be conducted in pursuit of benefit to the community.

To put it another way, when the regulator considers any activity that a CIC carries on or that an organisation that wishes to become a CIC intends to carry on, the key question that he must ask himself is not. "What does this activity in itself do to benefit the community?" but, "Why is the activity being carried on? Is it for the benefit of the community?". It is a matter of "Why?" and not simply "What?". If a reasonable person can conclude that things are being done for the benefit of the community, those things will satisfy the test. The exception is if activities are specifically defined, under powers elsewhere in the clause, as not satisfying the test. We will discuss the working of that provision separately during this stage.

The amendment, although welcome in its intention, might have unintended consequences. I have explained that the test will require the regulator to consider why the organisation is carrying on the activities that it carries on across the piece. The amendment would leave it open to an organisation to seek and win CIC status, even if some of the activities that it carried on were inconsistent with the benefit of the community. The organisation would have to show only that its activities were mainly for the benefit of the community. There is a risk of companies obtaining CIC status that might bring that status into disrepute. We would not welcome that.

I hope that I have given the noble Lord the reassurance that he is looking for. The Bill will not hinder the activities of CICs that give benefit to the community. On that basis, the amendment can be withdrawn.

Lord Phillips of Sudbury

That was an extremely clear answer to both amendments. The first of my amendments is misconceived, given that illumination of the day about the framework. A lot of people outside the Committee will be interested to hear what has been said in the past hour and will want to take stock of it.

I think that I am satisfied with the Minister's careful explanation of the phrase "wholly or mainly". I shall consider carefully what he said, and, if I feel that I need to come back to the matter, I might be in touch with him before the next stage. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 131ZA to 132 not moved.]

5.45 p.m.

Lord Glentoran moved Amendment No. 133: Page 30, line 32, leave out subsection (6).

The noble Lord said: Amendment No. 133 is another probing amendment. The headline in my notes says, "What on earth is an excluded company'?". That is what I wish to probe.

The principle behind the subsection is simple. Some companies are not eligible to be CICs. Such a company is, instead, what is called an "excluded company". The definition of "excluded company" is to be set out in regulations.

I have some difficulty with the way in which the provision is drafted. While speaking to the previous group of amendments, I mentioned that, with regard to CICs, Regulation 4 listed the sort of activities that were prescribed as, not being activities which a reasonable person might consider are activities carried on for the benefit of the community".

They include political activity such as campaigning for election for a particular party and campaigning against a law or a government policy. However, along with the description of activities that a reasonable person should not think is an activity for the benefit of the community, there is a further regulation describing what an "excluded company" is. Why do we need both regulations? Why can the former category not be amalgamated in Regulation 5 on excluded companies? The drafting seems odd.

I want to challenge two precepts about excluded companies. First, there are the political issues. Regulation 5 defines excluded companies as: (a) a company which is (or when formed would be) a political party; (b) a company which is (or when formed would be) a political campaigning organisation; or (c) a company which is controlled by a political party".

Regulation 6 then gives further details; in particular, under subsection, (1)(b) the definition of "political campaigning organisation".

I support, of course, the principle that no political party should satisfy the community interest test. There can, however, be a very fine line on occasion between political campaigning and community activity. It could be possible to justify some political campaigning as being for public benefit. This would, of course, not include politically subversive activity, but if we think about charities there are countless examples of organisations that serve the public good while also campaigning or lobbying the Government to change the law. These are the sort of organisations which lobby noble Lords every day of the week. Existing charity law and the Charity Commission have to determine what is a political purpose. Can the Minister tell us whether excluded companies will follow a similar process with the regulator when looking at the possible conflict between political campaigning and community interest? Has there been any further thought on this matter? As my colleagues at the Millennium Commission commented recently, Depending on the political issues of the day, this could vary from Greenpeace to asylum seekers rights to the Ramblers' Association. Anything can be considered political and therefore this could place the Regulator in an extremely difficult position. If he concluded that a CIC was campaigning politically, the most draconian powers such as the transfer of shares by Order or extinguishment of rights, could be invoked".

As far as I can see, the eligibility restriction on political campaigning organisations is dangerously broad.

My second issue that I want to raise deals with services which I believe should not be carried out by CICs because they are the legitimate responsibility of local government. I have had a great deal of experience in this area in the past. As noble Lords are aware, I am still on the board of the Millennium Commission. We were mandated to give money only to projects that did not absolve local authorities from services that they should be providing none the less. In other words, the original foundation of the commission was that it should not allow its funds to act as a substitution for public funds. This could often be very contentious and I see the same problems occurring here. In the consultation paper on CICs published in March 2003, on page 13, it was stated: The Government does not intend that CICs should deliver essential public services in core sectors such as hospitals and schools. Rather, CICs should develop to meet the needs of local communities, complementing core Government services in areas such as childcare provision, social housing, leisure and community transport".

As far as I can see, this does not satisfactorily clarify the situation. How does one differentiate between, essential public services in core sectors", and, complementary core Government service areas"?

There are some services which it is the duty of local authorities to use their budgets to fund, whether they run the services themselves, or contract them out to other providers. This is the first political point that I have raised but, as regards the Millennium Commission and the lottery funds, since they came to power this Government have moved the objectives and the permitted usage of those funds very considerably in terms of those funds being used directly for government and local government purposes.

But with CICs, you could have entrepreneurial social enterprises taking over providing services that should be provided by local authorities. This concern was echoed by the respondents to the Government's consultation who, warned of the danger of public bodies viewing CICs as being a convenient way of delivering services via social enterprises".

What is to stop that happening? When I asked the officials that question, they told me, "It just won't happen". That is not good enough. I believe that if the Government do not intend CICs to provide core public services or to be a substitution for government funds, they should make any CIC which does so an excluded company under regulation 5. I beg to move.

Lord Sainsbury of Turville

The noble Lord, Lord Glentoran, made some very interesting points setting out exactly how complicated it will be to define this area. From my point of view, that clearly says, "Put it in detailed regulations and don't try to cast it in stone on the face of the Bill".

He raised a number of cases—for example, political campaigning by bodies such as Save the Children or Amnesty International. The Government fully accept that there can be a fine line between community activity and political campaigning. A number of people made that point during the consultation. That is why the dummy regulations include a specific exemption from exclusion for political activities which are incidental to the non-political activities of a CIC and why they will allow CICs to engage in campaigning where it is incidental to the furtherance of their community benefit purposes. I believe that that is an area where the CIC regulator is likely to pay close attention to the Charity Commission practice.

The amendment proposed by the noble Lord would remove subsection (6), which both defines the concept of an excluded company for this part of the Bill and allows regulations to set out what kind of companies will be excluded companies. The definition is relevant in Clauses 33 and 35, which determine eligibility to become a CIC. Excluded companies may not become CICs. The definition is also used in Clause 38, which restricts the regulator's power to order a transfer of shares and membership rights under Clause 46. That power may be used only in respect of CICs that are, or have become, excluded companies. That is why we need to have the concept of excluded companies in the Bill.

