What is an Asset Lock?

No matter how big or small, an organisation with a good board always questions their own governance and considers future planning, including how their assets are managed in the future should they cease trading – this is when to consider an asset lock. 

What is an asset lock? 

An “asset lock” is a way of ensuring that the assets of a company or society can never be cashed in by or transferred to private individuals or other companies for their own advantage.  

An asset lock means that: 

  • While the company or society is still trading it must use its assets for a specific community benefit and may not transfer them to any person or organisation that will use them differently 
  • If the company or society is dissolved, any cash or other assets remaining after creditors have been paid may not be transferred to the members. 

Instead, the assets must be transferred to another company or society that has a similar asset lock. 

Whether or not a company or society adopts an asset lock depends on exactly what kind of company or society it is, but the following bodies typically do have an asset lock; 

Charities and Community Interest Companies (CIC)-are obliged by law to have asset locks – This is known as a statutory asset lock.  

Some charity governing documents contain a clause that expressly prohibits the trustees from disposing of land or buildings. However, trustees can sell or lease property if the sale is in the charity’s best interests and the value of the asset must return to the charity. 

An asset transfer out of the CIC can only be made if it is for full market value / is made to another asset-locked body specified in the Articles of Association/ is made to another asset-locked body with the consent of the Regulator or it is made for the benefit of the community. 

Community Land Trusts – A CLT must be a corporate body, such as a community benefit society, Community Interest Company limited by guarantee or Company Limited by Guarantee and therefore is required to have a statutory asset lock. 

Company Limited by Guarantee – Not a necessary requirement, but many not-for-profit bodies incorporated as a company limited by guarantee have chosen to adopt bespoke Articles that do include an asset lock. This is considered a voluntary asset lock. 

Other types of organisations that can set up a voluntary asset lock: 

Registered Society – A Community Benefit Society or a Co Operative may choose to adopt an asset lock, known as a “restriction on use” of the society’s assets. The restriction prevents the society from transferring its assets to any other person or company apart from one with a similar asset lock. 

Unincorporated association – In this case assets (and liabilities) belong to the members. Members agree to their own constitution or rules, if agreed these rules may include a requirement to protect the asset for community benefit.  

Trust – Assets (and liabilities) belong to the trustees. A governing document known as a Trust Deed can specify that assets must be used in the interest of beneficiaries.  

Not everyone agrees that an asset lock is a necessary requirement in order for a company or society to have not-for-profit status: What might or might not happen to the organisation’s assets in the future arguably is less important than how the organisation operates from day to day.  

But having an asset lock in place does demonstrate clear commitment to your organisation’s social objectives, ensures that your asset remains in local use and helps provide reassurance to investors and the wider public.