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Learn about the new Community Company

A guide to community companies

The community company is a type of company designed to assist community groups in managing what they own and their businesses. The community company is intended to be run as a business, but instead of individual owners benefiting from the success of the business, the community as a whole will benefit. The community company can in some cases be considered by existing groups as an alternative to charitable trusts and cooperatives.

If you learn nothing else, this is what you need to know about community companies:

  • A community company must have a community interest, that is, where the community will benefit from the company’s activities.
  • Community companies cannot make any distributions of funds or pay any dividends to its shareholders. The community must receive the benefit.
  • Community companies cannot make loans to directors or shareholders.
  • There is a ‘lock’ on the disposal of assets of the community company.
  • Directors must prepare a report on the activities of a community company each financial year.

Goals of a community company

What are the objectives of having community companies in Vanuatu?

The new community company structure has been introduced to:

  • provide communities with a simple and cheap way to incorporate and operate.
  • provide clear obligations so the way the community company operates is well understood.
  • protect the communities through regular reporting of activities to the community.
  • give better certainty for third parties who want to do business with the community companies such as lenders, investors and other businesses.
  • protect and grow the community assets for current and future members.

Basic requirements for setting up a community company

The basic requirements for incorporating a community company are the same as those for a private company. This includes submitting the names and details of shareholders and directors, and company contact details through the electronic process on this website. A set of company rules must also be provided if they differ from the model rules in the Companies Act. The requirements for operating a private company also apply, and details of this can be found here in the Learn what a company is section.

Community companies do have special requirements including:

  • the principal objective of the company must be that it promotes a community interest, so a statement of the company’s community interest must be included. The meaning of community interest is further detailed below.
  • the name of the company must have the words “Community Company Limited” at the end in all communications. This is important because people who deal with Community Companies must know that they are dealing with a Community Company.
  • the community company must have at least 1 shareholder and 1 director. The director must be a person and cannot be another company.
  • the requirements for operating a private company also apply, and details of this can be found here in the Learn what a Company is section here.

A Registration fee is required for the incorporation of a company. If the application is accepted by the Registrar of Companies, then they will be made publicly available in the Register, and the Community Company will receive a Certificate of Incorporation.

What does a community mean?

This section describes what a community means under the law, and what it means when the law says the community company must be in the ‘community interest’. 

Since the purpose of the community company is to benefit the community, it is important to have a clear idea of who the company should be serving.

A community is a group of people who share a readily identifiable characteristic. If a reasonable person thinks that a particular group of people shares that readily identifiable characteristic, then this group would constitute a community. A community company may not have as its principal objective, the promotion of a political purpose.

Some examples of communities might include:

  • residents of Tanna
  • people with difficulties learning to read and write
  • people who suffer from ABC disease
  • cocoa growers in Efate
  • women who make handicrafts in Port Vila
  • a Santo village wanting to expand its fishing operations, or
  • a Malampa community wanting to grow more crops with a government grant.

The definition of community is intended to be quite broad. The key is that the community must be wider than just the shareholders and employees of the community company.

Often a community might be wider than the shareholders of the community company. For example, it might be “young unemployed people of Ambryn”. Not every single young unemployed person in Ambryn will be a shareholder of the company, but they will all be part of that community.

Some groups may be readily identifiable, but a reasonable person might not think of them as a genuine community, for example “my friends” or “regular drinkers of XYZ beer”. These types of groups are unlikely to be eligible to form a community company.

What is a Community Interest?

In a normal company, it is the owners and employees who benefit the most from the business. A community company is different, because the main benefits must be for the community, rather than the individuals who own or run the company.

The Companies Act includes an important test, called the community interest test, which every community company must satisfy.

The Community Interest Test

The community interest of the company must be where the benefit is to the community. This test is satisfied where a reasonable person might consider that the company is carrying on business to benefit the community.

In order to satisfy the test, it is worth looking at the:

  • purpose of setting up the company
  • the activities which the company will participate in, and
  • who will benefit from those activities.

Not every activity of the company needs to benefit the community directly, but overall, the activities should in some way, be beneficial to the community.

For example, if the company sells products that do not directly benefit the community, but the profits made from selling them are used for community benefits, then this will satisfy the community test.

It is also acceptable for the company to benefit its employees by for example, paying them a salary, or commissions of products they sell. This is because the company wouldn’t be able to function properly at all if it didn’t pay its employees and, as a consequence, it would fail to benefit the community.

