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HEFCE

Related Companies: Recommended Practice Guidelines (Robson Rhodes)

March 1996

Reference RR 1/96 Appendix D

March 1996

The electronic version of this document contains the main sections. The complete printed document is available for the HEFCE's Audit Division.

Higher Education Institutions

Related Companies

Appendix D

Recommended Practice Guidelines

Contents
Study of Related Companies (Robson Rhodes)

DEFINITIONS

HEFCE Higher Education Funding Council for England

SHEFC Scottish Higher Education Funding Council

HEFCW Higher Education Funding Council for Wales

DENI Department of Education for Northern Ireland

Institution University or higher education college in England, Wales, Scotland or Northern Ireland

Governor Member of Council, Board, Governing Body or other Body ultimately responsible for the affairs of the Institution

Related Company or Company Any Company over which the Institution has control or exercises a substantial degree of influence in relation to that Company's activities*

Guidelines Recommended Practice Guidelines issued to Institutions from time to time by the HEFCE

Shadow Director A person (or a body corporate) in accordance with whose directions or instructions the directors are accustomed to act

SCOP Standing Conference of Principals

CVCP Committee of Vice-Chancellors and Principals

UNICO The Universities Companies Association

* Under this definition the Institution would in most cases have a controlling or majority interest in the Company. However, there may be situations where a Related Company is not a subsidiary undertaking, as defined by accounting standards, but where the relationship between the Institution and that Company is such that these Guidelines may still be applicable.

CONTENTS

SECTION

Letter of Introduction

Part I Introduction

Part II Recommended Practice Guidelines: Checklists

Part II Appendices not included here
A Duties of the Nominated Officer

B Nominated Officers Report
  • (i) Summary
  • (ii) Preliminary considerations
  • (iii) Company formation
  • (iv) Management
  • (v) Review
  • (vi) Exit/Realisation of investment

C Duties of Company Officers
  • (i) Directors
  • (ii) Company Secretary

D Contents of Key Documents
  • (i) Memorandum and Articles of Association
  • (ii) Memorandum of Understanding

E Specimen Memorandum of Understanding

F Outline Business Plan

LETTER OF INTRODUCTION

Companies in the higher education sector have become increasingly significant. In many cases their financial results and increased capital value have contributed to the financial health of Institutions. However, not surprisingly given the recent economic climate, some Companies have been a drain on their Institutions and there have been some failures. The National Audit Office in 1994 urged the Higher Education Funding Council for England to study the issue and draw out lessons for the sector as a whole.

Robson Rhodes undertook this study on behalf of HEFCE. We reviewed the nature and scale of activities within Related Companies as well as their performance in financial and managerial terms. We have distilled the lessons for the sector into these Recommended Practice Guidelines to help Institutions and their Companies ensure that the Companies have been set up properly for a proper purpose.

Our study team concluded that the current practices of Related Companies often mirrored recommended practice (although few Companies exhibited recommended practice in all aspects). There is, however, a lack of formality in many instances in the relationship between the Company and its Institution and sometimes between a holding company and its subsidiaries.

Our study team has been supported by a Technical Panel which has included representatives from CVCP and SCOP. In addition, the Guidelines have been heavily influenced by the input from UNICO and delegates at Regional Workshops held throughout the country in early autumn. We are grateful to all for their support and suggestions.

These Guidelines are based on three fundamental principles:

* each Related Company has a responsibility and accountability to its shareholders;

* each Institution, as a significant shareholder in the Company, has a duty of governance in relation to that Company;

* the HEFCE, through its funding, advisory and monitoring role in relation to Institutions, has a legitimate interest in how Companies are set up, managed and reviewed.

The Recommended Practice Guidelines are an important element in how each Company and Institution will discharge its duties and responsibilities. The HEFCE welcomes the extent to which good practice is already implemented by Institutions and sees no need, at this stage, to add to the current measures. However it wishes to keep the situation under review and will hope to see evidence that the Recommended Practice Guidelines are adopted and implemented by the sector.

