#3284 - Challenging A Guarantee Crib Sheet - Finance and Capital Markets

Challenging a Guarantee

1. Is it written?

   1. 4 Statute of Frauds 1677 in order to be enforceable, a guarantee must be both

      1. In writing

      2. Signed by the guarantor or a person authorised by the guarantor
         

2. Has there been a variation to the primary obligation?

   1. If there is a variation to the primary obligation between the bank and the borrower, without the consent of a guarantor, a guarantee agreement, as the secondary obligation, will no longer be valid

      1. Check the guarantee agreement to see if there is a ‘waiver of defences’ clause which will allow a bank to alter the primary obligation whilst ensure the guarantee agreement is not discharged
         

3. Is there consideration?

   1. Guarantees are contracts and must therefore contain consideration as a basic contract requirements

   2. Where a guarantee is executed as a deed there will be no argument about whether good consideration has been given

      1. If a guarantee is executed as a deed the guarantor will be bound from the date on which the deed is delivered
         

4. Is the guarantor insolvent?

   1. If a guarantor becomes insolvent the guarantee could be sent aside as

      1. 239 CA 2006 A transaction at an undervalue

         1. Guarantor insolvent at the time of giving the guarantee or become so as a result

         2. Guarantee given within 2 years before the onset of insolvency

         3. Value that the guarantor receives as a result of giving the guarantee is significantly less than the value it has given to the lender

      2. 238 CA 2006 A preference

         1. Guarantee given within either 2 years or 6 months before the onset of insolvency depending on whether there is a connected person

         2. Guarantor insolvent at the time of giving the guarantee or become so as a result

         3. Guarantee puts the recipient into a position which is better than the position he would have been in if the guarantee had not been given
            

5. Is there unlawful financial assistance?

   1. It is unlawful for a public company whose shares are being, or have been acquired, to give financial assistance directly or indirectly for the purpose of that acquisition unless certain exceptions apply

      1. Financial assistance includes the provision of guarantees, security or indemnities
         

6. Is there corporate benefit?

   1. Directors must show that they are acting to further the objects of the company and that there is no abuse of power caused by acting with an improper purpose in mind

      1. 173 CA 2006 Duty of directors to exercise independent judgment

      2. 174 CA 2006 Duty of directors to exercise reasonable care and skill

      3. 172 CA 2006 A director must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. Directors should consider:

         1. The likely consequences of any decision in the long-term

         2. The interests of the company’s employees

         3. The need to foster the company’s business relationships with suppliers, customers and others

         4. The impact of the company’s operations in the community and the environment

         5. The desirability of the company maintaining a reputation for high standards of business conduct

         6. The need to act fairly as between members of the company

      4. Downstream Guarantee (parent guaranteeing a loan one of its subsidiaries is taking)

         1. There will be corporate benefit to the parent as its subsidiary is looking to further its development that will ultimately lead to greater profits for the parent company

            1. Increased profitability of the subsidiary will result in higher dividends and share price leading to increased profitability of and benefit to the parent

      5. Upstream Guarantee (subsidiary guaranteeing a loan its parents is taking)

         1. Often much harder to prove corporate benefit, however factors that can be considered are:

            1. Reduced funding for the group as a whole

               1. Parent will get a better rate of borrowing if it has a guarantor for the loan, and in turn, the parent may be able to loan at a better rate to the subsidiary

            2. Does the parent company undertake an activity that the subsidiary benefits from?

               1. If the parent can raise finance more cheaply it will have more funds available to channel into research and design that subsidiaries may benefit from

               2. Parent companies often provide services to subsidiaries such as book-keeping, employee records etc. that a subsidiary can benefit from

   2. Consequences for breach of 172 CA 2006

      1. 178 CA 2006 equitable reliefs

      2. 260 CA 2006 Shareholder derivative claim where directors will have to account for the loss

      3. 239 CA 2009 Ratification of breach of duty

      4. 238, 239 or 245 IA 1986
         

7. Does the company giving the guarantee have the capacity to do so?

   1. Ideally a company giving a guarantee should have express power to grant a guarantee in its Memorandum or Articles of Association

      1. 31 CA 2006 A Company has unrestricted objects unless they are explicitly/specifically restricted

      2. 39 CA 2006 If a company grants a corporate guarantee beyond its powers it can be set aside purely on this basis

      3. 40 CA 2006 If the directors of the company granting the guarantee act beyond their powers the guarantee will be...