Debt finance

A company can grant a security interest aiming to secure its obligations as a borrower on a credit facility and as a guarantor of the obligations of other borrowers and guarantors’ obligations under a credit facility.

For that reason, the general rule set forth under Angolan legal framework is that a company’s corporate power is restricted to rights and duties considered adequate in order to proceed with the exercise of the company’s corporate object.

Hence, it is assumed that the granting of guarantees regarding other entities’ duties is opposed to the purpose of companies, except in situations where the companies’ own interest is legitimate in providing the guarantee or the company being considered is in a group or control relationship with other companies (Article 6(3) Angolan Companies Law).

The company’s own legitimate interest is visible when providing the downstream guarantees. However, it is less visible when providing upstream and cross-stream guarantees, being advisable for the necessary resolutions to be given with the intention to justify the own interest of the company, which in certain circumstances might be an indirect one, when providing the guarantee.

In regard to governmental or other consents or filings (or other formalities) required when granting/taking a guarantee, with exception of when there are state-owned and other public sector companies, the general rule is that no governmental consent or filings is required under the law, in order for a guarantee being provided by an Angolan company to be enforceable.

Notwithstanding, a guarantee provided by an Angolan company becomes enforceable when either a shareholder or border consent is given in accordance with the Angolan Companies Law. Commonly, such consent will detail expressly the benefit expected to be acquired from the provision of the guarantee.

Moreover, a security can be taken over inventory when executing a written agreement. Whenever there is a situation of non-payment or the occurrence of other circumstances presumed to be described in the pledge agreement, the pledgee or security agent can provide an enforcement notice to the pledgor. As an alternative, parties may prefer the provision of ordinary notices containing details of the stock.

Additionally, a company cannot guarantee and/or give a security to support borrowing arising from the financing of direct or indirect acquisition of shares of the company, being expressly forbidden (Article 344 of the Angolan Companies Law). Exceptions are available. Criminal liability of the directors/managers of such company may be considered when violating this prohibition, as well as the declaration of voidance and nullity of the agreement, guarantee or security interest.

Contrary to that, no express prohibition exists when the subject is the direct or indirect financing of shares of any company which directly or indirectly owns shares in the company or shares in a sister subsidiary, even though it is generally understood as applicable. Again, as previously mentioned, the corporate powers of the company may be restricted in respect of granting of guarantees or security.

Some of the key areas affecting the giving and taking of guarantees and security are as follows.

Corporate benefit

A transaction may be voidable if there is no corporate benefit to the entity. The presence of corporate benefit is a factual matter.

Corporate benefit is a particular issue for guarantees. Each director owes a duty to the company to act for the benefit of the company in its best interests, with due care and diligence, in good faith and for a proper purpose. Each director must also avoid any conflict between his or her personal interests and those of the company. These duties must be observed when it is proposed that a company grants a guarantee of the obligations of another.

In deciding whether to grant a guarantee (or provide third party security), the directors may consider both direct and indirect benefits flowing to the company. For example, in the context of a corporate group, the granting of a guarantee might indirectly benefit the guarantor if it is a requirement for the support of a related company and benefits flow back to the guarantor. Note that corporate benefit must be assessed at the level of the individual company – i.e. it is not sufficient that the guarantee benefits the group as a whole.

A director of a wholly-owned subsidiary may take into account the best interests of its holding company so long as the company's constitution permits him or her to act in the best interests of the holding company and the subsidiary is solvent.

It may be possible to address concerns regarding the presence of corporate benefit by obtaining shareholder approval for the transaction.

A guarantee that does not benefit the company commercially may be voidable. Further, the guarantee could be held to be an unfair preference or uncommercial transaction. The directors could be subject to civil and criminal penalties and personal liability.

 

Insolvency and voidable transactions

If a lender enters into a secured transaction shortly before the company becomes insolvent, unsecured creditors may be able to challenge the security on the basis that the grant of security constituted an unfair preference or an uncommercial transaction. Unfair preferences and uncommercial transactions are both voidable. If the unsecured creditors are successful, the lender will not be able to have recourse to the purportedly secured assets and they will be distributed amongst all creditors, including the unsecured creditors. The rules are technical and the following is a simplified outline.

Unfair preferences arise where one creditor is unfairly preferred over others.

Uncommercial transactions do not involve creditors as such, but aim to recover any disposals of assets at an undervalue.

The transaction must have been entered into while the company is insolvent, or the company must have become insolvent as a consequence of the transaction. It must also have been entered into during the period ending on the 'relation-back day', but on or before the winding up process began. For unfair preferences, the period is six months, and for uncommercial transactions, it is two years. In each case, the period is four years in the case of related parties and 10 years if the transaction was entered into to avoid the rights of creditors. The relevant period is known as the 'hardening period'.

After the end of the hardening period, the transaction is no longer vulnerable to being voided.

Financial assistance

An Australian company may not provide financial assistance to a person to purchase shares in the company itself or its holding company (even if that holding company is incorporated outside of Australia) unless the financial assistance:

• does not materially prejudice the company, its shareholders or its ability to pay its creditors ('no material prejudice' exception);
• has been approved by the company’s shareholders in accordance with the 'whitewash' procedure prescribed by the Corporations Act 2001 (Cth); or
• falls within a specified exemption.