We recommend that all Institutions apply the Guidelines to the formation of new Companies and establish a timetable for reviewing existing Companies.

E SULLIVAN

Partner

Robson Rhodes


Part I

INTRODUCTION

1 The Higher Education Funding Council for England

1.1 The Higher Education Funding Council for England was established in 1992 to administer funds made available for the provision of teaching and research in higher education Institutions.

1.2 One of its key objectives is to promote the efficient use of Institutional assets and effective accountability for public funds, while recognising the autonomy of Institutions.

1.3 Accordingly, HEFCE commissioned Robson Rhodes to conduct a study of Related Companies operating within the higher education sector and to produce guidance for the sector in the form of these Recommended Practice Guidelines.

1.4 Although HEFCE commissioned the study, both SHEFC and HEFCW officers and Institutions participated. The Guidelines therefore are intended to be of use to all Institutions funded by the three funding councils and DENI. Reference to HEFCE within these Guidelines should be taken to refer to any of the councils.

2 Institutions

2.1 Institutions of higher education are legally independent corporate bodies which have a common charitable purpose of providing education and undertaking research. They are accountable through their Governing Bodies which carry ultimate responsibility for all the affairs of the Institution.

2.2 The constitutions and powers of Institutions within the higher education sector are extremely diverse and may (depending upon the type of Institution) be laid down in, for example, the charter and statutes of the Institution or in the Education Reform Act 1988 (as amended by the Further and Higher Education Act 1992), together with the instruments and articles of government.

2.3 Governors act in a fiduciary capacity and must act in the best interests of the Institutions they govern. In certain circumstances they may face personal liability for loss resulting from a failed project.

2.4 Not all Institutions may have the power to set up Related Companies; in addition, some of the proposed activities of such Companies may not be directly in accordance with the Institutions constitution. Governors should seek proper advice on all aspects of proposed projects.

2.5 More detail on the responsibilities of Institutions may be found in the Guide for Members of Governing Bodies of Universities and Colleges in England and Wales (published by the Committee of University Chairmen in June 1995). Guidance in relation to the role and responsibilities of Governors at Scottish higher education Institutions is currently being developed between SHEFC and representative bodies of the Scottish sector.

3 Related Companies

3.1 Institutions set up Related Companies for a variety of reasons: for example, to carry out activities of a commercial nature, which may protect the Institutions charitable status and incidentally provide advantageous tax or estate planning; to reward, and retain, key academic personnel; to avoid demands on the Institutions management resources; or as a means of conducting joint ventures.

3.2 There may also be less tangible reasons for establishing a Related Company, such as providing a focus for commercial enterprise in a culture different from that of the Institution itself.

3.3 With the increased pressures on funding, Institutions are seeking alternative sources of income and are looking to expand their commercial activities. It is likely, therefore, that Related Companies will play an increasingly significant role within the higher education sector in the future.

3.4 The activities of Related Companies can vary considerably. Some take advantage of specialist skills by selling training and consultancy expertise; others exploit the commercial potential from research and intellectual property. They may also help to attract private funders to share in the risks and rewards of ventures which Institutions may not otherwise be able to fund.

3.5 By establishing a Related Company to undertake a commercial activity an Institution may be able to ensure that its powers are not exceeded, that its legal duties (specifically under the law relating to charities) are not breached and that its Governors reduce the risk of personal liability.

3.6 By carrying out activities through a Company it may be possible to limit liabilities which may arise, for example through negligence or breach of contract claims. However, in certain circumstances (particularly where the Institutional "parent" exercises a high degree of control) limited liability may not protect the Institution: individual directors of the Related Company who are also Institutional employees or Governors may face personal liability. In each case, proper professional advice should be sought, both at the preliminary consideration stage (see Section 5 below) and at subsequent stages where problems may arise.

3.7 An example of the above point could be wrongful trading. If the Company and the directors (including the Institution), which for this illustration are taken to control the Company's activities, knew or ought to have known that the Company was insolvent and that there was no reasonable prospect of avoiding insolvent liquidation but continued to trade taking no steps to minimise potential loss to creditors, the directors (including the Institution) may be held liable to contribute to payment of the Company's creditors.