The draft regulations published in February this year prescribe three types of company as excluded companies. They are companies which are political parties, political campaigning organisations and companies controlled by political parties. The exclusion of those companies from CIC status reflects the outcome of last year's consultation. Subsection (6), together with the regulations to be made under it, provides a means of ensuring their exclusion.

We have opted to use regulations for this purpose rather than define excluded companies on the face of the Bill because, in the light of experience as CICs develop, it may well prove desirable to change the provisions in order to refine the community interest test. For example, the types of political activity which might be considered acceptable for CICs to carry on may change over time, and the description of "excluded company" would need to be updated to reflect that. The use of regulations also means that a significant amount of technical detail can be kept out of the Bill. Any regulations under this clause will be subject to the affirmative procedure in both Houses.

As I said at the beginning, it seems to be essential that, where these complex issues may change over time, having introduced the concept of the excluded company on to the face of the Bill, they are best kept within the regulations. I hope that the noble Lord accepts that point and feels that he can withdraw the amendment.

Lord Glentoran

I can certainly accept the point that, at this stage, there should be regulations appertaining to excluded companies. So far as I know, those regulations are not written yet.

Lord Sainsbury of Turville

I believe that they are.

Lord Glentoran

I apologise. I am sure that I should have memorised them, and I shall return to them before Report stage. I thank the noble Lord for taking this point seriously. We are clearly in agreement that this is another very difficult area that we need to define as best we can. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 32 agreed to.

Clause 33 [New companies]:

Lord Phillips of Sudbury moved Amendment No. 133ZA: Page 31, line 8, after "decide" insert "expeditiously

The noble Lord said: This is a simple but, I hope, practical point. It deals with the concern that the Charity Law Association has expressed rather forcefully that the whole procedure in relation to becoming a community interest company will be too bureaucratic and long-winded. The association is anxious to ensure that decisions on eligibility will be dealt with expeditiously, hence the suggested inclusion in Clause 33(4) of that word—that the regulator must decide expeditiously whether or not a company is eligible. I beg to move.

Lord Evans of Temple Guiting

Once again we thank the noble Lord, Lord Phillips, for suggesting a drafting improvement to this part of the Bill. Again, I am not able to accept the amendment, because we do not think it is needed, and because it may have some unintended consequences, a phrase used by my noble friend Lord Sainsbury in opposing Amendment No. 131.

It may help if I briefly say something about the administrative arrangements that we intend to make for the regulator, although they are not matters for the Bill itself. We intend that the regulator's office should have close links to Companies House, sharing systems where practicable, and will probably be located in or with Companies House in Cardiff. Indeed, the new regulator and Companies House will provide a "one-stop shop" service wherever possible, so that in most cases, including applications for registration, CICs will need to interact only with Companies House. Companies House has a well deserved reputation for providing a swift and efficient service, although it is under no statutory obligation to do things "expeditiously". We expect that CICs will also enjoy a high quality of service.

In respect of the additional decision-making process that the regulator will undertake during the registration process, I should like to refer to the draft regulations that were published in February, because they show what we intend the "prescribed formation documents" mentioned in this clause to be. Draft regulation 11 provides for two of those documents. One will be a declaration that the company will not be an excluded company under the terms of Clause 32(6). The other, the so-called "community interest statement", is to include a declaration that the company will pursue activities for the benefit of the community.

The regulator is to take those declarations into account, in Clause 33(5), in reaching his decision about eligibility to be a CIC. So at the application stage, relying heavily on declarations is the most logical way to proceed. It also has the very considerable benefit of making the decision-making process simple and quick. That is a practical reason why we do not think this amendment is needed.

I should also point out that the Bill already contains provisions that should point the regulator towards acting expeditiously, where it is appropriate for him to do so. Clause 24(4) requires the regulator to adopt an approach based on good regulatory practice, and to have regard to the impact of his approach on those who are affected by it. In general, that will guide the regulator towards providing a swift and efficient service. However, where there is a doubt about whether an application meets the criteria, the regulator must have the discretion to examine it thoroughly. That is why we oppose the amendment. With that explanation, I hope that the noble Lord will withdraw his amendment.

6 p.m.

Lord Phillips of Sudbury

I am grateful to the Minister and I am reassured that the Government are now doing everything they can to tie in this matter with the company registrar. That makes sense from all points of view. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Glentoran moved Amendment No. 133A:

Page 31, leave out line 20.

The noble Lord said: Members of the Committee will be glad to hear that I can deal very briefly with this amendment. The question is: why is the registrar not required to record his decision?

Lord Evans of Temple Guiting

I can appreciate that, on the face of it, the provision may seem rather puzzling. Its purpose is simply to ensure that the Registrar of Companies is not required to record such notices on the companies register. We do not believe that it would be sensible for him or her to register these notices and I shall briefly explain why.

The notice referred to is essentially an ephemeral working document, used by the regulator to convey his decision to the registrar. Since the two will be working together closely to ensure that registration as a CIC is a quick and seamless process, the notice will effectively be an internal document.

In the case of a decision by the regulator that an applicant under this clause is eligible to be formed as a CIC, that will lead to the company being registered as a CIC under subsection (7) of this clause. That registration, in itself, will of course be a record that the company is eligible to be a community interest company. It would be superfluous to place the notice containing the regulator's decision on the public record.

If the regulator should decide that an applicant is not eligible to be a CIC, the registrar will notify the applicant accordingly. In the case of an application under Clause 33, the applicant would not be on the companies register at the time of the application and therefore the registrar would not have a company against which to record the notice of the regulator's decision. In the case of an application under Clause 35, we do not believe that any company would want notice of its failed application to become a CIC placed on its record at Companies House.

In summary, the bracketed words in subsection (6) of the clause may seem obscure but the Government believe that they are of value. They make clear that the registrar should not record such notices and ensure that the companies register will not be cluttered with internal working documents. They will enable Companies House to deal with its part in the process with a minimum of bureaucracy.

Lord Glentoran

I thank the noble Lord for that explanation, which, so far as I am concerned, is quite understandable. I may be told differently when I take outside advice and therefore I reserve my position. But, in the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 33 agreed.

Clauses 34 to 37 agreed to.

Clause 38 [Conditions for exercise of supervisory powers]:

Lord Phillips of Sudbury moved Amendment No. 134:

Page 34, line 30, leave out subsection (1).

The noble Lord said: In moving Amendment No. 134, I shall speak also to Amendment No. 137. The noble Lord, Lord Glentoran, will speak to Amendments Nos. 135 and 136 in this group.

Lord Glentoran

I believe that Amendment No. 135 is in the name of the noble Lord, Lord Phillips.

Lord Phillips of Sudbury

Amendment No. 135 is mine. I got more than I bargained for.

I find Clause 38(1) singularly unsatisfactory. There are a number of clauses in the Bill which those of us on this side of the fence feel are not clear and therefore not helpful. One comes back again and again to the fact that this legislation will be particularly important for those whom one might call lay activists who will not want to be running to lawyers the whole time. It has developed into what I think will become a legal nightmare.

