Guarantee And "Hybrid" Companies In The Isle Of Man
Pauline Doyle, Partner, Ernst & Young Isle of Man
The forms of (a) a company limited by guarantee and (b) a company limited by guarantee AND having a share capital were first introduced in the Isle of Man statutes in 1865. A vehicle was sought which would give limited liability to institutions and could operate without a working capital. External guarantors ensured that the company would maintain solvency, and they would have direct involvement in the day-to-day affairs of the company, without contributing any share capital.
A variation of this structure arose where some companies required a certain level of working capital but also need the "external" guarantee of solvency. This company is now known as a hybrid company.
The use of the guarantee companies and of guarantee companies having a share capital was usually, in the past, restricted to clubs and associations where membership, not shareholdings, was needed, and the objectives of the club were simple. In terms of corporate and tax planning, both the guarantee and hybrid companies have been recently revisited as offering interesting potential.
Isle of Man legislation permits the formation of both a guarantee company and a hybrid company. The legislation of other offshore jurisdictions (like Jersey and Guernsey) does not permit formation of these structures.
2. Nature of a member’s rights
Guarantee member enter into "contractual" arrangements, giving them rights and obligations. These obligations are personal to the guarantee member, are not transferable and cease on death. To become a guarantee member, an individual must make application to the board of directors of the company. Guarantee members must be treated equally by the company. They cannot be divided into classes, as would be the case in a share capital company.
This inflexibility does not apply in the case of the guarantee company having a share capital, as rights can vary according to the be class of shareholders. This is particularly useful in determining to which class ultimate rights on a liquidation will attach.
3. Features of Guarantee and Hybrid Companies
The key features and differences of a pure guarantee company and a hybrid company are as follows:
- The Pure Guarantee Company
- There are only guarantee members, there are no shareholders.
- There is no share capital.
- The members guarantee to contribute a small sum for example £1, 1US$.
- The Hybrid Guarantee Company
There are 2 "sorts" of "participants":
- A class of shareholder (or various classes), who are entitled to capital.
- Members, who are entitled to dividends. In a pure guarantee company, members undertake to contribute small amounts in event of insolvency or/and liquidation. Members receive membership, not shares, and this membership cannot be transferred. Membership ceases only on death or resignation.
In the hybrid company, guarantee members are entitled to income rights and shareholders are entitled to capital rights. It is possible to structure a hybrid company so that it has the characteristics of a partnership or a trust.
Other important features of both Isle of Man Guarantee and Hybrid Companies are:
- The company must be managed and controlled in the Isle of Man by a majority of Manx resident directors.
- Regular meetings must be held in the Isle of Man and all key decisions taken in the Isle of Man. "Brass plate" and "rubber-stamping" are unacceptable.
- The companies are tax resident in the Isle of Man.
- Provided the company does not carry out business in the Isle of Man and is beneficially owned by non-residents of the Isle of Man, there is no taxation in the Isle of Man.
4. The hybrid company as a quasi-trust
The use of an offshore trust to protect assets is widely known. Currently in most civil law jurisdictions there is uncertainty as to the taxation treatment of trusts, and this subject is under review. Prospective settlors domiciled in a civil law jurisdiction (irrespective of their nationality) cannot, then, create trusts with tax efficiency or certainty. Tax authorities may exercise a "look through" power so that the disposition is seen as a transfer to an individual, exposing either the settlor or recipient to transfer or gift tax. In addition, the transfer itself may be seen as void in the settlor’s own domiciliary jurisdiction domicile, and by the common law jurisdiction in which the settlor or beneficiaries seek to enforce it.
A civil code country may recognise trusts created abroad, but not if created by those domiciled within its own boundaries. A common law country will recognise trusts, but not if created by someone the law of whose domicile does not recognise such creation. The hybrid company is, however, structured as a company and it is obviously not a trust. It, therefore, offers an opportunity to place assets in a vehicle which operates as a company, can trade as a company and can have protection of its assets.
5. Structural comparison
In the classical trust structure, a settlor instructs his trustees to hold assets upon trust, and to protect the assets for the benefit of the beneficiaries. A letter of wishes may offer guidance to the trustees and a protector may be introduced.
In the hybrid company structure, the instructions, closely resembling a letter of wishes, which are given to incorporate the company may come from anyone.
The directors and shareholders manage and control the company between them, and a "golden" shareholder, who functions as a protector, can legitimately confine the directors’ discretion. Only guarantee members have the right to receive distributions. The guarantee members may call upon the directors to wind up the company and distribute its assets (if any), subject always to the obligation of the guarantee members to contribute on an insolvent liquidation.
On the death of a guarantee member, his membership dies. It cannot be transferred in life or transmitted on death, and it is, then, of no value to the guarantee members’ heirs. New guarantee members can be introduced with each generation. Obviously this facilitates selective election of members - nothing is automatic.
The identity of the shareholders and guarantee members of a hybrid remain confidential, as this information is not included in the company’s annual return, to the Isle of Man Companies Registrar. The object of the hybrid (except as a charitable quasi-trust) is similarly undisclosed, in that only the Memorandum and Articles of Association are open.
It is the distinction between a shareholding member and a guarantee member which enables the structure to function as a trust:
- A shareholder has a right to income and to assets in a winding up in proportion to his capital contribution.
- A guarantee member has an obligation to contribute an amount in the event of a winding up, but is not required to contribute capital, and may or may not have liquidation rights under the Articles.
This pattern is reversed in the case of a hybrid structured as a trust. The Articles of Association place management and control of the company in the hands of its directors and shareholding members, but the shareholders are barred from receiving any distribution. The guarantee members, with low obligations to contribute to insolvency, are eligible to receive dividends and interest-free or interest-bearing loans, and the members have very restricted voting rights. In summary, the guarantee members are the passive "beneficiaries" of a hybrid corporation, which is similar to a trust.
The content of this article is intended only to provide general guidelines related to this particular matter. For your specific circumstances, full specialist advice is recommended.