In the case of Re Credo Care Ltd  EWHC 3701 (Ch), the The High Court sanctioned a plan of arrangement under Section 899 of the Companies Act 2006 (CA 2006) which sought to remove entrenched ‘not for profit’ restrictions contained in the memorandum and articles of association society, in order to enable the distribution of profits (and any surplus upon liquidation) to its members.
Credo Care Ltd (Company) was incorporated in August 2000, as a limited liability company under the Companies Act 1985 (CA 1985), as an agency providing care services for disabled children and with other complex needs. The Society 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 of association contained non-profit provisions that prevented the distribution of profits to members (including in connection with any surplus resulting from a liquidation or dissolution). The relevant provisions further stipulated that the income and property of the society should be used solely for its purposes – namely, to provide social work and housing, and everything incidental thereto – and should not be paid or transferred as a dividend, bonus or otherwise. to members of the Society. The shareholders of the Company had passed a special resolution to vary these provisions (to facilitate a distribution of the profits and property of the Company), but, for the reasons set out below, this was likely to be ineffective.
The Company’s memorandum expressly provided that no change could be made to the memorandum or the articles of association where such change would have the effect of causing the Company to cease to be a company to which section 30 of the CA applied. 1985.
Section 30 of the CA 1985 exempted private companies limited by guarantee from the requirements of the CA 1985 for limited companies. The relevant exemptions applied in limited circumstances, including where a company’s memorandum or articles of association required its profits to be used for the promotion of its objects, prohibited the payment of dividends to its members and required that all the assets otherwise available to members on a winding-up 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 vary any provision of its memorandum by special resolution, this would not apply where the memorandum expressly prohibited such variation (as in the present case). In light of this constitutional impasse, the two shareholders of the Company sought recourse to the jurisdiction of the Court scheme, pursuant to Part 26 of the CA 2006, in order to amend the entrenched provisions.
The Court ruled that it was possible for the Society to amend the not-for-profit organization provisions enshrined in its Memorandum and Articles of Association by way of a plan of arrangement. In exercising its discretion to approve the scheme, the Court considered the four-prong test summarized in About 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 society and its members. This was on the basis that the scheme would effectively amend the statutory contract (i.e. the governing documents of the Society) in place between the Society and its members and therefore provide the required degree of ‘give and take’ of two parts.
- Since the company had only two members (both fully aware of the proposed regime), the class of shareholders concerned was clearly fairly represented and there was no coercion from a minority group.
- Since the basic purpose of the scheme was to enable the company to distribute its profits and any surplus in a wind-up to its members, the scheme was used to facilitate what was essentially a business transaction. It therefore followed that the shareholders concerned, as a class concerned, would logically and reasonably approve the scheme since it would allow them to implement the arrangements they contemplated.
- There was no “smudge” on the diagram. Although it is a company limited by guarantee, the Company has never sought to avail itself of the exemptions relating to companies of this nature and, in particular, has never received financing or incurred debt on the basis non-profit restrictions.
The Court’s order therefore had the effect of removing the not-for-profit provisions enshrined in the Company’s Memorandum and Articles of Association, thereby allowing the distribution of the Company’s property and assets to its shareholders.
David Steinberg, Co-Head of Restructuring and Insolvency Practice at Stevens & Bolton LLP comments that:
The Court’s in-depth examination of the factual context and of the relevant legislative provisions applicable in this case is a useful reminder that its discretionary power to sanction a scheme will only be exercised in circumstances where it is strictly necessary. In this case, the shareholders were able to effectively demonstrate that the desired changes to the Company’s constitution could not otherwise be implemented due to the interplay between the provisions enshrined in the Company’s articles of incorporation and the relevant provisions of 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 simpler – given that there were only two members, both pro-regime – the position will of course be very different towards a company with a more disparate shareholding base, possibly with constituent groups that are not in all cases favorable. These dissenting minorities will nevertheless be protected if they have the opportunity to make representations before the Court in circumstances where they believe that a scheme should not be sanctioned – which may be on the basis of provisions rooted in the constitutive documents of a company which are likely to be modified by another procedure.