I tabled the amendment because this seems an unnecessary provision. In so far as I can make much practical sense of it, I am anxious because it says that the regulator should act only with regard to the powers that he is voluminously given by Clauses 39 to 48. It says that the regulator should use those powers only to the extent necessary to maintain confidence in community interest companies. There is an extraordinary piece of psychology wrapped up in that. Where else in our statutory library, so to speak, does one find a comparable test?

Secondly, it appears to require the regulator, in a specific case, not simply to say that there is serious malfunctioning in a CIC and one must contemplate appointing a manager or removing a director. That is not the test he applies at all—it is not whether there is malfeasance in a particular CIC. The test is, "If I do nothing, will it undermine confidence in community interest companies at large?". I do not know how the poor old regulator will separate the one from the other. The Government may say that they are one and the same. In that case, I suggest that they abandon the subsection which I believe does nothing but confuse. It is nebulous; it will be a shackle to the good governance of the CIC sector, not a help. I beg to move.

Lord Glentoran

I have some fairly lengthy arguments on the three amendments in the name of the noble Lord, Lord Phillips, and on my Amendment No. 136, I am afraid. My noble friend Lord Hodgson of Astley Abbotts and I added our name to Amendment No. 134 because we share the noble Lord's concerns about the conditions for the circumstances within which the regulator can exercise his power under Clauses 39 to 48.

As I have said before, we have some apprehension about how "light touch" the powers of the regulator will actually be. First, I would like to question the subjective nature of the condition in Clause 38(1) which says that the regulator must exercise his powers under Clauses 39 to 48 only to the extent necessary—the point already made by the noble Lord—to maintain confidence in community interest companies. I could not tell you what precisely this means. I look forward to some clarification from the Minister on this point, because unless he can spell this out more clearly, we will not be happy with the drafting in the subsection.

However, our Amendment No. 136 probes on a more specific matter. Subsection (2) states that the regulator can exercise power under Clauses 42 to 45 only if the company default condition is satisfied. Subsection (3) goes further in defining what the default condition is. It states that the default condition is satisfied if, (a) there has been misconduct or mismanagement in the administration of the company". Again, I am concerned about what this means in practice. The powers which a regulator has under Clauses 42 to 45 are as follows: Clause 42 contains the power to appoint a director; Clause 43 contains the power to remove a director; Clause 44 contains the power to appoint a manager; and Clause 45 contains the power to protect the property and assets of a CIC and, in particular, to transfer it to the official property holder or to freeze assets.

These are considerable powers. The Bill allows the regulator to appoint and remove directors and provides that a director so appointed, has all the powers of the directors appointed by the company". This kicks into play only where paragraphs (a) to (d) apply. We have several problems with the looseness of the definition of paragraph (a). What constitutes, misconduct or mismanagement in the administration of the company"? It is one thing to say that a director could be removed if the company, under paragraph (c), was not satisfying its community interest test. However, in the context of the personal misconduct of an individual, the regulator will not be able to check up on every director. He will have to react to reports relayed back to him from relevant bodies. I have grave misapprehensions that this provision could be used in cases where directors fall out and, to satisfy personal grievances, report their fellow director for "misconduct" in the hope that the regulator will remove him; that is, mischievous reporting.

The situation is particularly serious for another reason. Any director appointed by the regulator, will be capable of influencing the direction of the CIC", and will not be able to be "blocked". This implies to me that a director appointed under Clause 42 will override the powers of all the other directors of the CIC. I do not agree with that provision. It appears that the situation would be the same for a manager as appointed under Clause 44. How would he relate to the directors of the CIC in terms of hierarchy? Whose views would predominate? According to the explanatory notes, the Regulator is able to specify the manager's functions and powers and to prevent the directors of a CIC from carrying out such functions". These powers are, as I said before, draconian. I cannot think of a worse situation than one where, if someone accuses me, a director, of misconduct, I might be removed from my position or have a manager imposed above me who could fetter my ability to exercise my proper duties. Is there a facility for directors to appeal against the imposition of a director or manager? If not, I believe there certainly should be otherwise I would not be able to understand why any company would want to sign up as a CIC. How does this fit in with Section 303 of the Companies Act 1985 that provides for a resolution for a company to remove a director? Perhaps we need to think about having some strings attached to allow the board of a CIC to retain partial control rather than being steam-rollered by an imposed director.

I should like to finish by lending my support to the final amendment in this group of the noble Lord, Lord Phillips, Amendment No. 137. We have had representations from the Law Society on this issue and agree with its opinion that paragraph (3)(d) is problematic. It queried whether it was appropriate for the regulator to be able to appoint a director or manager or remove a director of a CIC or divest a CIC of its property simply because it is dormant. I am not convinced that this is justifiable especially given the broad remit provided by the imprecise wording of subsection (1).

Lord Phillips of Sudbury

I realise that I did not speak to Amendments Nos. 135 and 137 which stand in my name. I wish to do so briefly.

Amendment No. 135 would add a fifth category of cases regarding the regulator using the power to transfer shares under Clause 46. That is a very important power akin to his right to deal with property under Clause 45. I believe that transfer of shares is no less important an act than the other matters dealt with in subsection (2) of Clause 38, and that the "company default condition", as it is called in subsection (3) of Clause 38, should also be applicable to an exercise by the regulator under Clause 46 when transferring shares.

Amendment No. 137 is the last amendment in the group. I realise now that, for the reasons explained earlier, a company does not need to have community interest objects. I find that perverse. There is therefore an argument for leaving subsection (3)(d) in place. If a company has community interest objects, there is an ultra vires prospect. Quite apart from whether it satisfies the community interest test, there should be power on the part of the regulator to intervene if the company involved is not carrying on activities in pursuit of those community interest objects.

6.15 p.m.

Lord Sainsbury of Turville

In various ways, the amendments seek to change the limits which Clause 38 places on the regulator's ability to use his supervisory powers. Our public consultation last year demonstrated that to succeed, the regulation of CICs would have to be credible, but carried out with a genuinely light touch. The clause provides the framework for achieving that, and these various changes need to be seen in this context. The amendments have the potential to weaken the framework quite significantly.

Amendment No. 134 goes to the heart of this issue, by removing subsection (1). We do not believe that the provision is unnecessary, nor that it is an "extraordinary bit of psychology". It is an important over-arching provision that is intended to stop the regulator using his powers to a greater degree than is necessary. It is the single most important means of ensuring a proportionate approach to the use of the regulator's supervisory powers. In fact, it is a light-touch regulation. The Government attach great importance to ensuring that the regulation of CICs is done in a proportionate way. That is not just because it is the right approach in principle. It is also vital in practice because, if the regulatory regime is seen as being too onerous, that will be bound to deter the use of this new type of company.

Without subsection (1), the regulator would be able to use his powers wherever the rest of Clause 38 permitted him to do so, even if it was not necessary to do so in order to maintain confidence in CICs. For instance, a relatively modest breach of the company default condition set out in subsection (3) might not be sufficiently material to affect confidence in the CIC form, but could be enough to justify the use of a wide range of supervisory powers if subsection (1) were deleted.

