A FTSE250 General Counsel & Company Secretary writes...
We are a FTSE 250 company that does not yet take the option of granting a guarantee in respect of its UK subsidiaries to take a s.479A-C exemption from audit. I am currently minded to oppose any such grant of a guarantee because it seem to me to tear down the corporate veil and make the PLC directly liable for the liabilities of the subsidiary up to the year in which the guarantee is granted whether or not such subsidiary continues to be part of the guarantor’s corporate group; this is a point that ICAEW does not deny in para. 15.1 of its “Technical Release ICAEW 07/13BL”.
However, I appreciate that there may be circumstances in which such a guarantee would be appropriate and wonder if members might be willing to share their thoughts on this point.
The logic of the giving of a guarantee is that the “corporate veil” is undoubtedly torn down, so obviously don’t do it if you have material concerns that you may need to make use of the corporate veil if the subsidiary in question is hit with significant liabilities. But if it’s a subsidiary where this risk is small or effectively non-existent then it becomes a trade off of the potential “cost” to parent company of that risk (if one can put a monetary value on it) as against the (known and ascertaiable) costs of doing an audit. Which is a long-winded way of saying (as with other respondents to the question) we do it where we know the subsidiary well and that risk is really small.
Incidentally, I didn’t know that the English courts have apparently not worked out what “the parent undertaking guarantees 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, ” means exactly. Which is another grounds for not giving the guarantee, if you have doubts about it ever coming into play.
We do it for about 30 of our subsidiaries each year. These are companies that we know about and do not have a lot going through them. The worst part of the process is filing all the documents, including the parent company accounts at Companies House – having to print off 30 x hard copy 300 page Annual Report & Accounts of the parent and then receiving multiple rejections stating these documents have not been received when they have – I think different departments must deal with the same pack of documents. I look forward to the day these can be filed electronically. A lot depends upon what the company does.
We considered this but were concerned by the lack of clarity in the legislation regarding the extent to which unknown liabilities would be captured i.e. contingent and prospective.
We sought legal advice, which was, “it isn’t clear” [ whether the guarantee would encompass these] the crux was, we would only know once a court had ruled (and there haven’t been any such rulings yet).
We’ve not chosen to go down the guarantee route this year.
We do it for a a handful of companies for which we know everything about and we prepare accounts. Not sure we would do it in a different situation.