Guarantees—commercial benefit

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Guarantees—commercial benefit
  • Directors' duties—duty to promote success of company
  • Intra-group guarantees and commercial benefit
  • Downstream guarantees
  • Upstream guarantees
  • Cross-stream guarantees
  • Guarantees and distributions
  • Insolvency of the guarantor
  • Interests of the company's creditors
  • Transactions at an undervalue
  • More...

Guarantees—commercial benefit

Once the capacity and authority of a company to enter into a guarantee have been investigated, the next step is to consider the commercial (or corporate) benefit of entering into the guarantee.

Issues of commercial benefit can be of particular concern in finance transactions which include a guarantee because the company providing the guarantee is often in the position of taking on a considerable contingent financial liability for the obligations of a third party (typically the principal debtor of the lender—see Practice Note: Guarantees—Whose obligations are guaranteed?). On the face of it, providing such a guarantee would appear not to be in the commercial interests of the guarantor. See the Q&A: In what circumstances do I really need to worry about commercial (or corporate) benefit?

This Practice Note considers the issues that arise in relation to commercial benefit when a company provides a corporate guarantee. In particular it covers:

  1. the duty of directors to promote the success of the company and commercial benefit

  2. issues surrounding intra-group guarantees

  3. insolvency issues including how commercial benefit is relevant to transactions at an undervalue

  4. what happens if there is no commercial benefit

  5. issues for directors to consider when evaluating commercial benefit, and

  6. issues for lenders to consider for transactions which include a guarantee

Directors' duties—duty to promote success of company

Under the provisions of the Companies Act 2006 (CA 2006) each

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