Lord Phillips of Sudbury

I am most grateful to the Minister for giving way. It may help if I ask him my question at this stage, at the end of his explanation of why he does not accept Amendment No. 134. Can he conceive of a situation in which there is a significant breach of the running of the affairs of a CIC when it would be proper for a regulator to take no action because he considered that the CIC involved was low-profile and tucked away in some part of the country where it carried no influence anywhere else? The regulator might feel himself constrained by the fact that he first had to be satisfied that he could act only if necessary to maintain confidence in the CIC sector as a whole. Can the Minister think of such an example? Is that a danger?

Lord Sainsbury of Turville

No, I cannot. Simply because a company is in the wilds of Scotland does not make it irrelevant. The provision relates to minor infringements in the case of which we believe that the regulator should not use his power because they do not affect the confidence of people in CICs. Simply the fact that the company was in an obscure part of the country does not mean that its infringements would not affect confidence in CICs. Presumably the word would spread, even from the remotest parts of Scotland, to the community, and people would cite it as an example of a serious infringement about which the regulator did nothing.

Amendment No. 135 would add the power in Clause 46 to order a transfer of the shares or membership rights in a CIC to the list of powers which can be used only if the company default condition is satisfied. In practice, the amendment would be likely to make the power conferred by Clause 46 virtually redundant. As subsection (4) of Clause 38 makes clear, Clause 46 is available to the regulator only in respect of excluded companies, as defined in Clause 32.

The Government intend that any company that falls into the category of excluded companies should not be able to be a CIC. The draft regulations that were published in February show that political parties, political campaigning organisations and companies owned by political parties are all intended to be prescribed as excluded companies, and that policy was supported in our consultation last year.

Clause 46 is intended to address that specific risk—the perhaps very rare risk that a CIC may come under the control of a political party, and thus find itself becoming an excluded company. The power in Clause 46 will allow the regulator to arrange for the control of an excluded company to change hands in those circumstances. Its use will provide an alternative to the regulator using the power in Clause 47 to petition for such a CIC to be wound up. The use of Clause 46 will be appropriate when the CIC itself is functioning well and providing benefit to the community, and where it would be preferable to keep it going under new ownership rather than to apply to have it wound up. If the power can be used only when the company default condition has been satisfied, it will not be available to meet the very situation for which it has been designed.

Amendment No. 136 would prevent the regulator using a range of powers when there is evidence of, misconduct or mismanagement in the administration of a company unless one of the other conditions listed in subsection (3) of the clause was also satisfied. It may be helpful if I describe what we mean by misconduct or mismanagement in this context, and show what effect the amendment would therefore have on the regulator's ability to act to maintain confidence in CICs.

One example of mismanagement or misconduct would be directors who knowingly persevere in acting in breach of the terms of the company's memorandum and articles, or this legislation. Other examples of mismanagement include acts which may result in significant company resources being misused; in a CIC's reputation being seriously undermined; or in the people who benefit from the CIC's activities being put at risk. Another example where misconduct might be demonstrated would be a director of a CIC that was set up to help animals being convicted of cruelty to the animals in the care of the CIC.

The Bill does not define "misconduct" or mismanagement. The Charities Act 1993 similarly empowers the charity commissioners to exercise certain of their supervisory powers when there is misconduct or mismanagement. Those terms are also left undefined. Put simply, by "misconduct" we mean when a person is unfit, by his or her conduct, in relation to his or her duties, to act as such. By "mismanagement" we mean bad, wrong or improper management or administration. If the regulator was unable to exercise his supervisory powers in those circumstances, there is a strong chance that public and stakeholder confidence in CICs would be shaken.

The question was raised of the duties of a director appointed by a regulator. Any such director, under Clause 42, would have the same powers and duties as all the other directors of a CIC, including powers exercisable only by some of the existing directors and not others. The existing directors retain all their powers and duties. The director who ceased to be a director would have the right of appeal to the CIC appeal officer on matters of fact, and also judicial review on matters of law. As with all the regulator's supervisory powers, the ability to act to deal with misconduct and mismanagement has to be seen in the context of subsection (1) of this clause. That provision is intended to ensure that the regulator will act only to the extent that is necessary to maintain confidence in CICs.

Finally, Amendment No. 137 would remove another limb of subsection (3), by preventing the use of various powers when a CIC that has community interest objects is not carrying on activities in pursuit of those objects. It might help if I explained briefly the significance of community interest objects. The concept is defined in Clause 32(3). An object in a company's memorandum is a community interest object if activities in furtherance of that object can reasonably be considered as for the benefit of the community.

It is important to stress that CICs will not be required to have specific objects of that kind. If they wish, they will be able to have general trading objects that will not be caught by Clause 38(3). However, we think that it is helpful to CICs to have the choice. A CIC may wish to adopt a community interest object, for example, to demonstrate to potential investors or others that it is dedicated to particular objects. Clause 38(3) makes such a decision meaningful, because the regulator will be able to act if a CIC does nothing to pursue those objects. The amendment would remove what we see as a useful option for some CICs. On that basis, I ask the noble Lord to withdraw the amendment.

Lord Phillips of Sudbury

I am grateful to the Minister for what he has said. I shall read carefully his justification for Clause 38(1). At first hearing, I am not convinced, but it may bear some study.

The other matter that I would put to the Minister is this: are we not in a strange position on this Bill, where community interest objects are not required; where, as he put it, it will be sufficient for a CIC to have general trading objects; and where there will be nothing at all, as far as I can see, in terms of the objects and activities of the CIC concerned to demonstrate and to put at the heart of its constitution the fact that it is not any old trading company, but a trading company for community interest? As I understand the Minister, it does not even have to say that. It seems to me that that is quite bizarre. He may want to say whether he believes that it should say at least that the general trading purposes of a company are to be pursued for a community interest under the relevant legislation.

Lord Sainsbury of Turville

I believe we have covered that under a previous situation where we made it clear that a company would have to make such a declaration when it applied to become a CIC and the regulator would look at it on that basis.

Lord Phillips of Sudbury

It is not in the constitution. It will be the first time in English legal history when at no place in the constitution of an entity of such a particular character will it be required to assert that it is, and must be, of that character. I ask the Minister to ponder that point. It seems to me to be counterintuitive. I believe that an amendment could easily be made to the Bill. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 135 to 137 not moved.]

Clause 38 agreed to.

Clause 39 agreed to.

Schedule 7 [Community interest companies. Investigations]:

Lord Phillips of Sudbury moved Amendment No. 137A: Page 68, line 14, leave out sub-paragraph (1)

The noble Lord said: I can move this amendment briefly. I inserted the amendment at the wish of the Charity Law Association. The association says that the subsection purports to bestow legal professional privilege although that is not in Parliament's gift. In common law one has legal professional privilege unless Parliament expressly removes it. We are concerned that paragraph 2(1) sets a dangerous drafting precedent. I beg to move.

6.30 p.m.

Lord Sainsbury of Turville

We believe the amendment would unnecessarily muddy the waters as to whether legal professional privilege is preserved in relation to the powers set out in paragraph 1 of Schedule 7. To make our position clear, our intention in drafting the schedule is to ensure legal professional privilege is preserved in relation to those powers. We have no desire for an investigator of a CIC to be able to demand legally privileged information or documents.

