The following Banking & Finance Q&A produced in partnership with Brian Cain provides comprehensive and up to date legal information covering:
This Q&A explains when it is necessary to analyse whether an obligor in a banking transaction is receiving a commercial benefit (also called a corporate benefit) for participating in the transaction and why that might be important.
For an explanation of how this matter arises in connection with guarantees which is the most common context in which the issue of commercial benefit arises in finance transactions, see Practice Note: Guarantees—commercial benefit.
Assessing whether an obligor in a finance transaction is receiving a commercial benefit is necessary where guarantees, third-party security or some other form of co-payment obligation is imposed on a party and that party is not the recipient of any funds being advanced either directly or indirectly eg by way of the borrower on-lending the money advanced to it.
A lack of commercial benefit can invalidate a transaction or lead to it being challenged by shareholders or an insolvency officeholder.
If a company enters into a transaction where there is no commercial benefit, that transaction can be set aside at the instance of the shareholders of the company. Any third party such as a lender may be unable to enforce the transaction and/or hold the proceeds derived from the transaction as a constructive trustee.
Whether there was commercial benefit can
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