Can a company guarantee or secure the obligations of another group company; are there limitations in this regard?

Lending & Secured Finance

Croatia Small Flag Croatia

Generally, a company can guarantee or secure the obligations of another group company but there are liabilities and limitations set forth in the Companies Act. For example, if no contract on the conduct of a company's affairs has been concluded, the controlling company must not use its influence to advise the subsidiary to engage in harmful legal transactions or to take action or neglect the action to its detriment unless it commits to compensate the subsidiary for the damage it would thereby incur.

Czech Republic Small Flag Czech Republic

Yes, this is possible and also common on the market. In general, providing of security needs to be approved by competent corporate bodies and directors signing the transaction documents shall not be in conflict of interest (e.g. they cannot act to detriment of the company due to external pressure, such as instruction from the parent company). Further, a company may provide financial assistance (i.e. funds or security) for acquisition of shares in the company only subject to a number of statutory limitations. Complicated structures are sometimes developed by the parties to the acquisition (e.g. post-closing mergers) in order to circumvent the applicable legal restrictions.

Finland Small Flag Finland

Yes, guarantees and security for the obligations of other group companies are allowed in Finland but are, however, limited by the rules regarding financial assistance, unlawful distribution of assets and corporate benefit. Please see question 11 below.

Germany Small Flag Germany

Yes, provided that for up- and sidestream security (to (grand-)mother and sister companies) certain restrictions apply (which are set out in the two following paragraphs below). Those restrictions do not have the effect to invalidate security but, if not adhered to, might cause the officers of the security grantor to be held personally liable.

Stock corporations may only grant up-/side-stream security within strict boundaries and in any event not exceeding the free assets of the relevant stock corporation. In addition, stock corporations may not provide financial assistance (directly or indirectly) for the purchase of their own stock.

The rules applicable for providing up-/side-stream security (collateral and guarantees) by limited liability companies require that payments to be made under a guarantee (or enforcement proceeds from the enforcement of collateral) do not exceed the security grantor's free assets (i.e. the security grantor's assets minus debt minus statutory share capital). To achieve that, agreements providing for the granting of up-/side-stream security/guarantees usually contain a so-called limitation language which restricts the enforcement (in case of guarantees) or the distribution of enforcement proceeds (in case of asset security) to avoid officers being held personally liable. The details of the limitation language depend on a number of factors, such as the type of financing and management's access to information.

Spain Small Flag Spain

Cross, down and upstream guarantees by group companies are available under Spanish law, provided that the necessary corporate resolutions are granted and the financial assistance prohibition (see answer to question 11 below) is not violated.

In any event, we describe below several potential grounds for the relevant security to be challenged. These are as follows:

a) transgression of the corporate object of the grantor; and

b) security deemed contrary to Spanish public policy.

Philippines Small Flag Philippines

A company can guarantee or secure the obligations of another company or group of company provided the undertaking is (a) approved by at least a majority of its board of directors, if the power to guaranty or secure the obligations of another company is among the primary purposes of the corporation, or (b) approved by at least a majority of the board of directors and ratified by stockholders representing at least 2/3 of its outstanding capital stock, if the power to guaranty or secure the obligations of another company is among the secondary purposes of the corporation. Accordingly, if there is nothing in the articles of incorporation which confers on the company the power to guarantee or secure an obligation of another company, the corporation is not authorized to do so. The Philippine Securities and Exchange Commission (“SEC”) has opined that such act could prove to be disadvantageous to the corporation and ultra vires for being an act not within the express, implied and incidental powers of the corporation conferred by the Corporation Code or articles of incorporation.

Sweden Small Flag Sweden

Subject to the limitations described in our answers to questions 11 and 12 below, a Swedish company can guarantee or secure the obligations of another group company.

Turkey Small Flag Turkey

In general, companies can provide a guarantee or security in respect of the obligations of another group company, provided that there are no restrictions under their articles of association in this respect.

However, pursuant to TCC, a controlling company is prohibited from exercising its control over a controlled company (i.e. the subsidiary) in a way which would cause losses to the controlled company, including forcing it to provide upstream guarantees or securities result in the controlled company engaging in transactions to provide an upstream guarantee. However, if there is a corporate benefit in engaging in these types of transactions and if it can be proven that the director of the controlled company has acted in good faith and that a prudent director of an independent company would (acting in good faith) have taken the same action under similar conditions, upstream guarantees or security may be provided by the controlled company in favour of the controlling company. If no such corporate benefit exists, upstream guarantees or security can still be provided, however, the controlling company should undertake and offer to the subsidiary an equivalent consideration against such guarantee.

On the other hand, if a company directly or indirectly holds 100% of the shares in the controlled company, the company may give instructions to the controlled company if the policies of the group so require, even if the controlled company may suffer from the results of those instructions. Such instructions may cover the granting of upstream guarantees. Any resulting loss arising from these instructions would also give rise the liability of the instructing company. Typically, lenders deal with these conditions through requiring relevant representations and undertakings in the documentation (and usually attempt under a disclaimer not to concern themselves to analyse separately if any such conditions exist).

