The Gazette 1991

GAZETTE

i

SEPTEMBER 1991

The Latest Hazard to Guarantees: The Effects of S.31, Companies Act, 1990 on Inter-Company Guarantees

Part III of the Companies Act, 1990 is entitled, "Transactions Involving Directors", and extends from S.25 to S.52 inclusive of the Act. 1 Its title is somewhat of a misnomer in that it would appear to be confined to transactions/arrangements involving a company and its directors. In fact, this Part of the Act, and in particular S.31, has created a veritable minefield for lending institutions and their legal advisers, where they seek a guarantee from a company in consideration of that lending institution granting facilities to another company.

in favour of another company in that S.26 (2) provides: "A body corporate shall also be deemed to be connected with a director of a company if it is controlled by that director". Hence, it is the case that where the other requirements of S.31 are met, a company may not give a guarantee in favour of another company where that other com- "the . . . [Act] . . has the effect of prohibiting a company from . . . giving a guarantee in favour of another company [in certain circumstances]." pany is "connected wi t h" and "controlled by" any of the fol- lowing persons: - a director of Guarantor Ltd; - a director of the company which is the holding company of Guarantor Ltd; - a " shadow d i r ec t o r" of Guarantor Ltd; - a "shadow director" of the company which is the holding company of Guarantor Ltd. Where it does, such a guar- antee 3 is prima facie voidable. 4 S.27(1) of the Companies Act, 1990 defines a "shadow director" as:

1. Inter-Company Guarantees Ostensibly, S.31 of the Companies Act, 1990 only concerns the situation where a company enters an arrangement with one of its "S[ection] 31 has created a veritable minefield for lending institutions." directors. However, while it may come as a surprise it is also the case that inter-company guaran- tees are affected. A typical situation may be set out in the following fashion. Borrowings Ltd, approaches Big Bank pic seeking to get a loan for £1,000,000 IR. Big Bank pic considers the request, and in due course sends a facility letter to Borrowings Ltd, setting out, inter alia, the security which Big Bank pic will require before drawdown. Of course, Big Bank pic will require that Borrowings Ltd will give a charge, whether fixed or floating, over its assets. However, Big Bank pic will typically require a guarantee supported by a fixed and/or floating charge over the assets of a company which is "associated", but not in the sense of a group, with Borrowings Ltd, which we shall term Guarantor Ltd. By virtue of S.31 Companies Act, 1990, such an inter-company guarantee can be rendered voidable in certain circumstances.

by Thomas B. Courtney B.A., LL.B of Hanby Wallace, Solicitors

hibition of loans, etc. to directors and connected persons", provides as follows: "Except as provided by sections 32 to 37, a company shall not — (a) make a loan or a quasi-loan to a director of the com- pany or of its holding company or to a person connected with such a director; (b) enter into a credit trans- action as creditor for such a director or a person so connected; (c) enter into a guarantee or For our present purposes, it is S.31 (1) (c) which is of concern. Again, ostensibly, this section would appear to merely prohibit a company from giving a guarantee etc. in favour of a human person, namely, one of its directors or a director of its holding company. However, the inclusion of "a person so connected" has the effect of prohibiting a company from, inter alia giving a guarantee provide any security in con- nection with a loan, quasi- loan or credit transaction made by any other person for such a director or a person so connected. 2

2. S.31: The Hidden Scenario S.31 (1), which is entitled "Pro-

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