Lenders – Boost your recoveries

Lenders always look for ways to mitigate risk and secure their financial interests. An under-explored avenue for enhancing credit security lies buried within sections 479A to 479C of the Companies Act 2006. These provisions allow certain subsidiary companies to be exempt from audit requirements, and introduce a parent company guarantee for all outstanding liabilities to which the subsidiary company is subject at the end of the financial year to which the guarantee relates, until they are satisfied in full.

For lenders, being aware of and understanding the implications of these guarantees, can help both credit assessments and recovery strategies.

 

The legal framework, explained

Section 479 of the Companies Act 2006 provides an opportunity for eligible subsidiary companies to obtain an exemption from the statutory audit requirement. It’s conditional upon the provision of a guarantee by the parent company for all the subsidiary's liabilities for that financial year. This exemption is predicated on several key conditions:

• the parent is established under the law of any part of the UK;
• unanimous consent from the subsidiary's members for the audit exemption must be obtained;
• the parent undertaking must give a statutory guarantee of the subsidiary's outstanding liabilities in respect of that year;
• the subsidiary company must be included in the parent company's group accounts;
• specific disclosures regarding the exemption must be included in the group accounts; and
• specified information about the exemption and the guarantee must be filed at Companies House.

 

Strategic consideration for lenders

• Credit assessment at onboarding: The presence of a section 479 guarantee might influence a lender’s assessment of a subsidiary's creditworthiness. This guarantee signifies a parent company's willingness and commitment to support the subsidiary, thereby enhancing the attractiveness of the subsidiary as a lending proposition. It provides a direct line of recourse to a usually more financially stable parent, offering reassurance that the subsidiary's obligations are more likely to be met.
• Recovery considerations in default scenarios: Where a subsidiary faces financial difficulties or defaults on its obligations, the guarantee under section 479 should be considered. It provides that the parent company is legally obligated to fulfil the subsidiary's liabilities, offering lenders a clearer and potentially more expedient recovery route. The guarantee acts as a safety net, reducing the risk profile of loans to subsidiaries and facilitating a more streamlined recovery process.

 

Benefits to Lenders

• Enhanced security: The guarantee offers an additional layer of collateral, supporting the subsidiary's liabilities and potentially reducing the lender's exposure to loss.
• Simplified Recovery Process: Should a default occur, the guarantee provides a direct claim against the parent company, potentially simplifying and speeding the recovery process.
• Informed Credit Decisions: Awareness of such guarantees allows lenders to make more informed decisions, evaluating the financial health and support structures of potential subsidiary borrowers with greater precision.

Lenders are encouraged to consider these guarantees as a factor in their lending strategies, both at the initial credit assessment stage and throughout the lifecycle of their financial engagements with subsidiary companies.

For further insights into how these guarantees can be integrated into your lending practices, or to discuss the specific implications for your portfolio, please contact our team of experts.

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