The key is that the company must have a wider benefit beyond just the shareholders and directors.

If an activity has a negative effect on the community, then this will not satisfy the test. Also, activities that are primarily political will not satisfy the test.

Who are shareholders and directors of a community company?

Information about how to choose shareholders and directors.

Who should be appointed as shareholders and directors?

The people who control the community company are the directors and shareholders. The decision about who will take these roles is made when applying for incorporation of the community company. They can of course be changed as well, as long as the changes follow the company’s rules.

The directors of a community company have the same duties as directors of any other company. They need to be able to understand what is happening in the general life of the company, how the company is performing financially, and how the company is benefit the community.

They have to act honestly, and they have to act in the best interests of the company- not in their own best interests.

Directors of a community company have the same responsibilities as those of a private company. More information on these responsibilities, called directors duties, is contained in this section on Company Director.

The shareholders are the owners of the company. However, for a community company this means that they own their shares on behalf of and in trust for the community. They have to act and make decisions in a way which reflects the community’s interest.

Special rules for community companies

Because the company exists to benefit a community, there are some special rules to protect the community.

In addition to the requirement that the community satisfy the community interest test, there are four basic rules of a community company that make them different from regular companies. The reason for these rules is to ensure that the community is protected and actually receives the benefits from the activities of the company. They are:

  • Community companies cannot make any distributions of funds or pay any dividends to its shareholders.
  • Community companies cannot make loans to directors or shareholders.
  • There is a ‘lock’ on the disposal of assets of the community company.
  • Directors must prepare a report on the activities of a community company each financial year.

The next parts look at these requirements in some more details.

No Distributions or Dividends to Shareholders

A dividend is a way for a normal company to pass on the profits of the company to its shareholders. For a community company, since the shareholders are people who represent the community, it would not be fair to make a distribution to those individual people. Instead, of distributing the profits this way, the profits are kept within the company, and are used to benefit the community as a whole.

The next parts look at these requirements in some more details.

No Loans to Directors or Shareholders

Loans cannot be made to directors or shareholders of community companies.

Making a loan to a director or a shareholder is another way individuals have been able to take a company’s capital outside of the company. Often the loan is paid back to the company, but sometimes it is not. This is another situation where someone might personally benefit from the money a company makes, rather than having the community as a whole benefit.

‘Lock’ On Disposing Company Assets

Before deciding to register a community company it is very important to understand the asset-lock, because it has long term consequences.

Under the Companies Act, 75% of shareholders must agree to the disposal of a community company asset that are outside its ordinary course of business. The asset must also be sold for market price.

Sometimes companies will want to dispose of an asset that it no longer wants or needs. For example, if a tuna company no longer needs a fishing boat, because it has decided that it will only process tuna, rather than fish for it, then it might sell the boat.

If a community company wanted to make this decision, then it should be one that the community agrees on first. The community should also be comfortable that the best possible price was found for the boat.

All members of the community would also need to be notified before any decision is made to sell an asset.

These protections ensure that the community is happy with the decision, and that the full value of the sale stays within the company.

The ‘lock’ only applies to assets which are outside of the ordinary course of business. So if there are assets, such as canned tuna, which are produced everyday, then it would not make sense to require the community to be informed, and for shareholders to vote every time a can of tuna was sold.

Community companies may also include stricter rules on the disposal of assets in its rules if the community wishes. For example, it may want to specify particular assets which can’t be sold, or it may want to ensure 100% of the shareholders agree to the sale.

Annual Reporting

Every financial year, the directors of the company must provide a report to the community and to the Registrar (this can be done online on this website) outlining for that year:

  • remuneration (such as salaries or other benefits) received by directors
  • how the company’s activities benefitted the community
  • what consultations were undertaken with the community, and
  • what, if any, assets were disposed of by the company.

If the directors do not provide this report, then every director will be liable for an offence under the Companies Act and can be fined.

The report will be made available to the public through the company registry.

Other Issues

Paying Directors of Community Companies

It is up to each community company to decide how much it will pay its directors. The rules of the community company will determine how directors are paid, and would typically require that the shareholders approve of the director’s remuneration.

The directors must also report to the registrar each year how much they are being remunerated, and this information will be publicly available.

Involving the Community

Community companies are encouraged to involve their community as much as possible in the activities of the company, and the directors are required to report to the registrar every year on their involvement with the community.

This information will be made publicly available.