Company Limited by Guarantee

Introduction:

This note will discuss a company limited by guarantee as one of the types of companies in Ghana. The note will also discuss limits placed on a company limited by guarantee, the two types of companies limited by guarantee, peculiar details that are provided during the registration of a company limited by guarantee, and the names of companies limited by guarantee.

A Company Limited by Guarantee as a Type of Company in Ghana:

In Section 7(1)(b) of the Companies Act, 2019 (Act 992), it is provided that an incorporated company may be a company limited by guarantee.

In Subsection 2(b), a company limited by guarantee is defined as follows:

a company limited by guarantee is a company which has the liability of its members limited to an amount that the members may respectively undertake to contribute to the assets of the company in the event of its being wound up;

The above provision may be understood with an illustration. Legum, a company limited by guarantee, has X, Y, and Z as its members. During incorporation, X guaranteed that he would pay Ghc 10,000 to the company if it was wound up. Y also guaranteed that he will pay Ghc 300 for this same purpose. Z also guaranteed that he will pay Ghc 2 for the same purpose. During its operations, Legum incurred a debt of Ghc 100,000. The following may then be said:

1. X, Y, and Z, as members of Legum, are not, while Legum is still operating, personally liable for the Ghc 100,000 debt incurred by Legum because Legum is a limited liability company.
2. However, during winding up, debts that remain unpaid by Legum will still need to be paid.
3. The effect of the provision in subsection 2(b)(supra) is that X, Y, and Z will be liable to pay the amounts they themselves undertook to contribute to the assets of the company during winding up. X will thus be liable to pay Ghc 10,000, y will be liable to pay Ghc 300, and Z will be liable to pay Ghc 2. They cannot decide to reduce their liability to any amount other than that guaranteed, because Section 8(3) of Act 992 provides that “The total liability of the members of a company limited by guarantee to contribute to the assets of the company in the event of the company being wound up shall not at any time be less than the amount of money specified in the application required for incorporation. ”
4. Once these contributions are made to the assets of the company during winding up, they can then be used to settle Legum’s debt (or a part of it).

Limits Placed on a Company Limited by Guarantee:

Act 992 places several restrictions on companies limited by guarantee. These restrictions shall now be discussed.

1. Cannot be registered with shares and cannot issue shares:

In Section 7(8) of Act 992, it is provided that:

A company limited by guarantee shall not for the purposes of incorporation be registered with shares and shall not create or issue shares.

2. Limits on making of profits:

In Section 8(1) of Act 992, it is provided that:

A company limited by guarantee shall not be incorporated with the object of carrying on business for the purpose of making profits other than making profits for the furtherance of its objects.

Thus, a company limited by guarantee cannot make profits for the benefit of its members, but can do so to further its objectives. For example, a company limited by guarantee may be incorporated to promote girl child education. While it cannot make profits for the purpose of distributing to its members, it can do so for the purpose of promoting girl child education.

In the case of Chapel Hill School Ltd v Attorney General [2009] GHASC 9 (22 July 2009) , the Supreme Court of Ghana explained the effect of a similar provision in Act 179. In that case, the appellant, a school, was originally established as a company limited by guarantee. Subsequently, the appellant was incorporated as a company limited by shares. When the appellant was assessed for tax by the Internal Revenue Service, it contended that it was an educational institution of a public character and its income was exempt from tax and sought an order for the annulment of the tax assessment. To sustain its claim, the appellant argued that none of its income or assets confers a private benefit to any person. The Supreme Court noted that “for the appellant to succeed in showing that it is an institution of a public character, it must, in our view, establish that its educational business was of public benefit and did not confer any private benefit on individuals.” The court then noted that by converting from a company limited by guarantee to a company limited by shares, the appellant removed doubts that its business did not confer a private benefit on individuals. Per Date-Bah JSC,

Unfortunately, the appellant’s case is destroyed, in part, by its conversion in form from a company limited by guarantee into a company limited by shares. By this conversion, whether or not profits are actually distributed, the members of the company are entitled to profit from the business run by the company. The potential for there to be benefit to private individuals implies that, from 2001 onwards, the appellant school was no longer of a public character. However, before then the appellant’s case that it was of a public character is cogent and persuasive and, in our view, should be accepted. Section 10 of the Companies Act, 1963 (Act 179) provides that a company limited by guarantee shall not be incorporated with the object of carrying on business for the purpose of making profits. It spells out a sanction for officers and members of a company limited by guarantee who breach this prohibition against making profit. Accordingly, for as long as the appellant was a company limited by guarantee, there was a legal assurance that its business was not conferring any private benefit on individuals. Indeed, the company limited by guarantee, which was introduced into Ghanaian law by the Companies Act 1963, can be said to be functionally equivalent to a trust. It is functionally a trust in corporate form. By this we are not asserting that the technical equitable rules on trusts apply to it. However, we do say that the function of the two institutions is identical in this context. This connotes that the members of the company, like a trustee, cannot benefit from the revenue from the trust, which should be used exclusively for the purposes of the guarantee company. Thus any excess revenue remaining after all the expenditures of the company in any year has to be retained and applied in the future to the company’s purposes. This assurance was removed by appellant’s conversion into a limited liability company. We therefore consider that from the date of the conversion of the appellant from a company limited by guarantee into a company limited by shares, it ceased to be of a public character.

If a company limited by guarantee makes profits for the benefit of its members other than the furtherance of its objectives, Section 8(2) of Act 992 provides that “the officers and members of that company who are cognisant of the fact that the company is so carrying on business are jointly and severally liable for the payment and discharge of the debts and liabilities of the company incurred in carrying on that business, and the company and those officers and members are each liable to pay to the Registrar, an administrative penalty of twentyfive penalty units for each day during which the company carries on that business.”

3. Prohibition of payment of dividends by companies limited by guarantee:

In Section 75(1) of Act 992, it is provided that:

A company limited by guarantee shall not at any time pay a dividend or make a distribution or return of the assets of the company to members of the company.

This provision reinforces the earlier provision in Section 8(1)(supra) and the case of Chapel Hill School Ltd v Attorney General that the profits of a company limited by guarantee are not to be used to confer private benefit for the purpose of furthering the object of the company.

Types of a Company Limited by Guarantee:

Per Section 7(4) of Act 992, a company limited by guarantee may be private or public. Thus, we have:

1. Private company limited by guarantee.
2. Public company limited by guarantee.

A company limited by guarantee is said to be private if its members and debenture holders are fifty or less. It is public if its members are more than fifty.

Registering a Company Limited by Guarantee:

In the application for incorporation of a company limited by guarantee, the members specify how much they want to pay in the event the company is being wound up.

Names of Companies Limited by Guarantee:

In Section 21(1)(c) of Act 992, it is provided that the last words of the name of a:

(c) company limited by guarantee shall be “Limited by Guarantee” or the abbreviation “LBG”;

In light of the above, you may be given the following set of facts, and it is important that you identify the type of company as a company limited by guarantee:

Legum LBG has made a lot of profits and seeks to pay it as dividends to its hardworking members. They are, however, confused on the distribution of profits. X suggests the profits should be distributed equally, Y suggests it should be equitably distributed. They have come to you for advice on how to proceed. Advice them.

From the above, it should be clear that Legum LBG is prohibited from paying out dividends to its members and is prevented from acquiring profits for any other purpose than furthering its object. It cannot thus distribute the profits as dividends, whether equally or equitably, but must use it for the purpose of furthering its object.