Jersey Guarantee Companies – the forgotten option ?

Simon Howard - Anti Money Laundering

Little use is currently made of Jersey companies limited by guarantee.  Traditionally guarantee companies have been used for philanthropy purposes or as research bodies or to operate clubs and societies. But that could be set to change with the increasing use that is made of Jersey-based entities as asset holding or governance vehicles.  Typically, such asset holding or governance bodies are not commercially active or profit-generating operations.  They exist to control rights to underlying assets or to exercise supervision and oversight powers over underlying businesses.   Guarantee companies are suited to this type of role as they are commonly referred to as “not-for-profit” entities.  This in itself can be a little misleading as there is no reason in principle why a guarantee company cannot be involved in commercial or business activity.  It is perhaps more correct to refer to guarantee companies as non-distributing companies in that generally members of the guarantee company do not receive any distribution of profits by way of dividend.  Any profit generated or received by the guarantee company would typically be applied in furthering the purpose for which the company was established.

Guarantee companies can be incorporated in Jersey by following the same procedure as applies to companies limited by shares.  The guarantee company memorandum of association has to provide for guarantor members and state that each guarantor member undertakes to contribute to the assets of the company (if it is wound up while they are a member or within twelve months after they cease to be a member) such amount as is necessary to pay off the debts of the company and the winding up expenses but in any event not exceeding the maximum limit per member stated for this purpose in the memorandum.  Usually the limit of liability is set at £1.00 per member.

The articles of association of the guarantee company are of course adapted to reflect the absence of share issues and shareholders and replaced with provisions dealing with the admission and retirement of members.

As a not-for-profit entity with the benefits of separate legal personality, limited liability for members, perpetual succession and a zero tax regime in Jersey, the guarantee company option should not be forgotten when considering the type of entity to use, not just for philanthropy proposals, but also for private trustee roles.

It is this latter context in particular that opens up new possibilities for the use of Jersey guarantee companies as private trust companies (PTCs) for private client, off-balance sheet holding and asset management arrangements.  Using a Jersey company limited by shares as a PTC involves the complication of who will own the shares in the PTC.  Often this is resolved under current practice by superimposing a Jersey law purpose trust over the top of the Jersey company to create an orphan structure.  But this brings its own complications in terms of an extra layer of fiduciary responsibility, extra administration costs and the need to identify a suitable enforcer for the purpose trust.

A Jersey company limited by guarantee may in appropriate cases be a simple solution to the structuring arrangements for a self-contained holding or governance structure with ownership and control divorced in whole or in part from the client or organisation that is the instigator of the scheme in question.  With appropriate drafting of the articles of the guarantee company the ownership and control of the company can be contained within the envelope of the corporate structure with the directors of the company also acting as the members of the company, thus providing a simple sidestep to the complications arising from the use of share capital companies as PTCs.  The powers of appointment and removal of directors to the board of the guarantee company can be vested in the board itself or in one or more director-members who are given special rights as members under the articles of the company to control the composition of the PTC board.

Alternatively control over the composition of the PTC board can lie outside the guarantee company in the hands of non-members where this is authorised by the articles of the PTC.  For example the right to appoint or remove directors could be determined by reference to the provisions of a trust of which the PTC is the sole corporate trustee where the terms of the trust name a person or succession of persons who are to have the right to appoint or remove directors to and from the PTC board.

Simon Howard

Howard Consulting Limited

This document is a brief guide to the subject matter covered, and is not intended to be a detailed or comprehensive statement of the law.  It should not be treated as legal advice and is provided for general information purposes and to promote discussion.  You are recommended to take professional legal and other appropriate advice before pursuing any particular course of action. 

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