Lenders, Borrowing Groups of Companies and Corporate Guarantees: An Insolvency Perspective

Danny Spahos

jcls Vol 1 Issue 2 (December 2001)

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Abstract

This paper examines the potential impact of section 238 of the Insolvency Act 1986 on the validity of corporate guarantees, and offers a framework for determining when they are liable to be undone. Briefly, the test is whether the value of the guarantee is broadly equivalent to the value of the benefit(s) moving to the company as a result of giving the guarantee. The article provides a formula for assessing the value of a guarantee, in light of the accounting treatment of contingent liabilities under the Financial Reporting Standard 12, issued by the Accounting Standards Board in September 1998. It further explores the wide variety of benefits for which the company may seek to trade its guarantee, by reference to the various types of guarantee (downstream, upstream and cross-stream) and in light of the recent decision of the House of Lords in Phillips v Brewin Dolphin Bell. The safety net provided by section 238(5) to guarantees that fail to pass this test is then discussed. The paper concludes that section 238 is a non-negligible source of lender liability, as it imposes an implied statutory duty on the lending bank to consider, in seeking the security of a corporate guarantee, the interests of the surety’s creditors.

Keywords

Insolvency Act 1986, accounting, benefits, company law, contingent liabilities, corporate guarantees, financial reporting, implied statutory duty, lender liability, lending banks, safety net