I am aware of the concern referred to by the noble Lord, which I take to underlie this amendment, that one has legal professional privilege in common law unless it is expressly removed by Parliament. If that were the case, it might be argued that Schedule 7 would create a dangerous precedent as drafted. I think that was the point of the noble Lord's amendment.

However, we are aware of numerous precedents in legislation where privileged material is explicitly protected from compulsory disclosure. Notably this occurs in respect of the company investigation powers in Part 14 of the Companies Act 1985, which are being amended by this Bill. I refer to subsections (1) and (2) of Section 452 of the Companies Act 1985, which are being re-enacted with minor and consequential changes by Schedule 2 to this Bill. Other examples appear in Section 83(5) of the Companies Act 1989—in the context of investigation powers of the Secretary of State—and in Section 30 of the Housing Act 1996 concerning the powers of the Housing Corporation to obtain information from registered social landlords.

The powers in this schedule are based on the powers in new Section 447 of the Companies Act 1985, which is in Clause 18 of the Bill. Given the similarity between the drafting of these two sets of powers, the amendment would create an inconsistency, which would lead to potential doubt as to whether legal professional privilege was protected in respect of the powers of an investigator of a community interest company under this schedule. That situation would not be acceptable to the Government, or, indeed, I suspect to Members of the Committee. Therefore, it is important to include subparagraph (1) of Schedule 7(2) to avoid any confusion on the intention of the Bill.

Lord Phillips of Sudbury

I am most grateful to the Minister. I shall be happy to throw back his comprehensive reply at the Charity Law Association. I am sure it will be as satisfied as he is, and that is the end of that. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 7 agreed to.

Clause 40 agreed to.

Clause 41 [Civil proceedings]:

Lord Phillips of Sudbury moved Amendment No. 138:

Page 35, line 42, at end insert ", and ( ) the remedy sought

The noble Lord said: The amendment seeks to make the process of civil proceedings under Clause 41 a fairer one. As it stands, the regulator before instituting proceedings must give written notice to the company against which they are to be brought, stating the cause of action and a summary of the relevant facts. I am suggesting that he should also say what he has in mind as regards the proposed remedy. Given that this Bill contains a panoply of the most fearsome powers, I think they have a right to know. I recommend the amendment to the Committee. I beg to move.

Lord Glentoran

We support the amendment because we believe that it is essential and sensible.

Lord Sainsbury of Turville

I am absolutely delighted. I thought I would be able to make one noble Lord happy today: I can obviously make two Peers happy. We are very grateful to the noble Lord for the amendment.

In practice, we think that the remedy, which the regulator is seeking, when bringing proceedings will often be evident from the other information that the Bill requires to be included in the notice given to the CIC. However, where it is not, it will certainly be helpful to the CIC concerned if the remedy sought is made clear. We therefore agree to consider the amendment.

Lord Phillips of Sudbury

I am grateful to the Minister. On that basis, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 41 agreed to.

Clause 42 agreed to.

Lord Glentoran moved Amendment No. 139:

After Clause 42, insert the following new clause—

"DUTIES OF DIRECTORS Where the appointment or the duties of a director of a community interest company under this Act conflict with his duties as a director as provided for in the Companies Act 1985 (c. 6) and the Companies Act 1989 (c. 40), the latter will prevail.

The noble Lord said: I rise to speak to our Amendment No. 139. We tabled it originally in order to ask what the position would be when the duties of a director to his shareholders or creditors, particularly in the case of a company being wound up, came into conflict with the duties of the director under the Bill in terms of distributing assets and the asset lock for community interest purposes. We want to make certain that nothing in the Bill impedes the duties of a director under the 1985 and 1989 Acts to satisfy shareholders and creditors first before transferring any residual assets to another CIC or charity. I believe that we have come a long way.

To some extent, the amendment is also an attempt to challenge the situation where an imposed manager or director hinders a current director of a CIC in doing what he sees as his statutory duty as a director under the Companies Acts 1985 and 1989. Surely there could be some conflict or contention in the case of an outside director or manager who was drafted in and constrained the actions of a regular director.

The problem with the Bill is that it never expressly states that a CIC will be subject to all the statutory and other rules of law applicable to a non-CIC company. However, that is the implication and, in any event, it appears that a CIC, whether or not originally incorporated as such, will be a company incorporated under the Companies Act 1985. Therefore, presumably all the normal statutory and common law rules on directors' duties, and so on, will apply to a CIC director. My point is that, in cases where there is a clash, surely the directors' duties under the Companies Acts 1985 and 1989 will, and should, prevail.

The situation here is complicated. The Law Society was helpful in picking up some of these issues. It commented: Clause 42(6) says that a director appointed to a CIC by the Regulator has all the powers of a director appointed by the company. Are those powers to the exclusion of the powers of the other directors? It should also make clear how the law applicable to directors will otherwise apply to him—for example, will such a director be subject to [a particular] Part of the Companies Act 1985 and to all the common law directors' duties? Assuming he should be, that should be made clear in the Bill. Clause 44 allows the Regulator to appoint a manager to take over specified functions of a CIC's directors. It states that such a manager will act as the company's agent in carrying out those functions. As such, he will presumably not owe the full range of duties to the company that would be owed by a director. This should be made clear. Also, while a manager has taken over particular functions, the directors are expressly prevented from exercising those functions. It should be made clear that directors will not be liable for bread of duty in relation to actionns of the manager in carrying out those functions. In addition, the manager is treated as the company's agent—but, given that it will have no control over either his appointment or, presumably, the way he carries out his functions, should it too be exempt from any liability it might otherwise incur for his actions?

I consider those last two points to be particularly important. Can a CIC be liable for the actions of a manager imposed under the regulator? Does such a manager owe the same duty to the CIC as a normal director, even if he has assumed only certain of the director's functions? These are all very important questions and I apologise for dwelling on them all in one debate. I have left the Minister with many questions to answer and with what I see as a complicated legal mess to sort out. I beg to move.

Lord Sainsbury of Turville

The amendment seeks to deal with a perceived conflict between the legal and fiduciary duties of directors under the existing body of company law on the one hand, and the new requirements introduced by Part 2 of the Bill on the other. The Government do not believe that the amendment is necessary, because while these various duties and requirements will coexist, they do not in fact conflict. Nor do we believe that the amendment would do anything to clarify the situation. These are important points, and I shall try to explain fully the position as we see it.

At Second Reading, the noble Lord, Lord Glentoran, suggested that the directors of CICs could find that their ability to carry out their duties in accordance with company law could be compromised by the powers which the regulator will have to take supervisory action if the community interest test is not being met. For instance, he argued that if a CIC can balance its books only by compromising its pursuit of the community interest, the regulator might prevent the directors from fulfilling their duties. That is a helpful example of the perceived problem with which I shall attempt to deal.

The directors of a CIC would be expected to balance the books and ensure that the company meets its obligations to its creditors in the same way as those of any other company. In some cases clearly that will have an impact on what the CIC is doing to pursue the community interest. For instance, a CIC that is seeking to provide a service to a large community may find that it has to scale down its operations in order to be able to balance the books, and thus remain in business.

