Community Interest Company Guarantor Risk

rh07innda

I have been asked to be a guarantor for a community interest company for a friend. I would set my liability / guarantee amount at £1.

Can I ask if this would have any legal or financial implications for me in the future if the company were to go in to debt? I understand I would only have to pay £1 but could this affect my credit score or anything else that I can't currently think of. Would I have any responsibilities or have to be aware of the companies activities?

Thanks in advance!!

DullGreyGuy

Only if you didnt pay the £1, but the chances of someone taking you to court for £1 are fairly slim. 

You will be listed on Companies House as a person with significant control, you may have to check any employment contracts or HR policies about conflicts of interest etc. 

The Articles of Association will state the rules of the company but this will mainly be what their duty to you is.

Why isn't your friend being the guarantor themselves? 

rh07innda

Thank you so much for getting back to me. That is good information. There would be no reason for me not to pay the £1.

My friend says that the guidance on selecting a guarantor needs to be someone with no connection to themselves - so no relationship or family. Is this true?

Thanks in advance again.

gm0

Devils advocacy

It depends what happens - how bad, how big, how public, how criminal.   And how rich the owner of the "kicked over" sandcastle is to afford lawyers to make a point or harass as well as seek redress.

There is no entirely free lunch (100% safe) to do this and be "studiously uninvolved" ever after with zero chance of blowback. 99.99% of the time (or more) it will of course be fine.

As with Ltd company director/owners.  All these forms CIC, Ltd by guarantee, Ltd by share capital (£1).  Protect you from unlimited liability or personal guarantees of the financial activities of the company which can go bust and be sued separately.  Of course angry litigants may sue company directors, owners, guarantors and any other related parties anyway as well. If they think there are assets to recover and some basis (however legally speculative or contrived) for allegations of complicity, negligence vs duties, misrepresentation, fraud, international terror support etc.  Or they think a settlement can be extracted to avoid prolonged and expensive legal conflict. (Legal bullying).  Such cases - depending on jurisdiction may be quickly thrown out or rumble on.

Directors using a CIC or small Ltd often have very limited ability to borrow - precisely because it is asset and proven revenues light and lacks personal guarantors.   Unless you sign a personal guarantee for business loans separately

But in return for the protection of the forms - ltd liability - the law expects you to behave a certain way - especially as a director.  Less so as a shareholder only or a guarantor.  But the declared owners/guarantors are formally the governance step behind the directors - if the directors go rogue.  Others dissatisfied with how things have gone will look first to the directors and afterwards to guarantors / shareholders to check appropriate governance has been done (to some level).  And seeking redress or validation of claim - wherever it may be found.   The clue is in the C of PSC (control).

Even if you are in practice not sued in the end (in a scandal).  It will attract unwelcome attention as you *will* be personally associated with it.  And journalists have columns to fill.  The people behind scandal XYZ......F Bloggs and J Smith.....pages 7-8

I would only do this for a good cause and activity that I was active in myself.   For something I supported in general but didn't want to be actively involved in - I'd make a donation or seed capital loan to help them get started - and not be involved long term beyond that.  Help the friend get it moving.  And not be a sleeping partner but legally public face of.

Some would argue I am way too overcautious about a *really* tiny tail risk

And imprecise about the thresholds at which action or inaction by guarantors, directors etc. becomes legally *genuinely* relevant - a real liability for actual negligence vs legal games.  Which is jurisdiction and case law dependent.

Guarantor duties are few.  The bar for negligent conduct to drag you into things is very high.

But lack of precision does not invalidate the general point - the *process* of testing any given public and unpleasant facts against that legal standard could be a painful experience nonetheless. Win or lose. 

The tail risk doesn't exist if you are not the guarantor. 
If you are - it does. 

Situational

The cause is in any meaningful way controversial or not. 
The friend (and associates in pursuing it) are believed of good character and sincere and diligent or less so 

DullGreyGuy

rh07innda said:

Thank you so much for getting back to me. That is good information. There would be no reason for me not to pay the £1.

My friend says that the guidance on selecting a guarantor needs to be someone with no connection to themselves - so no relationship or family. Is this true?

Thanks in advance again.

No, the director can be the guarantor and there only needs to be one. Now others may get more assurances if there is a gap between the guarantor and the director. Like shareholders, as a guarantor you can hold the directors to account and, subject to the articles, remove directors etc. 

To comment on gm0's point... the directors take much more risk than a guarantor, assuming you dont sign for a loan or give any further personal guarantees beyond the initial one to the company. I dont recall cases of shareholders/guarantors being sued other than where they haven't paid up their nominal value so would probably argue its less than "tiny" but the great thing about the English legal system is anyone can sue anyone so the chance isn't 0 but you are probably more likely to find yourself in a false allegation of hitting someone's parked car than be sued as a guarantor of a CIC

Marcon

rh07innda said:

I have been asked to be a guarantor for a community interest company for a friend. I would set my liability / guarantee amount at £1.

Can I ask if this would have any legal or financial implications for me in the future if the company were to go in to debt? I understand I would only have to pay £1 but could this affect my credit score or anything else that I can't currently think of. Would I have any responsibilities or have to be aware of the companies activities?

Thanks in advance!!

