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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.
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.
2. S.31: The Hidden Scenario
S.31 (1), which is entitled "Pro-
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
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
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
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:
T h o m a s B. C o u r t n ey
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