It is important to emphasise that such a course of action would not entitle the regulator to take supervisory action against a CIC under Clause 38 of the Bill. It would not be possible to argue in those circumstances that the company was failing to satisfy the community interest test since no reasonable person could argue that it would be for the benefit of the community for the CIC to operate in such a way that it could not balance its books. Similarly, it could not be said that there was misconduct or mismanagement of the company in such a situation—rather, the management of the company would be doing the only responsible thing in the circumstances.

This is, of course, a relatively simple example and in reality things may be less black and white. In all such cases the directors of the company will need to balance the various factors before making decisions. However, this is not a new issue, or indeed a challenge that faces only the directors of CICs. Any company which is subject to a regulatory regime needs to operate in accordance with that regime. If a director is hound to ensure that the company complies with a regulatory requirement, he will not be in breach of his fiduciary duties to the company if he does so. I hope that that helps to explain why the Government do not think that provisions along the lines of this amendment are needed. I should also say briefly why I do not think that this amendment would clarify the situation.

It is not clear what particular "duties" in the Companies Acts referred to in the amendment are intended to override the obligations on directors under the Bill. Directors' general duties to the company are not set out in the Companies Acts. Instead, they have been developed in case law over many years. The amendment as drafted would not therefore prioritise directors' general duties over those in the Bill. The effect would be very limited and, I fear, confusing. Nothing in the Bill detracts from directors' specific obligations under the Companies Act 1985. Accordingly it is difficult to see what this amendment would add.

I should remind noble Lords at this point that the Government have said that they will implement the recommendation by the independent Company Law Review that there should be a statutory statement of directors' general duties. This is being addressed as part of the department's major project to reform company law through the implementation of the Company Law Review's recommendations.

Lord Hodgson of Astley Abbotts

When?

Lord Sainsbury of Turville

I can assure your Lordships that the position of directors of CICs will be taken into account as that work develops. I believe that we have already dealt in suitable terms with the question of the noble Lord, Lord Hodgson.

A number of other points were raised that related to directors and more specifically to their responsibilities in the circumstances that we are discussing. First, it was asked how directors could fulfil their duties if the regulator appointed a manager to carry out their functions. Where a manager is appointed to a CIC by the regulator under Clause 44, and a company director is prevented by an order of the regulator from exercising any function, any duties associated with those functions will no longer apply to those directors until such time as the regulator's order is discharged. We do not consider that it could be successfully argued that the directors were in dereliction of duty where they did not exercise a function because they were prevented from doing so by an order of the regulator. Where managers share functions with the directors, the duties will be shared accordingly.

A second point on the same issue concerns the duties of the manager and the duties of a director appointed by the regulator. Any manager appointed by the regulator under Clause 44 will have such duties as attach to those functions conferred on him by the regulator's order. Where the manager is to exercise a function to the exclusion of the directors, any duty relating to that function transfers to the manager. If necessary, the regulator's order can make that clear.

Finally, on the third point—the duties of the director appointed by the regulator—I have already said that the director appointed by the regulator under Clause 42 will have the same powers and duties as all the other directors of the CIC, including powers exercisable only by some of the existing directors and not others. The existing directors will retain all their powers and duties.

I hope that that makes the position, if not crystal clear, at least clearer, and that the noble Lord will withdraw the amendment.

6.45 p.m.

Lord Glentoran

I thank the Minister for that careful and detailed explanation. I debated this issue with officials when we had an opportunity to talk to them and it is clear that the explanation has been well thought through. I do not mean that in any patronising way. I shall read the explanation carefully to see whether we need to come forward with any further amendment on Report if we still feel that there is a lack of clarity. I was concerned about the lack of clarity between the two roles of the imposed director and the director. I was also concerned about the potential charge of an imposed manager or director being accused of being a shadow director without due responsibilities. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 43 agreed to.

Clause 44 [Appointment of manager]:

Lord Evans of Temple Guiting moved Amendment No. 140:

Page 38, line 43, leave out from "may" to end of line 5 on page 39 and insert "authorise the Regulator—

1. (a) to require a manager to make reports,
GC 418
2. (b) to require a manager to give security (or in Scotland, to find caution) for the due exercise of the manager's functions, and
3. (c) to remove a manager in circumstances prescribed by the regulations.

( ) Regulations may—

1. (a) provide for a manager's remuneration to be payable from the property of the company, and
2. (b) authorise the Regulator to determine the amount of a manager's remuneration and to disallow any amount of remuneration in circumstances prescribed by the regulations."

The noble Lord said: In February, my noble friend Lord Sainsbury wrote to the noble Lord, Lord Dahrendorf, as chairman of the Delegated Powers and Regulatory Reform Committee, to explain the reasons for this amendment. He copied that letter to the noble Lords, Lord Hodgson and Lord Razzall.

To recap, the amendment increases the scope of the delegated power in Clause 44 for regulations to make provisions about managers appointed by the regulator. The amendment is intended to ensure that the regulations which the Government intend to make using this power can follow those in the Charities (Receiver and Manager) Regulations 1992, which serve as the model for much of what we intend to do in respect of managers appointed by the regulator of community interest companies.

The need for this amendment was identified in the course of work on the draft regulations, which were published in February. The amendment would make it clear that the regulations can authorise the regulator to remove the manager in particular circumstances, to set the amount of remuneration for the managers he appoints and to disallow all or part of that remuneration in particular circumstances. Following the amendment, regulations may also allow the regulator to specify what reports the managers he appoints should provide to him. The amendment also inserts appropriate terminology for Scotland into the clause.

I should add that the Government are considering further amendments to this clause in order to clarify the relationship between the power to appoint a manager to a CIC and the company insolvency process. We are most grateful to the Charity Law Association for drawing this issue to our attention. We intend to table amendments well before Report providing for the avoidance of doubt that the appointment of a manager under this clause does not affect any right a third person may have to appoint a receiver or manager.

We also intend to provide that the regulator must discharge any order made under this clause on the appointment of an administrative receiver, administrator or liquidator of the CIC concerned. This reflects our policy that the requirements of CIC status should not affect the rights of creditors in insolvency proceedings. I beg to move.

On Question, amendment agreed to.

Clause 44 agreed to.

Clauses 45 to 53 agreed to.

Clause 54 [Fees]:

Lord Glentoran moved Amendment No. 141:

Page 44, line 20, leave out subsection (3).

The noble Lord said: The amendment moves on to a new topic: fees. Clause 54 has three subsections that all state that regulations will make provision for the payment of fees. There are three different types of payments listed here which it may be useful for me to state: subsection (1) allows regulations to require the payment of fees in connection with the regulator's functions; subsection (2) allows regulations to provide for fees to be paid to the registrar of companies; and subsection (3) allows for the regulator to charge a fee for, any service which is provided otherwise than in pursuance of an obligation imposed by law".

I felt rather disappointed that the draft regulations, which I received a few weeks ago to peruse, did not include any regulations relating to payment of any kind. Am I wrong again and are they now in existence? Perhaps the Minister will tell me. The accompanying notes to the draft regulations claimed, in the introduction, that powers to make regulations covering fees will be drafted at a later stage, again in discussion with the social enterprise sector. I hope that the Minister has progressed further on this issue and will be able to provide us with some details about what the regulations on fees and payments will look like.

