Winding up a Company Limited by Guarantee

Company Insolvency

Winding up a Company Limited by GuaranteeMembers can vote to carry out a winding up of a company limited by guarantee. This form of business structure often used by non-profit organisations such as: clubs, co-operatives, social enterprises, community projects, membership organisations and charities.

A company limited by guarantee is legally separate from its members. Means that property and other assets can be held within the company’s name, if required to do so the company can enter into contracts and employ people.

It has Limited liability to protect the members of the company from personal liability for the company’s debts.

Winding up a company that is limited by guarantee means that there are no shareholders but instead is guaranteed by members who have agreed to a specific amount in the event of insolvency.

Within this article will will take a look at the process of winding up a company limited by guarantee and what that might mean for those involved. We will cover both insolvent liquidation and solvent winding up.

What Does Limited by Guarantee Mean?

The term Companies limited by guarantee (LBG) are often related to non-profit organisations. Theses are often converted into a  community interest company (CIC) to prevent extraction of profits. Limited by guarantee companies do not have shareholders, it still has members who will act as guarantors upon winding up.

Unless the incorporation documents state otherwise, all members will have an equal vote on any resolutions if they are paid up members. The case of shareholders would mean that they are based on their shareholding.

The limited by guarantee structure is almost unique to the UK, with only Australia to have such a similar structure for companies.

Types of institutions that limited by guarantee structures are used are:

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

Liquidating a Company Limited by Guarantee

Companies limited by guarantee are run by directors, they are registered at Companies House in the same way as a limited company is.

Should the company that is limited by guarantee enter insolvency, the same processes as a normal business are used. These are 1.  compulsory liquidation 2. voluntary liquidation. The personal liability of directors (and members) is limited to the amount specified on the original guarantee. This is often something like £10.

A resolution from the shareholders of the company is needed to start the process. This means that at least 75% of members must vote in favour of the resolution to wind up.

If an insolvency practitioner is carrying out an insolvent liquidation, their primary duty is to the creditors. This means that the sale of any assets will go directly to paying them what they are owed before the charity can be struck off.

As the term ‘winding up’ can also refer to solvent liquidation. What is the best process to close a solvent company, limited by guarantee, in a tax efficient manner.

What is a community interest company – CIC?

In 2005 community interest companies were introduced in the UK, these are a way to demonstrate the company’s intention to act for the benefit of the community.

This type of company model was quickly adopted with over 10,000 registered in this way between 2005 – 2015.  Though not a charity the community interest company is a business that has aims for the public good. The role of the community interest company is to ensure that all profits are reinvested back into the venture to improve the cause behind the company.

A community interest company must have the following criteria and the following needs to be met. These will be examined by companies house.  Any formation of a CIC cannot have:

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

Unlike charities, board members of community interest companies can be remunerated for their service. These payments must be taken via the payroll under a PAYE scheme, dividends cannot be paid.

If a voluntary winding up is to take place the liquidator will be required to examine any payments made to the board to ensure they have been made appropriately.

Winding up a limited by guarantee company

Voluntary liquidation is the same for companies limited by shareholding, and limited by guarantee companies may also face winding up action by creditors if they are unable to pay their debts as they fall due.

The following reasons why CICs and LBGs are typically insolvent are:

  • Fundraising activities have failed to deliver 
  • Sponsorship has been lost due to social media scandal or insolvency of a major sponsor
  • Removal of government funding
  • Community interest activities have been over-committed

There are significant difference to the structure of shareholding and that of LBG and CIC companies, but the voluntary winding process of both is a very similar process.

There would be a meeting of the members, this is to arrange that the relevant notice to pass a resolution that the company be wound up voluntarily.

A big differences, particularly with social clubs, is there are often a lot more members in limited by guarantee companies. Voluntary liquidation meetings are often called at short notice, they will need the consent of 90% of members. This is practically a difficult task to do when there may be in excess of 100 members.

An equal vote is allowed to all member, unless stipulated otherwise. There needs to be 75% of members in attendance at the meeting, these members need to vote in favour of the winding up resolution. Once the members have voted in favour of passing the resolution, the liquidation process is very much the same. The procedure then moves on to the decision process by creditors to establish the conduct of the liquidation moving forward.

Solvent Liquidation of a Company Limited by Guarantee

Solvent liquidation, are mainly referred to as members voluntary liquidation, this type of liquidation is a way to close a solvent company limited by guarantee, this means the company has assets and no creditors. Members voluntary liquidations (MVL’s) are managed by an insolvency practitioner who will dissolve assets. In some cases they are potentially passed on to another charity, as this is sometimes stated in the memorandum and articles.

Once the company has been struck off the Companies House Register, the Charity Commission needs to be notified so that they can also remove it from the Register of Charities.

Implications for members of a limited by guarantee company?

Members of an LBG company provide a guarantee this is instead of paying for a shareholding. This is treated effectively the same as uncalled share capital, this means that upon liquidation of a company members need to pay towards the assets. The upside to this is the guarantee will generally be a fairly nominal amount, usually between £1 – £10.

Once the liquidation of the company has taken place, the liquidator will look to recover from the members any ‘guaranteed’ amount.

If you are the manager of a limited by guarantee company or community interest company, and this type of vehicle is coming towards the end of its natural life, or just facing cash flow difficulties, our team of experts can provide advice of the next steps.

Do make contact and we can talk though the options that are open to you, simply complete the online enquiry form.

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