United States Small Flag United States

As a general matter, group company guarantees are very common in the United States. In addition to the requirement that a guarantee must satisfy general contractual principles to be enforceable (such as consideration and a meeting of the minds), many states have a so-called Statute of Frauds under which a guarantee must be in writing and signed by the guarantor. In terms of consideration, as a general rule, the guarantor need not receive a direct benefit in order for consideration to exist if the guarantee is entered into at the time of the original loan transaction (although, as discussed below, the amount of benefit may be relevant in later insolvency proceedings). Under laws of certain states, however, there must be additional consideration if the guarantee is given after the underlying loan is made.

Switzerland Small Flag Switzerland

Although there is no limitation under Swiss law in relation to a Swiss company guaranteeing or securing obligations of any of its (direct or indirect) subsidiaries (downstream), the granting of a guarantee, indemnity or security interest for obligations of a Swiss company’s (direct or indirect) shareholder (upstream) or affiliate or subsidiary of such (direct or indirect) shareholder (cross-stream) is subject to certain limitations (see question 11 below).

United Kingdom Small Flag United Kingdom

A company can guarantee and secure the obligations of another group company. The limitations to this are set out in more detail, below, including financial assistance, corporate benefit and capacity.

Jersey Small Flag Jersey

Yes, a company may guarantee the obligations of another group company and this is a common feature of cross border transactions involving Jersey companies.

Whilst a Jersey company under the Companies (Jersey) Law 1991 (the CJL) has unlimited corporate capacity, counsel acting for a lender should review the constitutional documents of the guarantor company to ensure that there are no limits on the authority of the director to enter into the guarantee.

Hong Kong Small Flag Hong Kong

Apart from the requirement that there must be commercial benefit to the party providing the guarantee or third party security (not to the group as a whole), there is no general limitation on the ability of a company guaranteeing or securing the obligations of another group company in so far as such "group company" is a subsidiary of the company giving the guarantee or security.

Note moreover that, pursuant to s500 CO, a company must, subject to exceptions, not give a guarantee or provide security in connection with a loan made to a body corporate controlled by the director of that company unless there is prescribed approval of its members. Please refer to "Loan to directors" sub-section of our response to Question 11 below for more information.

To mitigate the risk of a shareholder challenging the guarantee or security provided, especially in the case of upstream and cross-stream guarantee and security, a shareholders' resolution should be obtained (in addition to the necessary directors' resolution). However, shareholders' approval will not block a validity challenge by creditors or liquidator.

Austria Small Flag Austria

In general, a company can guarantee or secure the obligations of another group company. However, due to the strict Austrian capital maintenance rules, a company guarantee or security of another group company may violate capital maintenance rules (Verbot der Einlagenrückgewähr). The capital maintenance rules apply to limited liability companies and joint stock companies as well as to certain kind of partnerships, where the only unlimited partner is a limited liability company or joint stock company.

Capital maintenance rules are violated if the company´s assets are distributed to the shareholders or third parties in contrary to the relevant provisions of the articles of association. Distributions to shareholders can be made (i) by dividend distributions regarding the profits of the company based on a shareholder’s resolution or (ii) by way of capital decrease of the company based on a shareholder’s resolution.

In any other case, the company must ensure that the transaction is in line with the “arms-length principle” when entering into a transaction with its shareholders or group companies on the same or on an upper level, otherwise such transaction could violate the Austrian capital maintenance rules. However, there is one exemption to this rule, i.e. the transaction needs to be operationally justified (betriebliche Rechtfertigung), meaning the transaction needs to be clearly in the benefit of the company.

If a transaction does not comply with the “arms-length principle” and is not operationally justified (betriebliche Rechtfertigung), such a transaction could be void, whereas the company may claim back the respective assets. Further, the management might become personally liable to the company for any damage resulting thereof.

A downstream guarantee or any other security to a subsidiary company is not restricted under Austrian law. Due to the above mentioned strict capital maintenance rules guarantees or any other securities provided as upstream or side-stream guarantees may violate these rules. Therefore, an upstream or side-stream guarantee must particularly comply with the “arms-length principle”.

Mexico Small Flag Mexico

Yes. In accordance with Mexican law, there are no restrictions as to the number of security interests or guarantees that a company (third party) may create or grant in favor of a borrower/debtor, regardless of whether the third party is related or unrelated to such borrower/debtor.

Under Mexican law, there are three main capacities under which a third party can secure a borrower's/debtor's obligations: 1) joint obligor or co-obligor, 2) guarantor and/or 3) avalista (a person who signs a promissory note – pagaré – or other negotiable instrument executed by a borrower/debtor, as a guarantor).

Lender's due diligence approach is to confirm that third parties acting as guarantors, co-obligors or avalistas are authorized to do so under their organizational documents.

Bosnia & Herzegovina Small Flag Bosnia & Herzegovina

Another group company could be a guarantor or pledge assets as security for another group company.

Updated: June 5, 2019