The Gazette 1991

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GAZETTE

SEPTEMBER 1991

the law of Ireland or another country. 5. The Exceptions of S.31 To the general prohibition contained in S.31 against companies giving guarantees or providing any security in connection with loans etc. in the prescribed circum- stances, there are but t wo exceptions. 5 (i) Inter-Group Guarantees S.34 (b) provides that where a company is a member of a group of companies, " cons i s t i ng of a holding company and its sub- sidiaries", S.31 shall not prohibit that company from: " . . . (b) entering into a guarantee or providing any security in connection with a loan or quasi-loan made by any person to another member of the group; by reason only that a director of one member of the group is connected with another." Thus S.34 (b) applies to situations involving the members of a group of companies, and so there is no prohibition on one member giving a guarantee in favour of another member. A group relationship must how- ever be first determined, and so regard must be had to the pro- ". . . there is no prohibition on one member [of e group of compenies] giving e guarantee in favour of another member." visions contained in S.155 of the Companies Act, 1963 wh i ch provides the tests for determining whether or not a company is in law, a "subsidiary" or a "holding" company. (ii) Transactions with Holding Company S.35 provides another exception, namely that S.31 shall not prohibit a company from, inter alia, "(a). . . entering into a guar-

Essentially, S.35 (a) and (b) envisages Guarantor Ltd giving a guarantee in respect of a loan, quasi-loan or credit transaction made by Big Bank pic for Borrowings Ltd, where Borrowings Ltd is the holding company of Guarantor Ltd. 6. The "Non-Applicable" Exceptions Suffice it to say that the exceptions contained in S.32 and S.37 do not apply to guarantees because by their very terms, they are only applicable to loans, quasi-loans and credit transactions. Thus, S.32 provides that S.31 shall not apply to certain "arrangements" pursuant to S.32 (2) (a) "if it makes a loan or quasi- loan to, or enters a credit transaction as creditor for, that person. Clearly, guarantees are not included and so S.32 has no application. Similarly, S.37 merely provides that S.31 shall not prohibit a company from making "any loan or quasi-loan or entering any credit transaction as creditor. . . .". Again, there is no application of this section to guarantees entered by the company. 7. The Civil Consequences of Contravention For a lending institution, the conse- quences of a guarantee falling foul of the S.31 prohibition, may give rise to an appalling vista. S.38 (1) provides that: "Where a company enters into a transaction or arrangement in contravention of section 31 the transaction or arrangement shall be voidsble et the instsnce of the company. . . unless, any of the following situations can be said to apply: (a) restitution of any money or

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As with Part III of the Companies Act, 1990, the foregoing except- ions to the voidability of guarantees in contravention of S.31 are not without difficulty. The following analysis must be read in the light of the fact that to a large extent their scope and interpretation will in all probability be the subject of judicial review and so is now, to a large degree, speculative. (a) Restitution Impossible Thus the section provides that the guarantee is voidable at the instance of the company, unless restitution of the money or other asset given by Guarantor Ltd is no longer possible. It should be ap- preciated that this is primarily designed to protect the assets of ". . . the guarantee [in contra- vention of Section 31] is void- able at the instance of the company unless [certain ex- ceptions apply]." Guarantor Ltd, and that further- more, to make sense of this exception, it must be appreciated that it seems to be framed with loans to directors in mind. Hence, in the case of a guarantee, what Guarantor Ltd gives is a consent to a contingent liability (secured by its assets) to pay a debt or part of a debt of Borrowings Ltd to Big Bank pic if Borrowings Ltd defaults in the repayment of that debt. Thus, it does not in fact part with any tangible property, but binds itself to a possible future liability. The concept of restitution can be seen to rest on the possibility of reinstatement and reimbursement. Applying the concept of restitution to these facts, it would seem that a guarantee will only be valid where the guarantee given, cannot be restituted to Guarantor Ltd. Where the guarantee given has not been "called-in", by Big Bank pic, restitution is legally possible and so 263

any other asset which is the subject matter of the arrangement or transaction is no longer possible: S.38 (1) (a), or (b) the company has been indemnified in pursuance of subsection (2) (b) for the loss or damage suffered by it: S.38 (1) (a), or, (c) any rights acquired bona fide for value and without actual notice of the con- travention by any person other than the person for whom the transaction or arrangement was made would be affected by its avoidance: S.38 (1) (b).

antee or providing any security in connection with a loan or quasi-loan made by any person to its holding company; a guarantee or providing any security in connection with any credit transaction made by any other person for its holding company." into

(b). . . entering