Asset-Locked Body In A Community Interest Company (CIC)

In a Community Interest Company (“CIC”), the asset lock is a requirement to ensure that the company’s assets are used for the benefit of the community, rather than private individuals. This prevents assets from being stripped out for personal gain. To enable this, there is an “asset-locked body” to which residual assets can be transferred when a CIC is wound up.

What Is The Asset Lock?

The asset lock is a statutory safeguard under the Companies (Audit, Investigations and Community Enterprise) Act 2004 and Regulation 23 of the Community Interest Company Regulations 2005. Its main purpose is to preserve the community purpose of the CIC.

The asset-lock body restricts the use of the company’s assets as follows:

1. Profits must be used for the benefit of the community, not for the private pockets of directors or shareholders.
2. If the company is dissolved, its remaining assets must be transferred to another asset locked body to continue the benefit to the community.

What Is An Asset-Lock Body?

An asset locked body is an organisation that is eligible to receive the residual assets of a CIC upon its winding up, such as another CIC company or a charity. Such a body must be structured to ensure its assets are used for community or charitable purposes. They cannot be distributed for private gain.

When setting up a CIC, the company should name a chosen asset locked body in its Articles of Association. This body is effectively a designated beneficiary of the CIC’s residual assets if it ceases to operate.

Provisions On Winding Up

Wind up a Community Interest Company means that the asset lock provisions take effect, whereby remaining assets are:

• Transferred to the asset locked body named in the Articles, or
• As approved by the Regulator of Community Interest Companies, such as benefiting the community directly or being distributed to another approved asset locked body.

It’s important to note that distributions to shareholders are severely restricted, even on winding up. Any distributions must comply with the dividend cap and interest cap rules outlined in Part 6 of the CIC Regulations.

Where the named asset locked body is no longer in existence or suitable, the CIC must seek consent from the Regulator to transfer assets to a different approved body.

Why the Asset Lock Matters

The asset lock ensures a CIC cannot be exploited for private benefit. It distinguishes CICs from private companies and guarantees that community benefit is the primary purpose, even at the point of closure.