This sounds like a friend who hasn't a clue about how a CIC, or how any company limited by guarantee (rather than shares) works. Are you being asked to be a member of the company - because they are normally the ones who are the guarantors? If you agree to that, do you automatically become a director? The way to find out is to look at the company's Memorandum and Articles of Association, which you can download free from https://www.gov.uk/get-information-about-a-company

The model articles provided by Companies House include this, and I'd expect you to find this wording or something very similar:

2. Liability of members

2.The liability of each member is limited to £1, being the amount that each member undertakes to contribute to the assets of the company in the event of its being wound up while he is a member or within one year after he ceases to be a member, for—

(a) payment of the company’s debts and liabilities contracted before he ceases to be a member,

(b) payment of the costs, charges and expenses of winding up, and

(c) adjustment of the rights of the contributories among themselves.

rh07innda said:

My friend says that the guidance on selecting a guarantor needs to be someone with no connection to themselves - so no relationship or family. Is this true?

No, not in a CIC limited by guarantee. Personally I wouldn't go near a company when someone hasn't the faintest idea what they're doing - and that description sadly fits your friend all too well. 

DullGreyGuy said:

You will be listed on Companies House as a person with significant control, you may have to check any employment contracts or HR policies about conflicts of interest etc. 

Unlikely. Simply promising to shell out a quid if the company is wound up does not imply 'significant control', which means someone who can actually exercise control in the day to day running:

• holds more than 25% of shares in the company
• holds more than 25% of voting rights in the company
• has the right to appoint or remove the majority of the company's board.

DullGreyGuy said:

rh07innda said:

Thank you so much for getting back to me. That is good information. There would be no reason for me not to pay the £1.

My friend says that the guidance on selecting a guarantor needs to be someone with no connection to themselves - so no relationship or family. Is this true?

Thanks in advance again.

No, the director can be the guarantor and there only needs to be one. Now others may get more assurances if there is a gap between the guarantor and the director. Like shareholders, as a guarantor you can hold the directors to account and, subject to the articles, remove directors etc. 

This is a guarantee company, so there aren't any shareholders. Where a CIC is limited by guarantee:

• Members guarantee to meet the debts of the company up to a specific limit in the event of its failure
• They have no further personal liability for the debts of the company beyond their guarantee
• In practice each of the guarantors usually guarantees a nominal sum such as £1, but there is no reason why a principal supporter of the CIC should not in effect underwrite its activities by guaranteeing a larger sum
• Will you be looking for funding for your CIC? Funders tend to look more favourably on applications from CIC’s limited by guarantee
• A company limited by guarantee has been the traditional form of companies operating without the motive of making a profit for distribution to the members

DullGreyGuy

Marcon said:

DullGreyGuy said:

You will be listed on Companies House as a person with significant control, you may have to check any employment contracts or HR policies about conflicts of interest etc. 

Unlikely. Simply promising to shell out a quid if the company is wound up does not imply 'significant control', which means someone who can actually exercise control in the day to day running:

• holds more than 25% of shares in the company
• holds more than 25% of voting rights in the company
• has the right to appoint or remove the majority of the company's board.

I'd assumed the OP was to be the sole guarantor and as such would have more than 25% of the voting rights. 

Marcon said:

DullGreyGuy said:

rh07innda said:

Thank you so much for getting back to me. That is good information. There would be no reason for me not to pay the £1.

My friend says that the guidance on selecting a guarantor needs to be someone with no connection to themselves - so no relationship or family. Is this true?

Thanks in advance again.

No, the director can be the guarantor and there only needs to be one. Now others may get more assurances if there is a gap between the guarantor and the director. Like shareholders, as a guarantor you can hold the directors to account and, subject to the articles, remove directors etc. 

This is a guarantee company, so there aren't any shareholders. 

Its funny, you even highlight that I said "like shareholders" and yet point out there are no shareholders???

Marcon

DullGreyGuy said:

Marcon said:

DullGreyGuy said:

You will be listed on Companies House as a person with significant control, you may have to check any employment contracts or HR policies about conflicts of interest etc. 

Unlikely. Simply promising to shell out a quid if the company is wound up does not imply 'significant control', which means someone who can actually exercise control in the day to day running:

• holds more than 25% of shares in the company
• holds more than 25% of voting rights in the company
• has the right to appoint or remove the majority of the company's board.

I'd assumed the OP was to be the sole guarantor and as such would have more than 25% of the voting rights. 

Marcon said:

DullGreyGuy said:

rh07innda said:

Thank you so much for getting back to me. That is good information. There would be no reason for me not to pay the £1.

My friend says that the guidance on selecting a guarantor needs to be someone with no connection to themselves - so no relationship or family. Is this true?

Thanks in advance again.

No, the director can be the guarantor and there only needs to be one. Now others may get more assurances if there is a gap between the guarantor and the director. Like shareholders, as a guarantor you can hold the directors to account and, subject to the articles, remove directors etc. 

This is a guarantee company, so there aren't any shareholders. 

Its funny, you even highlight that I said "like shareholders" and yet point out there are no shareholders???

OP is clearly a novice in this area, so making assumptions without explaining the basis for those assumptions, or having a sentence which to a novice reader is potentially ambiguous ('Like shareholders....' doesn't explain that a guarantee company has no shareholders), could mislead.

I have been asked to be a guarantor for a community interest company for a friend. I would set my liability / guarantee amount at £1.

Can I ask if this would have any legal or financial implications for me in the future if the company were to go in to debt? I understand I would only have to pay £1 but could this affect my credit score or anything else that I can't currently think of. Would I have any responsibilities or have to be aware of the companies activities?

Thanks in advance!!

Are you being asked @rh07innda to act as guarantor for your friend (which doesn't make much sense - there is precious little commercial value in guaranteeing £1!), or for the CIC because it has a specific category for 'Guarantors' - people who, for want of a better description, are 'interested supporters' of the cause?

Do you actually want to support the cause, or just support your friend - if the latter, maybe a donation would be a simpler way to do it?