In the case of Re Credo Care Ltd  EWHC 3701 (Ch), the High Court has sanctioned a scheme of arrangement under section 899 of the Companies Act 2006 (CA 2006) which sought to remove entrenched “not for profit” restrictions contained in the company’s memorandum and articles of association, so as to permit the distribution of profits (and any surplus on a winding up) to its members.
Credo Care Ltd (Company) was incorporated in August 2000, as a company limited by guarantee under the Companies Act 1985 (CA 1985), as an agency to provide fostering services to children with disabilities and other complex needs. The Company operated as a “not-for-profit” entity, although it was not registered as a charity and had never operated as such.
The Company’s memorandum and articles contained not-for-profit provisions which prevented the distribution of profits to members (including in relation to any surplus arising after a winding up or dissolution). The relevant provisions further provided that income and property of the Company should be applied solely towards its objects - namely, providing social work and accommodation, along with anything ancillary to that – and should not be paid or transferred by way of dividend, bonus or otherwise to the Company’s members. The Company’s shareholders had passed a special resolution seeking to amend these provisions (to facilitate a distribution of the Company’s profits and property), however, for the reasons set out below, it was likely that this was ineffective.
The Company’s memorandum expressly stated that no amendment could be made to the memorandum or articles where such an amendment would have the effect of causing the Company to cease to be a company to which section 30 of the CA 1985 applied.
Section 30 of the CA 1985 exempted private companies limited by guarantee from the requirements of the CA 1985 in respect of limited companies. The relevant exemptions applied in limited circumstances, including where a company’s memorandum or articles required its profits be applied in promoting its objects, prohibited the payment of dividends to its members and required all assets otherwise available to members on a winding up to be transferred to another body with similar objects or to a body whose objects were the promotion of charity.
While section 17 of the CA 1985 permitted a company to amend any provision of its memorandum by special resolution, this would not apply where the memorandum expressly prohibited such an alteration (as in the instant case). In light of this constitutional impasse, the Company’s two shareholders sought recourse to the Court’s scheme jurisdiction, pursuant to Part 26 of the CA 2006, in an effort to amend the entrenched provisions.
The Court held that it was possible for the Company to amend the entrenched not-for-profit provisions within its memorandum and articles by way of a scheme of arrangement. When exercising its discretion to sanction the scheme, the Court considered the four-limb test summarised in Re TDG plc  1 BCLC 445 and held that:
- The proposed scheme fell within the scope of Part 26 CA 2006 as a compromise or agreement between the Company and its members. This was on the basis that the scheme would effectively amend the statutory contract (i.e. the Company’s constitutional documents) in place between the Company and its members and would therefore provide the requisite degree of “give and take” from both parties.
- Since the Company only had two members (both of which were fully aware of the proposed scheme), the relevant class of shareholders was clearly fairly represented and there was no coercion of any minority group.
- As the fundamental purpose of the scheme was to permit the Company to distribute its profits and any surplus on a winding up to its members, the scheme was being used to facilitate what was essentially a commercial transaction. It therefore followed that the shareholders involved, as the relevant class, would logically and reasonably approve the scheme since this would allow them to implement the arrangements contemplated by them.
- There was no “blot” on the scheme. Despite being a company limited by guarantee, the Company had never sought to rely upon the exemptions relating to companies of this nature, and in particular, had never received funding or incurred liabilities based on the not-for-profit restrictions.
The effect of the Court’s order was therefore to remove the entrenched not-for-profit provisions from the Company’s memorandum and articles, thereby permitting the distribution of the Company’s property and assets to its shareholders.
David Steinberg, co-head of the restructuring and insolvency practice at Stevens & Bolton LLP comments that:
The Court’s thorough consideration of the factual background and relevant statutory provisions applicable in this case serves as a useful reminder that its discretion to sanction a scheme will only be exercised in circumstances where this is strictly necessary. In this case, the shareholders were able to effectively demonstrate that the desired amendments to the Company’s constitution could not otherwise be implemented due to the interplay between the entrenched provisions in the Company’s memorandum and articles and the relevant provisions of the CA 1985. It was therefore necessary for the Court to intervene to circumvent the constitutional impasse.
While the position in Re Credo Ltd was perhaps more straightforward – given that there were only two members, both of whom supported the scheme - the position will of course be very different in respect of a company with a more disparate shareholder base, possibly with constituent groups that are not in all cases supportive. Such dissenting minorities will nonetheless be protected given the opportunity to make representations to the Court in circumstances where they believe a scheme should not be sanctioned – which may perhaps be on the basis of entrenched provisions in a company’s constitutional documents which are capable of amendment via another procedure.