4 Important Note

4.1 Before embarking upon any particular project, Institutions must examine their constitution (and, in cases of doubt, seek appropriate advice) to determine their powers to undertake the project and the administrative steps required to implement it. These Guidelines are solely for guidance: because of the diverse nature of the sector, they cannot claim to be definitive. In each case, reference should be made to and approval sought from the Governing Body.

4.2 The HEFCE welcomes inquiry on any particular matter and will endeavour, where appropriate, to give general and individual guidance. However, as Institutions are independent bodies, it is ultimately for the Governors to satisfy themselves that any particular project falls within the powers of the Institution and that all appropriate safeguards are in place.

4.3 This document is a summary only of the relevant law and evolving practice in relation to Related Companies. Accordingly, neither Robson Rhodes, nor the HEFCE, nor any other adviser or body accept any liability in relation to the contents and implementation of these Guidelines. In each case, appropriate advice on the project should be sought from properly qualified independent advisers.

5 Preliminary Considerations

5.1 The decision to form a Related Company should be made with care. It commits an Institution to a time-consuming course of action and may involve considerable direct and indirect costs. It is essential therefore to consider fully the commercial, legal and constitutional issues and any potential tax or other implications (advantageous or otherwise).

Preliminary Business Plan

5.2 The reasons for forming or acquiring a Company must be carefully evaluated, weighing up all the facts and options. In these Guidelines, this evaluation is called the Preliminary Business Plan. At this stage, factors for consideration should include the objectives of the Institution and the Company, the financing arrangements, the potential risks and the way in which the investment will ultimately be realised.

5.3 An Institution must satisfy itself that the creation of a Company is the best way to achieve its objectives. There are often alternatives to forming a Company: the Institution itself may be able to carry out the activity, or a joint venture or partnership may be appropriate. Such an analysis, and the final decision, should be made by the Governors in accordance with the Institutions constitution.

Tax considerations

5.4 A Company may be established to enable the Institution to take advantage of tax planning opportunities both in terms of direct and indirect taxation.

5.5 Institutions are generally exempt from corporation tax to the extent that they apply their resources for charitable purposes. Similarly, Institutions that supply education are generally exempt from Value Added Tax on such supplies. Commercial activities that are carried out by the Institution itself, and are otherwise than for the Institution's purpose, may (irrespective of constitutional issues) incur tax liabilities. The risk of a tax liability may be reduced and in many cases eliminated if such activities are undertaken through a properly constituted subsidiary.

5.6 There are several established methods whereby profits from Related Companies can be yielded up to the Institution in a tax-efficient manner. The most common method is by deed of covenant which, to be effective, must be drawn up and payment actually made prior to the end of the first profitable accounting period of the Related Company. Failure to meet this requirement will result in a taxation charge arising in the Related Company.

5.7 Many Institutions have used companies for VAT planning purposes, for example for the construction or refurbishment of buildings. In these cases, the Institution would construct the property and enter into a lease and leaseback arrangement with the Related Company. By electing to charge VAT on the rentals, the Institution was able to secure a significant up-front VAT recovery which would not otherwise have been available. Recent VAT anti-avoidance legislation has made such arrangements more difficult and may have reduced the potential advantages of a separate subsidiary Company. It may still be technically possible to take advantage of such arrangements but Institutions should take appropriate advice.

5.8 In all cases, Institutions will need to satisfy themselves, usually with professional advice, that the tax implications are clearly understood.

Nominated Officer

5.9 The link between the Institution and the Company is critical. An officer should be nominated to be responsible for reporting to the Institution on the performance and activities of the Company and to represent the Institution, as shareholder, in Extraordinary and Annual General Meetings. It will be the duty of the Nominated Officer to ensure that the interests of the Institution are properly represented and to make decisions on its behalf, where necessary. The duties of the Nominated Officer are detailed at Appendix A.

