What directors and business owners need to know

Companies limited by guarantee (LBG) are often non-profit organisations. Therefore, they are often converted to be a community interest company (CIC) to prevent extraction of profits.

Whilst a limited by guarantee company does not have shareholders, it still has members who will act as guarantors upon winding up. We will come to the implications on this later in the article. Unless the incorporation documents state otherwise, all members will have an equal vote on any resolutions. With shareholders, this would be based on their holding.

The limited by guarantee structure is almost unique to the UK. Only Australia has a similar structure for companies. Examples of types of business which use the limited by guarantee structure are:

  • Social clubs
  • Working mens clubs
  • Sports clubs
  • Student Unions
  • Residential property management companies
  • Charities
  • Political parties
  • Healthcare organisations

What is a community interest company?

Community interest companies were only introduced in the UK in 2005 as a way to demonstrate the company’s intention to act for the benefit of the community. The model was quickly adopted with over 10,000 companies registered in this fashion between 2005 – 2015.

A community interest company is not a charity, but still has a business aim in the public good. The community interest company status ensures that all profits are reinvested in improvement of the cause behind the company.

To qualify as a community interest company, the following criteria must be met, which will be examined by companies house. They cannot:

  • Have a political agenda
  • Serve only an unduly restrictive group
  • Be a registered charity
  • Carry out illegal activities

Compared to charities, board members of community interest companies can be remunerated for their service. However, this must be done through the payroll, and dividends cannot be paid. Upon voluntary winding up, the liquidator will be required to examine any payments paid to the board to ensure they have been made appropriately.

Winding up a limited by guarantee company

As with companies limited by shareholding, limited by guarantee companies may face voluntary liquidation if they are unable to pay their debts as they fall due. The likely reasons for CICs and LBGs to become insolvent are:

  • A lack of income from fundraising activities
  • Loss of sponsorship due to social media scandal or insolvency of a major sponsor
  • Loss of government funding
  • Overcommitment to community interest activities

Whilst there are significant difference within the structure of the companies, voluntary winding up of an LBG or CIC is a very similar process to a company with a shareholding. A meeting of the members is arranged with the relevant notice to pass a resolution that the company be wound up voluntarily.

One of the big differences, particularly with social clubs, is there are often a lot more members in limited by guarantee companies. Often voluntary liquidation meetings are called at short notice, with the consent of 90% of members. However, it is practically much more difficult to do this when there may be in excess of 100 members.

All members have an equal vote, unless stipulated otherwise. Similarly, 75% of members, in attendance at the meeting, voting in favour of the winding up resolution is required. Once the members resolutions have been passed, the liquidation process is very much the same. The procedure moves on to a decision process by creditors to establish the conduct of the liquidation moving forward.

What are the implications for members of a limited by guarantee company?

As stated in its names, members of an LBG company provide a guarantee instead of paying for a shareholding. This is treated effectively the same as uncalled share capital, payable upon liquidation of a company towards the assets.

The upside to this is the guarantee will generally be a fairly nominal amount, usually between £1 – £10. Once a company is liquidated, the liquidator will look to recover from the members any ‘guaranteed’ amount.

If you are managing a limited by guarantee company or community interest company, coming to the end of its natural life, or facing cash flow difficulties, our BusinessRescueExperts can provide advice of the next steps.