# Company Limited by Guarantee — Section 2(21)

## Definition

A company limited by guarantee (or 'guarantee company') is a company having the liability of its members limited to such an amount as the members may respectively undertake by the memorandum of association to contribute to the assets of the company in the event of its being wound up.

## Key Features

### 1. Special Feature: Trigger of Liability

The liability of members to pay their guaranteed amounts arises ONLY when the company has gone into liquidation — NOT when it is a going concern.

### 2. Common Examples

Clubs
Trade associations
Societies for promoting various objects

### 3. Source of Funds

Without Share Capital	With Share Capital
Does NOT obtain initial/working funds from members	Initial capital from members
Sources: grants, endowments, fees, subscriptions	Working funds from fees, charges, subscriptions

## Two-Fold Liability (If Share Capital Exists)

Where a guarantee company has share capital, the shareholders have two-fold liability:

1. As shareholder: To pay the amount unpaid on their shares whenever called.

2. As guarantor: To pay the guaranteed amount when the company goes into liquidation.

## Memory Aid

Guarantee = 'Pay only at funeral (liquidation)'

Worked example

### Example 1

Q: Mr. B is a member of a Trade Association Ltd. (a guarantee company without share capital). His guarantee is Rs. 50,000. When can he be called upon to pay?

A: Mr. B can be called upon to contribute Rs. 50,000 to the assets of the company ONLY in the event of the company being wound up. He has no liability while the company is a going concern.

### Example 2

Q: XYZ Ltd. is a guarantee company with share capital. Mr. C holds 100 shares of Rs. 10 each (Rs. 6 paid up) and has guaranteed Rs. 5,000. What is his total potential liability on winding up?

A: Total liability = Unpaid on shares + Guarantee = (Rs. 4 x 100) + Rs. 5,000 = Rs. 400 + Rs. 5,000 = Rs. 5,400.

⚠️ Common exam mistakes

Stating that guarantee amount can be called any time — it arises ONLY on winding up
Forgetting that guarantee companies may or may not have share capital
Missing the two-fold liability for shareholders in a guarantee company with share capital
Confusing guarantee companies with charitable Section 8 companies — although they overlap, they are distinct concepts

Bare-Act text Section 2(21) · Companies Act, 2013 · click to expand

'Company limited by guarantee' means a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.

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Company Limited by Guarantee [Section 2(21)]

Worked example

⚠️ Common exam mistakes