5.10 The Nominated Officer should be appointed from the Institution and be approved by the Governors.

6 Key Documents

6.1 Within these Guidelines we make reference to three key documents:

* Financial Memorandum between the HEFCE and the Institution;

* Constitution of the Company (the Memorandum and Articles of Association);

* Memorandum of Understanding between the Institution and the Company.

6.2 Each of these documents has a specific role to play in the operation of both the Institution and the Related Company. They should be considered as separate parts of the control and management system surrounding good practice.

6.3 In addition, where the Institution does not have a 100% holding, a Shareholders' Agreement should be considered. This would record the arrangements agreed by all the shareholders (and could make reference to the Memorandum of Understanding).

Financial Memorandum

6.4 The Financial Memorandum between the HEFCE and each Institution sets out the financial framework in relation to funding and the conditions that govern the use of funds. A summary of the main provisions is set down in the Guide for Members of Governing Bodies of Universities and Colleges in England and Wales (published by the Committee of University Chairmen in June 1995).

Constitution of the Company

6.5 Each Company is different. Where new Companies are incorporated, or where existing ones are acquired, there is scope for tailoring their constitutions to meet specific requirements and building in whatever protection the Institutions may assess to be relevant in the light of the proposed project. There is a great deal of flexibility.

6.6 In many cases, Companies limited by shares or guarantee may be used. In most cases such Companies constitutions will take the form of a Memorandum and Articles of Association. Appendix D(i), which is not exhaustive, sets out a number of issues to be considered when assessing the constitutional requirements of Institutions (and their partners in any venture).

Memorandum of Understanding

6.7 These Guidelines recommend the use of a Memorandum of Understanding to ensure that all parties fully understand and agree on the purpose and control framework of the Company.

6.8 The Memorandum of Understanding is intended to provide a clear and unambiguous interface between the Company and the Institution and will be governed by the general law of contract. We believe that a properly drafted Memorandum of Understanding has a vital role to play in ensuring that the close relationship between the Institution and the Company remains harmonious. It allows the directors to maximise the Company's performance and its contribution to the Institution, while keeping within the bounds of good practice.

6.9 We set out at Appendix D(ii) a list of matters which it may be appropriate to include in a Memorandum of Understanding. At Appendix E we include a specimen document for illustrative purposes.

7 Key Commercial Issues

7.1 In setting up a Company the Institution should consider whether the commercial risks which the Company faces can adversely impact on the Institution itself. We set out below key issues for consideration by the Institution when establishing a Company.

Capitalisation and working capital

7.2 The Institution should examine carefully how the Company is to be capitalised. A Company with insufficient capital may have difficulties with, for example, obtaining credit with suppliers and paying employees.

7.3 In addition, the Company may be unable to improve its capital value if it covenants all its profits back to the Institution.

7.4 It may be that the Company will require ongoing financial support. The form and extent of such support must be properly planned to ensure that it does not conflict with tax regulations. It is an area where suitable professional advice should be taken.

7.5 Close attention should therefore be paid to the Business Plan and in particular to cash flow forecasts. Appropriate sensitivity analysis should be carried out to confirm the viability of the enterprise before a decision to proceed is reached.

Shadow directorships

7.6 Certain officers of the Institution, because of their influential position, may be held to be directors (although not formally appointed) or Shadow Directors. Principals or Vice-Chancellors, for example, might come into this category if they exercise control (conspicuously or behind the scenes) over the running of the Company.

7.7 Where an Institution or its officers are held to be Shadow Directors of the Company, the risk of personal liability is involved. A Shadow Director will be treated in the same way as an appointed director and may therefore be held personally liable in certain situations, such as being guilty of the offences of fraudulent trading and wrongful trading under the Insolvency Act 1986, should the Company become insolvent.

7.8 In most cases, the risk of being held to be a Shadow Director is the price an Institution must pay for a position of control. The possibility of insurance cover against loss suffered by a Company should be investigated.

Conflicts of interest

7.9 In a situation where an official or employee of the Institution also acts as a director of a Related Company he/she will owe separate duties of care to the Institution and to the Company to act at all times in the best interest of each.

