Background

On 6 January, the Regulator of Community Interest Company announced that the limits on payments that a Community Interest Company (CIC) can make to investors are to be increased. The decision is made in response to a consultation carried out in 2009 (click here to access our previous e-update on this topic). The proposed changes will come into effect from 6 April 2010.

Proposed changes

Changes are to be made to the dividend and loan interest caps. However, the cap on the total proportion of profits that a CIC can return to investors (the maximum aggregated dividend cap) will remain unchanged at 35% of the company's distributable profits. Of importance, the changes will not apply to shares in issue prior to 6 April 2010 or agreements to pay performance related interest entered into before 6 April 2010.

Changes to the maximum dividend per share cap

The maximum dividend per share cap that a CIC can pay to investors is currently 5% above the Bank of England base rate of the paid up value of each share held. From 6 April 2010, the reference to the Bank of England base rate will be removed and the cap will, instead, be 20% of the paid up value.

Changes to the interest cap on debt finance

This cap applies to loan interest where the loan is linked to performance (quasi-equity). The current cap is 4% above the Bank of England base rate. From 6 April 2010, reference to the Bank of England base rate will be removed and the interest cap will, instead, be 10%.

Comment

  • The above changes ought to provide a platform for increased levels of investment in CICs.
  • Those involved, or interested in becoming involved, in the sector (particularly investors) should be aware of these important changes.
  • The new caps represent a significant increase and simplification.
  • Originally, the restrictiveness and complexity of the caps on CIC share capital have proven to be two of the biggest barriers in encouraging external investment in Community Interest Companies. This should be a welcome change in the structure of CIC disbursements.