The issue of fees is very important. The Government expect there to be a fee payable to the Registrar of Companies as normal of no more than £20. The Explanatory Notes make it clear that the annual running costs of the regulator will be approximately £310,000 plus exposure to legal liability estimated at £50,000. The one-off set-up costs are, apparently, likely to range between £250,000 and £500,000. That will include setting up IT systems, recruiting staff and so on. It would be interesting to know how the Minister arrived at those sums. Currently, we have no idea how large the take-up will be and surely that will affect the annual running costs.

I hope I am correct in thinking that the annual costs will be met by funds from central government. I had some doubts about that because of the comments on page 34 of the consultation document, which states: Fees for CIC registration will be used to offset the costs of the regulator, although it is not expected that fees will fully cover the costs of the regulator, at least in the early years of operation".

That is a very open statement. We by no means have the £20 registration fee guaranteed at that low level, and I would like an assurance from the Minister on the record that there is no intention to raise that amount if the regulator proves to be more costly than envisaged.

However, let us assume that there is merely a £20 charge. It does not necessarily follow that CICs will not be burdened by a big cost in setting up. I have some reservations about the indirect cost that companies will have to budget for in terms of legal advice before setting up. There has been much talk about that in the past two days in Committee. This concern is founded to some extent on subsection (3). For that reason I tabled a probing amendment to leave it out. Subsection (3) states that the regulator can charge individual CICs for any service which is provided otherwise than in pursuance of an obligation imposed by law. There are no regulations to spell out what other services these might be.

I have mentioned previously my belief that there should be an obligation for the regulator to have to provide advice to CICs about the permissibility of their actions. We shall return to that on Report. This is not currently explicit in the Bill. Since that is the case, can the Minister tell me whether the provision of advice as to the permissibility of an action when requested by a company will be available to the company only for a fee? What are these additional services? How much can the regulator charge? At the moment there is no guidance or limit. I feel that this is an unduly dangerous situation.

I apologise to the Committee if I sound cynical but I will mention again the likelihood that the regulator runs over its estimated budget and therefore starts charging CICs for providing "services" which he had no official obligation to do according to statute. I beg to move.

Lord Phillips of Sudbury

I support in the most general terms the amendment moved by the noble Lord, Lord Glentoran. I wonder whether the Government are not killing their own goose if they really expect to recover the costs of the regulator and his office from fees generated by CICs. Given the universal wish to see this new breed of social enterprise entity thrive, I would urge the Government to review that policy—if it still is the policy.

Lord Evans of Temple Guiting

Amendment No. 141, which the noble Lord, Lord Glentoran. told us is a probing amendment, would prevent the regulator from charging for any services he provides, not because the law obliges him to do so, but because he has chosen to do so. We believe that the regulator should be encouraged to provide additional services where that will be of benefit to CICs or to others. Where the regulator provides a service at his discretion, we consider that the regulator should be able to charge a fee, if he wishes to do so, to go towards the cost of providing that service. It is reasonable that those who benefit from a service should contribute towards it, and that the regulator should be able to meet demands for additional services, including those for which people are willing to pay a fee.

The Registrar of Companies, for example, sells bulk information to certain bodies, which use it to provide statistical analyses and other added-value services. We should not preclude the regulator from doing something similar if the demand should arise.

Subsection (3) allows the regulator to charge only for those services he is not actually obliged to provide. If the regulator could not charge a fee, he would either have to cover the costs of the service from elsewhere, which in this case would mean from the resources provided by the Secretary of State, or not provide the service at all. This subsection provides an additional option of charging a fee for the service. The amendment would remove this option, and would almost certainly mean that the regulator would provide fewer services as a result. The Government believe that allowing the regulator to charge fees for additional services, beyond those required by the Bill, may be of benefit to CICs, and to others in the social enterprise sector and beyond.

It may be helpful if I briefly set out how the regulator is to be funded. The Government intend that over time the regulator will move towards covering its costs through the fees it charges. This is of course the basis on which Companies House operates. However, the costs of the CIC regulator will initially be subsidised by the DTI as to begin with the fee income from its operations will of course not be sufficient to cover its costs.

Subsection (3) gives the regulator an appropriate mechanism for providing assistance, which goes beyond his statutory obligations, on the basis that he may, if he wishes, charge for doing so. This will enable him both to cover the costs of these additional services, and to manage demand, by deterring frivolous or excessive requests for assistance.

The noble Lord, Lord Glentoran, raised the issue of the inadequacy of the regulations on this matter, in his view. I remind him of something that I said an hour or so ago. He and others will have many opportunities to be consulted and work on the regulations before they are laid before Parliament.

The noble Lord also asked what fees the regulator is expected to charge, and for what services. The fee structure will be finalised in the light of further work on the budget and costs of the regulator and will be set out in regulations. The draft regulations published in February this year do not include provisions made under Clause 54, which will be developed later this year.

We expect that the regulator will charge a fee for the process of registering a company as a CIC, under Clauses 33 and 35. That fee will be payable in addition to the normal Companies House fee for registration as a company. As we have heard, that is currently £20. As the regulatory impact assessment published with the Bill explained, the Government intend that the additional costs of setting up a CIC should be comparable with that fee. There may be a fee also with respect to filing the annual community interest company report required by Clause 31. Again, if such a fee is charged, we expect it to be comparable to the current fees charged with respect of company annual returns—that is, £15. We have not yet determined whether the regulator should charge fees in respect of any of his other statutory functions.

The noble Lord, Lord Glentoran, asked whether running costs would not be affected by the take-up—the number of organisations that wish to become CICs. We are budgeting for a small operation in the first place of around eight staff. If take-up in the early years is far higher than anticipated, the regulator will be able to scale up its operation at a marginal cost. As the noble Lord, Lord Sainsbury, said at Second Reading, it is hard to estimate what the take-up will be at this stage.

The noble Lord, Lord Phillips, suggested that the Government should review the policy of the regulator moving towards covering its costs over time. As I said, the regulator is not expected to cover his costs in the short term because, initially, he will not benefit from economies of scale. The Government are well aware that charging disproportionate fees would have a serious negative effect on the take-up of CICs.

The noble Lord, Lord Glentoran, asked about the ability of the regulator to give advice on the permissibility of actions. In our debate on Thursday we discussed what we expected the regulator to provide in the way of guidance in some detail. I do not propose to revisit that debate. Given the hugely wide range of decisions that this could involve, it would be unwise to make a commitment on whether that advice could be available and at what fee.

With that explanation, I hope that the noble Lord is prepared to withdraw his amendment.

7 p.m.

Lord Hodgson of Astley Abbotts

Can the Minister explain one thing? I believe that he referred to Clause 31 and fees payable in connection with that clause and the community interest company report. As I read the Bill, they would not be able to be chargeable, because they are, in pursuance of an obligation imposed by law". Clause 31 is a requirement on CICs to provide reports, so I am not sure that they could charge a fee for it. But it may be that I did not hear the Minister right.