7.10 In particular, officers or employees of the Institution should consider the conflicts which may arise when they are both directors of Related Companies and charged with the responsibility for overseeing those Companies on behalf of the Institution. In problematic cases, appropriate independent professional advice must be sought to safeguard both the Institution and the individuals.

Other key issues

7.11 Other key issues which should be considered are:

* Is there any misuse of charitable funds? Any such misuse, without adequate justification, could put at risk the charitable status of the Institution.

* Has the Company been set up lawfully and has due regard been given to the powers, roles and responsibilities of the directors?

* Is a control structure in place that enables the Institution to monitor the performance of the Company and ensure that the Company performs with the best interests of the Institution in mind?

* Is the Company adequately capitalised and funded so that it avoids trading whilst insolvent?

* Are the key assumptions realistic and have the risks and sensitivities affecting those assumptions been considered? Have alternative scenarios been modelled?

* Are the funds to be invested in the Company available for the purpose?

8 Warning signs

8.1 An Institution which has Related Companies needs to be alert to the first signs of problems. Such signs may be:

* failure to achieve forecast targets;

* continual requests for further finance;

* liabilities exceeding assets;

* rapid staff turnover;

* failure to produce statutory accounts or regular management accounts throughout the year, or difficulty in doing so;

* negative comments from the auditors.

8.2 To ensure that any difficulties within the Company are identified at an early stage it is important to have an effective management reporting system both for the Company and for the Institution in overseeing the operations of the Company. Failure to monitor and understand the performance of the Company may prove costly.

9 Guidelines: checklists

9.1 The checklists set out below are not intended to be prescriptive or exhaustive but are tools to help both the Institution and the Company ensure that the relationship between them operates on a sensible and sound basis.

9.2 Many of our recommendations draw on existing good practice. Others result from discussions with representatives of Institutions. The checklists are designed to assist Governors, officers of Institutions and directors of Companies in identifying and implementing good practice.


Part II

RECOMMENDED PRACTICE GUIDELINES:

CHECKLISTS

Introduction

The following checklists should be studied and completed by officers of the Institution and the Company as appropriate. We recommend that the Nominated Officer should prepare a report for submission to the Institution. We set out a suggested report structure at Appendix B.

Completion cycle

The checklists are set out in five parts, each broadly corresponding to a stage in the life cycle of a Company. We recommend that these checklists should be reviewed as follows:

A - Preliminary considerations Before formation

B - Company formation On formation

C - Management To be completed at the formation stage and on a regular basis thereafter (we recommend at least annually)

D - Review To be completed on a regular basis (we recommend at least annually)

E - Exit/realisation of investment Pre-disposal/closure

Every Institution considering creating a Company should examine the issues in Checklist A.

Once it has been decided to proceed, every Institution should consider the formation, management and review issues outlined in Checklists B, C and D respectively before taking a decision to implement.

Checklists C and D should be reviewed at regular predetermined points (or ad hoc review if required by performance) by the Institution or by the Holding Company (when different people may have responsibility) - this should be agreed by the Institutions Nominated Officer.

Checklist E should only be completed once the decision has been taken by the Institution to dispose of its investment or wind up the Company.

The checklists have been designed to allow the addition of relevant comments, or references to supplementary documents as appropriate

Part II (A)

PRELIMINARY CONSIDERATIONS

Checklist A should be considered and, where relevant, completed before a Related Company is established. It is intended to determine that a Company is appropriate for the purpose and that the reason for formation is valid.

Questions should be answered Yes, No or N/A, and any relevant Comments added.

A1 Have the Governors approved the project?
In particular, have they satisfied themselves
as to the objectives in drawing up the
Business Plan?

A2 Has a Nominated Officer been appointed
to oversee the formation of the Company
by the Governors?

A3 Has a preliminary Business Plan been
prepared? Does it include:

(i) consideration of the feasibility of
the project;

(ii) the proposed objectives of the
Company;

(iii) details of the proposed management
structure of the project and Company;

(iv) constraints (eg, is the Institution
prepared to allow the proposed
subsidiary to use its name and
reputation?);

(v) financing (from non-earmarked
sources) and the need for guarantees;

(vi) assessment of risks and sensitivities;

(vii) exit strategy;

(viii) formation timetable?

