Friday, 19 February 2016

Jersey Guarantee Companies – The Forgotten Option

Little use is currently made of Jersey companies limited by guarantee.  Traditionally guarantee companies are often associated with philanthropy business. But that could be set to change with the increasing use that is made of Jersey-based entities as asset holding or governance vehicles.

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 at present by superimposing a Jersey law purpose trust over the top of the Jersey company.  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.

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