Guarantees vs corporate interest test

When a bank grants a credit and requires a security from a subsidiary company of the borrower, the bank must ensure that such security meets the corporate interest of this subsidiary and that it is not disproportionate to the financial means available to the guarantor.

Pursuant to a decision of the Court of Appeal of Brussels dated 15 January 2010, a bank must be held liable when requiring a guarantee from a Belgian subsidiary for securing the undertakings of the borrower, especially when such guarantee is the only security covering the reimbursement obligations of the latter and such guarantee exceeds the financial means of the subsidiary, so that, upon enforcement of the security, the subsidiary loses a substantial part of its assets for the sole benefit of its mother company.

Although there is little case law on upstream or cross guarantees granted, such guarantees have been upheld if they are within the corporate purpose of the guarantor and meet the so-called ‘corporate interest’ test.

This latter test can be met if it can be demonstrated that (i) the guarantor itself (even indirectly) derives a benefit from granting the guarantee and (ii) the amount that is secured, the duration of the guarantee and the risk that it will be called are not disproportionate to the financial means available to the guarantor and the benefit derived from the transactions.

If these conditions are not met, the guarantee would be deemed contrary to the company’s interest and, as such, could be considered as void. Should the guaranteed amount clearly exceed the financial means of the Belgian subsidiary (acting as guarantor) and be therefore beyond the scope of the corporate interest of the company, a Belgian trustee in bankruptcy could certainly be in a position to ask the Belgian Court for the guarantee to be made void. This situation could in addition potentially give rise to a direct liability of the Belgian subsidiary’s directors as well as of the bank, as confirmed in the above decision of the Court of Appeal of Brussels.
Should a Belgian subsidiary agree to grant an upstream guarantee in connection with a credit granted to its mother company, the recommendation is therefore to always verify that the credit will (even indirectly) benefit the Belgian subsidiary and that the guarantee so granted is not disproportionate to the financial means of the company.
The Court of Appeal of Brussels confirmed the above principle in underlining that the corporate interest is of public order.