A4 Is a Company the most suitable vehicle for
the proposed activity?

Have alternatives been considered, including:

(i) straightforward contractual agreement by the Institution;

(ii) joint venture;

(iii) partnership;

(iv) franchising/licensing arrangements?

A5 Has professional advice been taken as to
whether a Company is appropriate for the
purposes and objectives of the proposed
activity?

In particular:

(i) Is the activity within the powers
of the Institution? What steps must be
followed to ensure the validity of the
arrangements?

(ii) Are there any implications in respect of
the charitable status of the Institution?

(iii) What are the implications in respect
of taxation (both direct and indirect)
and other legislation?

A6 Has the outline Business Plan been
approved by the Governors?

A7 Have any restrictions within the constitution
of the Institution been considered and
resolved in respect of the formation of
a Company?

Part II (B)

COMPANY FORMATION

Checklist B should be completed once the decision to set up a Company has been approved by the Governors. It is intended to ensure that the formation of the Company has been properly planned and controlled.

Questions should be answered Yes, No or N/A, and any relevant Comments added.

B1 Has a comprehensive Business Plan been
prepared by the proposed directors of
the Company? The following should
be included:

(i) the objectives of the Company;

(ii) management structure;

(iii) management teams;

(iv) detailed financial projections,
including key assumptions and the
working capital requirement;

(v) risks and sensitivity analysis;

(vi) the permanent capital required;

(vii) an understanding of the true costs,
contribution to overheads, and rates
of return required;

(viii) the return of profits to the Institution;

(ix) the intended exit.

B2 Has the Institution validated the Business
Plan? (This may be through independent
professional advice or by suitably qualified
personnel within the Institution.)

B3 Has the comprehensive Business Plan,
together with the financial backing required
(for example in equity, loan and guarantees),
been approved by the Governors?

B4 Has independent professional advice been
taken on:

(i) the Company's constitution;

(ii) the impact of the proposed Company
on the charitable status of the
Institution;

(iii) the impact of taxation on the Company
and on the Institution;

(iv) loan agreements;

(v) the impact of the proposed Company
on the financial position of the
Institution;

(vi) the protection of assets, including
intellectual property and copyright;

(vii) potential risks to the Institution and
others for which the Institution may
become liable;

(viii) the potential impact of product
liability or other possible litigation,
where the impact or cost of such
litigation could flow through to the
Institution itself;

(ix) the impact of any guarantees?

B5 Are there formal loan agreements covering
the following:

(i) security of loans;

(ii) rate of interest (which should be at a
commercial rate);

(iii) payment of interest;

(iv) repayment of capital?

B6 Has the appointment of the directors been
ratified by the Governors?

B7 Has a Chairman of the Board of Directors
been appointed?

B8 Has a Company Secretary been appointed?

B9 Have Auditors been appointed?

B10 Has the year-end of the Company
been established?

B11 Has a Memorandum of Understanding
been prepared, setting out clearly defined
and understood responsibilities and the scope
within which the activities of the Company
can be carried out?

Does the Memorandum of Understanding
include the items set out at Appendix D(ii)?

B12 Is the constitution of the Board fit for
purpose?

Has it been well constituted, with an
appropriate balance of executive directors,
Governors, executive officers of the
Institution and non-executive officers?

B13 Has the Board of Directors set down written
procedures and management structures for the
conduct of its business?

B14 Is there a need for appropriate written
operating procedures?

B15 Are the directors aware of their legal
responsibility to act in the best
interests of the Company?

Are any directors of the Company also
officers of the Institution? If so, is there
a written requirement for the directors
and other senior officials to report to the
Governors any conflicts which may arise
from their duties to the Board and to the
Institution?

Is there a Register of Interests set up by the
Company to record any conflicts which
may arise?

Is this Register of Interests reviewed from
time to time by the internal auditors?

