One of the attractions of making Railtrack's successor a company limited by guarantee is that neither the government nor its members will go down if it flops
What do the Civil engineering Contractors Association, the National Federation of Builders, and the Construction Industry Board have in common with Stephen Byers' proposed successor to Railtrack? They are all companies limited by guarantee – and it is just such a body that Byers is promoting to succeed Railtrack. But what are the characteristics of CLGs, and what are the liability and funding issues implicit in the use of such a company as a successor to Railtrack?

In UK law there are three types of company that can be formed under the Companies Acts: unlimited companies, companies limited by shares, and CLGs. Members of an unlimited company that is insolvent when wound up can be made to meet the shortfall. Their liability is unlimited.

The liability of shareholders of companies limited by shares is "limited" to the amount they have paid for their shares. So an owner of a fully paid share in such a company has no such exposure if the company is insolvent when liquidated.

For a CLG, the liability of the members in the event of an insolvent liquidation is limited in quite a different way. All CLGs must contain within their memorandum of association a clause that "guarantees" that every member, on an insolvent liquidation, pays an amount towards the company's debts and obligations. In practice, this amount is usually nominal. For example, the "guarantee" of each member of CECA, NFB and the CIB is only £1.

As a CLG has no share capital, it has no shareholders – although it does of course have members. Consequently, it is a convenient corporate vehicle for charities, professional bodies and trade associations – entities where there is no intention of the members profiting financially from their membership of the company. In short, the members are not investors contributing financial capital. It is usual, therefore, for the memorandum of association of such a company to prohibit the distribution to the members of any of the company's assets in any form, whether income or capital, including when it is liquidated.

Usually in these circumstances any surplus assets are passed to a continuing organisation with similar aims. Byers is surely intending that the Railtrack CLG will have just such a prohibition.

Aside, then, from these limitations on the members' liability and other provisions that relate purely to shareholders, CLGs are subject to the same statutory regime as companies limited by shares. That is, the provisions regarding publication of accounts, the roles and duties of directors, the insolvency regime and, or course, the tax regime all apply to CLGs. A CLG is liable to pay tax on any "profit" earned year on year, whether or not it is carrying on any commercial enterprise.

So how will Mr Byers' CLG be funded if it has no shareholders? Most CLGs that are not commercial organisations raise funds from their activities and via subscriptions from their members. Mr Byers has other means in mind. He envisages that the company would be funded from revenue generated from the same sources as Railtrack (property income, track access charges and grant) and by debt – that is, it will borrow from the debt markets on favourable terms. The government is, apparently, anticipating that the CLG would have an investment-grade credit rating, although it is rather difficult to see how that rating would be arrived at.

As to members, the proposal is that the Strategic Rail Authority would be the founder member, with other members drawn from the private sector. Financial institutions and construction companies could also, apparently, be included as members. The members would then be able to play a governance role, controlling the appointment of the board and senior management. But, as we have seen, it does not appear as though the members would need to make any financial contribution to participate, or indeed have any financial exposure to the Railtrack CLG at all.

A CLG will allow Byers to distance the government from any financial liability for Railtrack (aside from direct subsidy), while putting day-to-day control of the company into the hands of those who have the greatest interest in Railtrack succeeding – namely, the other players in the railway sector. But if it failed again, the losers would be the debt market. The "guarantee" of its members is unlikely ever to be called.