The Bahamian Company as a Trust Substitute

The Bahamian Company as legal creature is superbly adaptable to a wide variety of succession/estate-planning/wealth management applications. It’s a structure that gives all of the practical advantages of a trust but without actually creating one. It’s a company limited by guarantee without a share capital (CLG) and it is well suited for servivce as a trust or even will-substitute.

A CLG is a company formed under the International Business Companies (IBC) Act, the statute laws of The Bahamas. It is without a share capital, although a hybrid (a company limited both by guarantee and shares) is also possible. Thus, it has no shareholders, only members.

CLGs come with limited liability, liability being ‘limited by guarantee’ ie the members agree that in the event of the company’s winding-up, they will ‘guarantee’ payment of the company’s debts and liabilities by contributing a specified sum but no more. Historically, this cap has always been so low as to make the guarantee essentially illusory - one dollar (US$1) or even the lowest coin of the realm, one cent (US$0.01).

Important Features of a CLG

A CLG, in common with most companies, possesses full legal personality (unlike a trust which is not a legal person at all). As is true for all limited liability companies, a CLG’s legal personality is separate and distinct from the members of the company (the Saloman v. Saloman principle), one consequence of which is that the company’s assets belong to the company itself and not its members. Of even greater importance, the debts and liabilities of the CLG are not attributable to its members.

As the CLG has no authorised capital for division into shares, the membership is not equity-based in any conventional sense. It is perfectly permissible to organise a CLG on the basis that its assets are to be used solely for the care, maintenance, welfare and benefit of its members. In this regard, section nine of the IBC Act says specifically that an IBC has power ‘to protect the assets of the company for the benefit of the company, its creditors and its members and, at the discretion of the directors, any person having a direct or indirect interest in the company.’

Modelling a CLG on the Standard Discretionary Trust but Without Creating a Trust

A CLG can be developed along lines that very closely simulate the discretionary trust model but which will not constitute a trust. It will be a company because the law of The Bahamas makes it so via the IBC Act.

Looking at how a CLG can be structured with that in mind, one should imagine a CLG that is organised with three classes of membership (entirely optional, of course): Class A, Class B, and Class C members.

Class A Members

The Class A member would be the equivalent of the trustee under a typical trust. (Typically, this would be a nominee company owned by a licensed trust company).

The Class A Member would be the director (even sole director) of the CLG and would also have all the voting rights of the Company. As such, they would have sole authority and power to decide how the underlying assets of the CLG are to be deployed for investment purposes (but with the power to delegate this investment power to another person), as well as the power to decide how and when the assets are to be distributed among all or any one or more of the Class B members, or how they are to be otherwise used for any of the other declared purposes of the CLG.

It needs to be stressed that this is just one of many possible permutations. The powers of the Class A Member, relative to the other classes, could be increased or diminished in accordance with the client’s requirements, the IBC Act affording maximal structuring flexibility in this regard.

Class B Members

Turning now to the Class B members. They would be the equivalent of the beneficiaries under a trust. They could, for example, include the person who would ordinarily be the grantor/donor/settlor under a typical trust; his spouse, and his children – although any variation is possible.

Class B members would typically have no powers or rights of any significance. Instead, they would merely have the possibility or prospect of being designated by the Class A Member as a recipient of a donation from the company but they would have no legally enforceable entitlement in this regard. The non-entitlement of the Class B Members to any part of the underlying assets of the CLG would approximate the position of beneficiaries under a standard discretionary trust.

Structuring along these lines can go even further. Rather than creating any Class B members at the outset at all, the Articles of Association of the CLG could perhaps merely authorise the Class A Member to elect one or more Class B Members from time to time from among a class consisting of… (identify the eligible pool, say, the client’s spouse, children etc).  

To enhance privacy in such a scenario (bearing in mind that a company’s constitutive documents are on public record at the Companies Registry), there could, for example, be a single class B Member – another company - with the intended ‘beneficiaries’ being members of this second company rather than being bringing them onto the record as named Class B Members.

Another variation of Class B Membership could serve as a kind of ‘will substitute’, similar to the old ‘mini-trust’ under which the settlor would be the only beneficiary of the trust during his lifetime but upon his death the beneficial class would automatically enlarge to embrace his intended heirs (avoiding the need for any probate).

Class C Members

Finally, there would be the Class C member(s) of the CLG. Conceptually, this person (or it could perhaps be a group of persons such as a family council, or another company comprising such persons as members) would essentially have the same powers that would ordinarily be reserved to the settlor or protector under a trust.

The key idea here would be to create checks-and-balances on the powers of the Class A member, such that the Class C member would have ultimate control, including, for example, having the following special powers (which again are similar to commonly reserved powers of settlors or protectors under trusts):

• the power to remove the Class A Member and appoint a new Class A Member (equivalent to the power to remove and appoint new trustees under a trust);

• the power to add or remove persons to or from the Class B membership (equivalent to the power to change beneficiaries under a trust);

• the power to require certain types of decisions of the Class A member to be made only with the Class C Member’s prior consent);

• the power to direct that the assets of the CLG be transferred to another company or even another trust or foundation;

• the power to export (continue) the CLG from The Bahamas to another jurisdiction (equivalent to the power to move a trust to another jurisdiction);

• the power to amend the Memorandum or Articles of Association (or, alternatively, to require the Class C member’s consent before the Class A Member could amend the same) – equivalent to the power to amend under a trust;

• the power to approve the delegation of certain powers, eg appointment of investment advisors to the CLG.

Other variations are possible. For example, where the client wishes to use the CLG as the equivalent of a revocable trust, this could be achieved rather simply by providing in the CLG’s Memorandum or Articles that, in the event of the winding-up of the CLG, the net assets would be distributable solely to the client (or his designated holding company), or as he might direct. Indeed the client could himself control whether or not the company goes into a voluntary winding up by making himself the Class C member and reserving the winding-up power on terms, moreover, that only the Class C member would be able to benefit on a winding-up.

Again, to enhance privacy, the Class C Member could be organised as another company in which the client or his nominee is the sole member.