Has legal advice been taken in respect of any
situation (such as the conflicts set out above)
which may put at risk the Institutions
charitable status or directors as individuals?

B16 Is there a suitable mechanism in place to
remove directors from office?

Is there a requirement in the Articles for the
directors to retire by rotation?

Are there any other restrictions which should
be imposed on the directors? (For example, it
may be appropriate for the Institution to have
a right to appoint and remove directors at
will.)

B17 Has the issue of directors remuneration been
considered?

B18 Are there laid down instructions in respect
of the management information to be
produced by the Company?

Does this management information include
instructions toproduce:

(i) budgets and forecasts;

(ii) management accounts?

B19 Are there clearly defined approval procedures for the following:

(i) strategic decisions;

(ii) contracts of employment;

(iii) subsidiary companies (of the Company)?

B20 Are the respective responsibilities of the following clearly defined:

(i) the Board of Directors;

(ii) the Institutions Finance Committee;

(iii) the Institutions Audit Committee or equivalent;

(iv) the Governors?

These responsibilities should be clearly set out in the Memorandum of Understanding between the Institution and the Company.

B21 Is there a mechanism in place for holding accountable key Related Company executives?

B22 Are there suitable indemnities in favour of Institutional officers or employees acting as directors of Related Companies?

B23 Are maximum authority limits set down in the Memorandum of Understanding, and clearly understood by officials both at the Company and at the Institution?

Do these limits cover the following:

(i) capital expenditure;

(ii) resource planning;

(iii) employment decisions;

(iv) investment decisions;

(v) sale of assets;

(vi) external financing (involvement
of third parties);

(vii) alterations to the proposed
activities of the Company?

B24 Are the directors satisfied that there are no arrangements which may prevent the Company carrying out its planned activity or proposed exit?

B25 Has suitable directors and officers liability insurance been taken out by the Institution and by the Company?

B26 Has the Company arranged suitable insurance cover?

B27 Has an appropriate timetable of Board Meetings been established (including the Annual General Meeting)?

B28 Has the Company been given authority to disclose information to the Institutions Audit Committee (ie has the Institution right of access to the Company's records)?

B29 Have the internal auditors been given instruction as to their responsibilities in respect of the Company and given rights of access?

B30 Has the Institution considered whether it is appropriate for the Company to adopt the recommendations of the Cadbury Committee and the Greenbury Committee on Corporate Governance?

B31 Has Checklist II(C) in respect of management issues been reviewed and completed where appropriate?

Part II (C)

MANAGEMENT

Checklist C should be completed once the Company has been set up and has commenced trading. .It is intended to ensure that management procedure is being adequately maintained and that the business issues arising out of the performance of the Company are understood by the Institution.

Questions should be answered Yes, No or N/A, and any relevant Comments added.

C1 Has Checklist II(B) in respect of formation issues been completed and reviewed?

C2 Have any profits arising been passed back to the Institution in accordance with agreed procedure?

C3 Are the protocols by which the directors conduct the business of the Company in line with the law? In particular has each director, on appointment, been given sufficient information by the Board to enable him/her to perform his/her duties?

C4 Has the Company suitable procedures in place to ensure that there are regular Board meetings and that formal minutes are prepared and approved by the Board which clearly detail:

(i) business which can only be conducted at Board meetings by company law;

(ii) other relevant business issues?

C5 Are decisions regarding the content of the agenda for individual meetings of the Board, and the presentation of agenda items, taken by the Chairman in consultation with the Company Secretary?

C6 Do the directors monitor the executive management of the Company?

Is this procedure subject to internal audit review?

C7 Does the Board of Directors formally record its compliance with the written procedure for the conduct of its business?

C8 Is appropriate financial and non-financial motivation given to key company personnel, to ensure that the performance of the Company is optimised, where this is relevant?

Advice on the use of the following might be sought:

(i) remuneration packages;

(ii) bonus schemes;

(iii) share ownership schemes.

Part II (D)

REVIEW

Checklist D should be completed at regular predetermined times once the Company has been set up and has commenced trading and thereafter. It is intended to ensure that the performance of the Company is subject to appropriate review procedures.

