Dispelling the Myth on the Profit-Making Status of Companies Limited by Guarantee vis-à-vis the Provisions of CAMA 2020.
- Introduction
In Nigeria, there is a common misconception that Companies Limited by Guarantee cannot generate profits or distribute dividends to their members. This notion is premised on a misunderstanding of the provisions of the Companies and Allied Matters Act (CAMA)[2] in relation to Companies Limited by Guarantee. The CAMA 2020 provides for three (3) types of Companies namely, Company limited by shares, Company limited by guarantee and Unlimited liability Companies.[3]
A Company limited by guarantee is a type of Company that has the liability of its members limited by the memorandum to such amount (not less than N10,000.00) as the members may respectively undertake to contribute to the assets of the company in the event that it is being wound up.[4] This corporate structure is commonly preferred by non-profit organisations and professional associations to promote objectives like the arts, science, culture, religion, charity, education, or any other useful object. Due to the nature and features attributed to Companies Limited by Guarantee, they are often perceived as non-business entities that cannot generate profits.
In this article, we will explore the provisions of the Companies and Allied Matters Act 2020 and provide clarity on the ability of Companies Limited by Guarantee to generate profits.
- Provisions of Companies and Allied Matters Act 2020 on Carrying on Business and Profit-making by Companies Limited by Guarantee.
Section 26 of CAMA 2020 provides that a Company Limited by Guarantee (CLG) may be formed for the promotion of any useful object such as commerce, art, science, religion, sports, culture, education, research, charity, or other similar objects, provided that the income and property of the company are used solely for the promotion of the object and no portion thereof is distributed as a dividend or bonus directly or indirectly to its members.
The Act further provides that a company limited by guarantee shall not be incorporated with the object of carrying on business for the purpose of making profits for distribution to members and any provision in the memorandum or articles or in any resolution of the company purporting to give any person a right to participate in the divisible profits of the company otherwise than as a member or purporting to divide the company’s undertaking into shares or interests shall be void.[5]
This provision of CAMA has been misinterpreted to mean that Companies Limited by Guarantee cannot generate profits or carry on business. However, it is important to note that the provision only prohibits the distribution of profits as dividends or bonuses to members as it does not prohibit a CLG from generating profits or using such profits for the furtherance of its objectives. In other words, Companies Limited by Guarantee can generate profits, but it cannot distribute such profits to its members as dividends or bonuses.
Section 26 of CAMA presupposes that CLGs may undertake business in order to generate or acquire the “income and properties” that are to be solely applied towards the promotion of its objects. Other sources of generating income could be through donations. The foregoing contention is supported by the provisions of Section 25(1) & (5) of the Company Income Tax Act,[6] which preserves tax deductibility for donors in respect to business related profits generated by charitable entities.[7] CLGs can receive donations from individuals or organizations to fund their operations or projects. However, such donations must be used solely for the promotion of the objects of the CLG and not for the personal gain or distribution to its members.
The Companies and Allied Matters Act 2020 also restricts the registration of a Company Limited by Guarantee with a Share Capital and where there exists any company limited by guarantee having a share capital, such company shall alter its memorandum to reflect the correct status as a company limited by guarantee and not having a share capital.[8] In comparison with companies limited by shares, Companies Limited by Guarantee do not have share capital or shareholders. Instead, they are made up of members who act as guarantors and are liable for the debts and obligations of the company up to a specified amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.[9] This section of CAMA further supports the non-distribution of profit to members of a company limited by guarantee since members/shareholders of companies having a share capital are entitled to the distribution of profit.
, in the case of AG FEDERATION v. NSE & ORS[10] the Court in lending its voice to the interpretation of a similar provision of Section 26(2) of the Companies and Allied Matters Act, 2020 held thus:
It is necessary to state that Section 26(2) of the Companies and Allied Matters Act is to the effect that as from the commencement of the Companies and Allied Matters Act, every company seeking to be registered as a company limited by guarantee shall not be registered with a share capital. The provision further states that every existing company limited by guarantee AND having a share capital shall, not later than the appointed day, alter its memorandum so that it becomes a company limited by guarantee and not having a share capital.
In my view, the use of the word “AND” in that provision is conjunctive and not disjunctive. The implication is that the words “company limited by guarantee” must be read together with the words “share capital” so that both must be fulfilled together. I am also of the view that the essence of the alteration of the memorandum of an existing company limited by guarantee pursuant to Section 26(2), though includes alteration of the name of the company, is principally to alter its status to wear the looks of a company limited by guarantee not having a share capital, the principal object of the alteration is to make it a Company Limited by guarantee and without a share capital. Per TIJJANI ABUBAKAR, JCA (pp 21 – 24 Paras F – B).
The Act goes further to state that, all officers and members of a CLG who are cognisant of the fact that the company is carrying on business for the purpose of distribution of profits to its members shall be jointly and severally liable for the payment and discharge of all the debts and liabilities of the company incurred in carrying on such business, and the company and every such officer and member shall be liable to a fine not exceeding a hundred Naira (N100) for every day during which it carries on such business.[11] CAMA 2020 also prohibits the distribution of the company’s properties amongst its members in the event of winding up. Rather, the Act stipulates that after the discharge of all its debts and liabilities, the remainder of the CLGs properties are to be transferred to some other company limited by guarantee having objects similar to the objects of the company or applied to some charitable object and such other company or charity shall be determined by the members prior to the dissolution of the company.[12]
- Conclusion
In conclusion, it is imperative to demystify the common misconceptions about Companies Limited by Guarantee as reviewed in this article. Granted that the main objective of a Company Limited by Guarantee is not to carry on business but to pursue its objectives, which are usually charitable or educational in nature, they are allowed to carry on business for the purpose of applying the profits and benefits generated in furtherance of such objectives.
Companies limited by Guarantee are better suited for organisations set out to achieve a particular cause and not primarily for profit. As a means to an end, they could engage in profitable activities for the benefit of the objects of the organisation. It is important for stakeholders to understand the provisions of CAMA governing CLGs to avoid misconceptions about the ability of these entities to generate profits as CLGs can be effective vehicles for achieving charitable or educational objectives utilizing generated profits to support their operations and contribute to the development of the society.