Lord Evans of Temple Guiting

That is something that would have to be done by regulations.

Lord Hodgson of Astley Abbotts

As I understand the matter, Clause 54(3) says that the regulator, may charge a fee for any service … otherwise than in pursuance of an obligation imposed by law". If the regulation imposes an obligation, as it does under Clause 31(3), which says that regulations "may … make provision", surely at that point fees are excluded by the very wording of Clause 54(3)—or have I got this completely wrong?

Lord Evans of Temple Guiting

Even if I thought that the noble Lord had got it completely wrong, I would not dare say so. I am advised that we are talking about a fee payable under regulations under Clause 54(1).

Lord Glentoran

It is clear that my noble friend will wish to read Hansard on that point and will perhaps return to it at the next stage. On the plus side, I was delighted to hear the Minister say that the Government did not expect the regulator to cover his costs. For clarification purposes, by that I understood that the Government would be doing so for a period of time. I have certainly had it in mind to say that, in order to get the organisation up and running, some pump-priming should be made available to the regulator, and that should be apparent to those who wish to form CICs. If the noble Lord does not wish to respond on that point, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Phillips of Sudbury had given notice of his intention to move Amendment No. 141A: Page 44, line 22, at end insert (5) A community interest company which is also a charity shall not be charged under this section.

The noble Lord said: The amendment speaks for itself. The Government will say that, under the Bill as it stands, it is not possible for a CIC to be a charity. I am looking forward in hopefulness, as will the regulator when receiving papers for registration, because we shall surely be tabling an amendment at the next stage. I do not know what the protocol is on these matters but, given that at present the Bill does not allow the prospect which the amendment anticipates, I believe it is probably right that I do not move the amendment.

[Amendment No. 141A not moved.]

Clause 54 agreed to.

Clauses 55 and 56 agreed to.

Clause 57 [Offences]:

Lord Glentoran moved Amendment No. 142:

Page 46, line 2, leave out paragraph (a).

The noble Lord said: This amendment focuses on Clause 57 but, in some ways, it refers back to my Amendment No. 139. Clause 57 provides that, where a company commits an offence, the directors or other officers of the corporate body who are to blame for the offence can be penalised, as well as the corporate body itself.

At subsection (3)(a) we are told that "director" includes a shadow director. In my opinion, this is a complicated issue because shadow directors often stand in for directors in some respects but do not take on the full responsibilities of directors. Liability in those circumstances is often contentious.

However, the real problem which I specifically had in mind when tabling the amendment was the liability of the regulator when he, or his appointee, steps in to make a decision in the role of a director or, alternatively, as we discussed earlier, when he puts in place another person as a temporary director or manager. Will they be committing an offence under Clause 57? If the CIC must take on the liability for a mistake made due to the actions or advice of the regulator, that would seem extremely unfair.

When we raised this issue with members of the Bill team, they were not sure of the position and were unable to help us at that stage. However, I am sure that, by now, they will have answers ready and waiting. I look forward to hearing from the Minister what further conclusions they have come to. I beg to move.

Lord Phillips of Sudbury

I oppose the amendment. I believe it is very important to have this provision in the Bill in order to safeguard the integrity of the CIC regime. I am afraid that there are naughty people in the world who do not take on formal directorships but operate as real directors or shadow directors in Companies Act terms. I believe that this is a desirable provision to have in the Bill.

Lord Evans of Temple Guiting

I am grateful to the noble Lord, Lord Phillips of Sudbury, for his support.

In relation to a CIC, as for a company, the phrase "shadow director" means a person in accordance with whose directions or instructions the directors of the company are accustomed to act. A person is not deemed a shadow director by reason only that the directors act on advice given by him in a professional capacity. Shadow directors are generally subject only to statutory provisions that are expressly stated to apply to them.

The amendment would allow a shadow director to escape punishment for offences committed by his company under this part of the Bill, even if the person concerned was responsible for the commission of the offence through their neglect, consent or connivance. To me and, I am sure, the whole Committee, that does not seem desirable. If there is a person in the background and the directors of the company habitually do what that person says, it seems reasonable that that person should be liable to be punished, if he is the real reason why the company committed the offence.

The noble Lord, Lord Glentoran, asked about the role of the regulator. In order to be a shadow director, the regulator will have to be a person in accordance with whose directions or instructions the directors of the CIC are accustomed to act. It is most unlikely that that would ever apply to the regulator. Other than the specific supervisory powers in the Bill, the regulator has no general power to require CICs to follow his directions or instructions.

The exercise of the specific supervisory powers in the Bill is unlikely to be frequent or wide-ranging enough with regard to any individual CIC for the regulator to be regarded as a shadow director. Few of the powers allow the regulator to tell the directors of a CIC what to do, other than in a very targeted way. For example, the regulator can order a CIC to submit to an audit, to answer questions or provide documents or to transfer property to the Official Property Holder.

I hope that that explanation will reassure the noble Lord, Lord Glentoran. There are another two pages of speaking notes on the regulator and the board. I would be happy to send the full speaking note to the noble Lord.

Lord Glentoran

I thank the noble Lord for that explanation. Not being considered right on this occasion, I shall consider the matter again. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 57 agreed to.

Clause 58 agreed to.

Clause 59 [Regulations]

Lord Evans of Temple Guiting moved Amendment No. 143:

Page 47, line 2, leave out subsection (6).

The noble Lord said: In moving Amendment No. 143, I shall speak also to Amendment No. 144.

The amendments are a response to the report on the Bill by the Select Committee on Delegated Powers and Regulatory Reform, for which we are grateful. My noble friend Lord Sainsbury of Turville wrote to the noble Lord, Lord Dahrendorf, on 29 January to thank him for the report and to confirm that the Government accepted its recommendations.

The amendments will provide that regulations requiring the payment of fees in connection with the regulator's functions made under Clause 54 will be subject to annulment in pursuance of a resolution of either House of Parliament. The Government have accepted that regulations setting fees should be subject to the scrutiny of both Houses. We were persuaded by the fact that regulations setting the fees for Companies House were also subject to the scrutiny of both Houses and felt that that was a logical precedent to follow. I beg to move.

On Question, amendment agreed to.

Lord Evans of Temple Guiting moved Amendment No. 144: Page 47, line 5, leave out "or subsection (6) applies to it

On Question, amendment agreed to.

Clause 59, as amended, agreed to.

Clauses 60 and 61 agreed to.

Schedule 8 [Repeals]:

Lord Sainsbury of Turville moved Amendment No. 145:

Page 70, line 13, leave out "69(4)" and insert "69(2) and (4)"

The noble Lord said: We realised that, because paragraph 20(a) of Schedule 2 replaces Section 452(1) of the Companies Act 1985, we should have included in Schedule 8 a repeal of Section 69(2) of the Companies Act 1989, which amended existing Section 452(1). The amendment will rectify that omission. I beg to move.

On Question, amendment agreed to.

Schedule 8, as amended, agreed to.

Remaining clauses agreed to.

Bill reported with amendments.

The Committee adjourned at sixteen minutes past seven o'clock.