Questions should be answered Yes, No or N/A, and any relevant Comments added.

D1 Has the Nominated Officer reviewed Checklist II (C) in respect of management?

D2 Has the Institution (the Nominated Officer in the first instance) reviewed on a regular basis the performance of the Company and understood the results?

In particular, the following factors should be included in this review:

(i) the sharing of resources between
the Institution and the Company, for
example staff and premises;

(ii) the contribution by the Company to
the Institutions overheads;

(iii) whether transactions between the
Institution andthe Company are
carried out on a full cost basis;

(iv) whether the level of profitability of the
Company and other performance
criteria are meeting the agreed targets.

The frequency of this review will depend on the specific circumstances of the Company and the scale of its operations.
In most cases a review of performance against budget at least quarterly would be appropriate.

D3 Has the lifespan of the Company been predetermined in any formal documentation or contract? If so, consider appropriate course of action, for example completion
of Checklist E.

D4 Does the Institutions assessment of the Company's performance give a clear understanding of its current and future financial exposure? In particular:

(i) Is there an approved Business Plan which is still appropriate to the operations and environment of the Company?

(ii) Do the management accounts show that the Company has operated in accordance with the approved Business Plan?

(iii) Is the exposure of the Institution clearly defined and reported?

(iv) Has the value of the underlying net assets been ascertained?

(v) What are the future financing requirements?

(vi) Will these future financing requirements be met?

(vii) Has the impact of the Company's activities and performance on the Institution been considered?

D5 Are sufficient reserves earmarked by the Institution to cover any contingent liabilities which may exist?

D6 Does the Audit Committee have clear terms of reference in respect of the Company?

D7 Do the external auditors formally report to the Audit Committee in respect of the Company?

D8 Do the internal auditors include the Company in their cycle of work and formally report to the Audit Committee?

D9 Is there adequate disclosure in the Institutions accounts of the following:

(i) Company activities;

(ii) Company performance;

(iii) the financial position of the Company;

(iv) Institutional liability for Company debts;

(v) any material relationships which may exist?

D10 Has the Company been consolidated into the Institutional accounts?

If not, have the Governors received summary information on the Company and the reason for non-consolidation?

D11 Does the Institution maintain a record of the Related Company profits to date and contributions to the Institution since formation?

Note: a record may be maintained for internal purposes only - it will enable the Institution to determine the level of reserves generated from commercial investment.

D12 Does the Institution and its related Companies maintain adequate records of transactions with related parties, as required by Financial Reporting Standard 8: "Related Party Disclosures"?

D13 Has the Institution satisfied itself that the Company has taken appropriate steps in respect of the following:

(i) health and safety procedures;

(ii) quality control procedures?

D14 Has a review of the Company been carried out by the Institution to consider the:

(i) financial performance;

(ii) performance of management;

(iii) future working capital requirements;

(iv) assessment of risks?

Has the Institution committed to its ownership of the Company for a further year? If not, then Checklist II(E) should be completed.

Part II (E)

EXIT/REALISATION OF INVESTMENT

Checklist E should be completed once the decision has been taken by the Institution to dispose of its investment or wind up the Company.

Questions should be answered Yes, No or N/A, and any relevant Comments added.

E1 Has the Institutions decision to dispose of its investment in a Related Company been ratified by the Governors?

E2 Has the Institution considered the potential costs in respect of:

(i) closure;

(ii) redundancies;

(iii) contingent liabilities;

(iv) guarantees;

(v) product liability?

E3 Has suitable independent professional advice been taken?

Such advice should cover:

(i) tax planning (both corporate and capital taxes);

(ii) valuation of the Company;

(iii) the terms of the disposal and any warranties or guarantees given;

(iv) contractual matters, including rights of employees;

(v) public relations/announcements.

E4 Is the Institution satisfied that it has obtained the best price possible (in the context of its goals) for its investment?

E5 In the event that the Institution has determined to withdraw its financial support from a Company, has this information been formally passed to the Board of Directors of the Company?