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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-
antee or providing any
security in connection with
a loan or quasi-loan made
by any person to its holding
company;
(b). . . entering
into
a
guarantee or providing any
security in connection with
any credit transaction
made by any other person
for its holding company."
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
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).
We specialise in bookkeeping
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Solicitors Office.
W. j d . jftenn&My
S .
Chartered Accountants.
5 Leeson Park, Dublin 6.
Tel: 971237 Fax: 970756
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
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