What Happens To A Company Limited By Guarantee During Insolvency?
If you’re not sure what a company limited by guarantee is or what happens when it is insolvent, you’ve come to the right place.
A private company limited by guarantee, also known as a CLG, differs from one limited by shares. For a company limited by shares, shareholder liability is limited to the capital originally invested by creditors.
As with companies limited by shares, those limited by guarantee (LBG) are also governed by the Companies Act 2006 in the UK.
Examples of companies limited by guarantee include charities, social enterprises, community organisations and professional associations. They play an important role in society by providing essential services, promoting community development and advancing various causes.
Many well-known organisations are companies limited by guarantee, including:
- Financial Conduct Authority (FCA)
- Network Rail
- PGA European Tour
- England and Wales Cricket Board
- Oxfam
- Cancer Research UK
- World Wildlife Fund
So, what is a CLG exactly?
What is a company limited by guarantee?
It’s a private company limited by guarantee without share capital. Instead, its members act as guarantors.
They have charitable or non-profit purposes and are not permitted to distribute profits to their members. Members must reinvest any profits into the company’s objectives.
They are a popular choice for organisations that want to operate as separate entities with limited liability while maintaining control over their finances.
These limited by guarantee structures are well-suited to companies that conduct non-profit activities, want limited liability protection and keep control over their finances.
Key characteristics of a company limited by guarantee include:
- No share capital: A company limited by guarantee does not issue shares. This means there is no concept of ownership or dividend payments either.
- Charitable or non-profit purpose: A company limited by guarantee is typically formed for charitable or non-profit purposes. They are not allowed to distribute profits to their members and must reinvest any surplus revenue.
- Separate legal entity: A company limited by guarantee has a distinct legal identity, separate from their members. This means they can own property and enter into contracts.
- Corporate structure: A company limited by guarantee has a corporate structure similar to those limited by shares. They have directors who manage the company’s affairs and a company secretary who handles administrative tasks.
- Limited liability: The liability of members is limited to the amount they signed up to contribute in their guarantee agreements. This protection shields their personal assets from the company’s debts.
That last point is important for members in case their company limited by guarantee enters insolvency. Here are three ways to check when a company is insolvent.
A company limited by guarantee in insolvency
Just like any other company, one limited by guarantee can borrow money from banks, but also has to pay its overheads and could fall into debt.
Reasons for a company limited by guarantee struggling to pay debts when they fall due include:
- Relatively lower income from fundraising activities
- Loss of a key sponsorship
- Loss of government funding
A company limited by guarantee must have at least one director who will typically also be a guarantor. Charitable organisations need two directors minimum.
All guarantors agree to contribute a set amount of money should the company become insolvent and potentially, enter liquidation.
Here is the process for placing a company into liquidation. We can also explain what happens to employees when a company goes into liquidation.
In the event of winding up the company, the process begins with a resolution. At least 75% of members must vote in favour of the resolution to wind up.
However, members’ personal exposure for an insolvent company limited by guarantee is often low.
Their exposure is restricted to the amount of their guarantee (usually a nominal sum of often just £1, or £10, etc.) – that is, unless there are any signs of fraud or negligence, of course.
Final thoughts: Company limited by guarantee (UK)
To summarise, a private limited company by guarantee is an organisation without share capital, but with members acting as guarantors.
They have charitable or non-profit purposes, so members do not receive profits and must reinvest any into the company’s goals.
In the event of insolvency, their personal exposure is limited – it’s restricted to their guarantee amount, usually a nominal fee.
If you found this article useful, take a look at the wide range of articles elsewhere on our blog.
For example, previously we have written a guide to the different types of liquidation. Also, find out how long to keep company records for after liquidation.
For more information about insolvency or liquidation, we recommend speaking to a qualified expert as soon as possible.
We are Hudson Weir, insolvency practitioners specialising in business recovery and with many years of experience. Please don’t hesitate to get in touch with any queries.
