Liquidation of a Community Interest Company (CIC)
Community Interest Companies (CICs) are limited companies set up for the use of trading and profits for the public good. If a CIC faces financial difficulties, this can culminate in liquidation.
What Is a CIC and How Is It Different?
CICs are structured to benefit communities rather than private shareholders or its members if is limited by guarantee. They’re regulated by the CIC Regulator.
A CIC must meet the “community interest test” defined in Regulation 2 of The Community Interest Company Regulations 2005, which entails performing their role for the benefit of a community.
They have an asset lock. An asset lock restricts how the company’s property is to be distributed, particularly in a winding up situation as set out in Regulation 23 of The Community Interest Company Regulations 2005. In such an instance, any surplus assets must go to another asset-locked body, such as another CIC or a registered charity.
When Might a CIC Be Liquidated?
Voluntary liquidation may happen when the directors and members decide that the company can no longer continue operating, has fulfilled its purpose or the directors no longer with to run the company. Compulsory liquidation, on the other hand, typically results from a creditor’s petition to the court due to unpaid debts.
There are two main types of voluntary liquidation:
- Creditors’ Voluntary Liquidation (CVL): Used when a CIC is insolvent and cannot pay its debts.
- Members’ Voluntary Liquidation (MVL): Suitable when the CIC is solvent but no longer required.
There would generally be no need to go into an MVL for a CIC company but instead take advantage of the dissolution process through using a DS01 form to strike off the company provided all other issues are addressed.
Key Considerations in CIC Liquidation
A CIC liquidation requires consideration of the following:
- Asset Lock Rules: The distribution of any remaining company assets must comply with the CIC’s asset lock restrictions, which fetter payouts to shareholders, thereby requiring the assets to be passed to a qualifying organisation.
- Role of the CIC Regulator: The CIC Regulator may be involved in the process, especially in ensuring that community assets are protected.
- Legal Requirements: If a CIC is insolvent, directors have a fiduciary duty to act in the best interests of creditors. Continuing to trade while insolvent can result in personal liability through such misconduct as wrongful trading.
- Creditors and Debts: In a CVL, a licensed insolvency practitioner is appointed to sell the CIC’s assets and distribute the proceeds to creditors in accordance with the statutory order of payment in insolvency proceedings.
