SGS 10 - Guarantees + debentures

Question 1

What are the key elements of a guarantee?

Answer 1

• Undertaking to pay on demand amounts owed by borrower
• Indemnify lender for loss (stand alone agreement)
• Guarantee is continuing
• State that guarantee will not be affected by variation of loan agreement (Wording in Triodos v Dobbs)
• Guarantor must waive right to require lender to go first at other parties
• Guarantor defers all rights against borrower. Any payment received by borrower will be payable to lender

Question 2

Does a comfort letter have any legally binding force?

Answer 2

No - comfort letter should state as such (Re: Atlantic Computers)

Question 3

Why not give a guarantee? Why comfort letter?

Answer 3

• Financial indebtedness undertaking prevents
• Company cannot give it (articles restrict)
• Practical economic reasons - subsidiary set up to ring fence liability
• Accounting - Guarantee must be recorded as a contingent liability on the balance sheet