A common example of prohibited financial assistance is the granting of a guarantee or security by a company whose shares are being purchased in support of a loan advanced by a personfinancier to the purchaser to fund the share acquisition.

Companies and their financiers do not generally rely on the ‘no material prejudice’ exception and the specified exemptions are only sometimes relevant. Instead, the common practice in Australia (and the prudent approach) is for the company to obtain shareholder approval of the financial assistance by way of the whitewash procedure. The whitewash procedure in Australia can be more time consuming and complex to implement than equivalent procedures in other jurisdictions.

A breach of the financial assistance prohibition will not affect the validity of the transaction, but may result in civil and criminal sanctions.

Related party transactions

Chapter 2E of the Corporations Act 2001 (Cth) is intended to preserve and maintain the assets or resources of public companies by requiring that, in simple terms, financial benefits passed to related parties that might diminish or adversely affect those assets or resources are disclosed and approved by a general meeting of the public company beforehand.

The provisions are detailed, but essentially a public company (or an entity controlled by a the public company) may only give a financial benefit to a related party of the public company if:

• the benefit falls within one of the seven categories of exempted financial benefit (e.g. arm's-length terms, pursuant to a court order); or
•  if the benefit is of any other kind, the public company has obtained the approval of its members to give the benefit or to enter into a contract to give the benefit.

Failure to comply with the related party transactions laws will not affect the validity of the transaction, but it may render any person involved liable for a civil or criminal penalty.

 

National Credit Code

The National Credit Code applies to credit contracts entered into on or after 1 July 2010 where:

• the lender is in the business of providing credit;
• a charge is made for providing credit;
• the debtor is a natural person or strata corporation; and
• the credit is provided for personal or domestic use or to purchase, renovate or improve residential property for investment purposes or refinance credit previously provided for this purpose.

There are certain confined exemptions (e.g. for low cost short term credit). The Code does not apply to business loans.

Where the National Credit Code applies there are restrictions on the guarantees that a lender may obtain from a customer. For example, a guarantee from an individual must be limited (in terms of the amount the lender can recover) to the amount of the relevant loan plus interest, charges, costs and expenses. There also are various disclosure and other obligations that the lender must comply with. Failure to comply may render the guarantee or security unenforceable.

Banking Code of Practice

The restrictions noted above apply in a similar manner under the 2019 BCOP, the ABA’s voluntary code of practice which is mandatory for retail banks to adopt as a condition of their membership of the ABA and which is enforceable by law. Similar to the National Credit Code, a bank that is a signatory to the BCOP may only accept a guarantee which is limited to (a) a specific amount or category of amounts (such as all amounts owing under a specific loan) plus other amounts (such as interest and recovery costs) or (b) the value of a specified property or other asset under a specified security at the time of recovery.

Foreign lenders

There are technical restrictions on the foreign ownership of Australian assets and companies set out in Australia's foreign investment legislation, namely the Foreign Acquisitions and Takeovers Act 1975 (Cth). Foreign lenders and foreign entities taking the benefit of security over Australian assets should consider the possible application of this legislation, which is administered by FIRB. Notification to FIRB and FIRB approval may be required in some cases before a foreign entity takes or enforces security. Particular issues arise for foreign government investors upon enforcement. 
There is a fairly broad ‘moneylender’ exemption for lenders. In simplified terms, if security over Australian assets is held in the ordinary course of carrying on a business of lending money and solely by way of security for the purposes of a 'moneylending agreement', the moneylender exemption will generally apply. This exemption also applies to the acquisition of an interest in an Australian asset arising by way of enforcement of a security interest held solely for the purposes of a moneylending agreement.

A moneylending agreement is defined as:

• an agreement entered into in good faith, on ordinary commercial terms and in the ordinary course of carrying on a business (a moneylending business) of lending money or otherwise providing financial accommodation, except an agreement dealing with any matter unrelated to the carrying on of that business; and
• for a person carrying on a moneylending business, or its subsidiary or holding entity, an agreement to acquire an interest arising from a moneylending agreement as described above.

Where the exemption applies, notification and FIRB approval are not required when taking or enforcing the security.

There are limits on how long the foreign government investors may hold onto an interest upon enforcement. For these investors, the moneylender exemption requires in effect that, if its interest is acquired by way of enforcement of a security, that interest must disposed of, or a genuine sale process commenced, within six months of the acquisition (or 12 months in the case of an authorised deposit-taking institution). If this does not occur, separate FIRB approval is required. The concept of 'foreign government investor' is broadly defined and potentially easily triggered. For example, it could include a trustee of a trust in which a foreign government holds a substantial interest and general partner of a limited partnership in which a foreign government holds (alone or with associates) at least a 20% interest (or 40% or more where there is more than one foreign government).

Failure to obtain FIRB approval, if required, could give rise to penalties, an unwinding of the transaction or an order for the disposal of assets.

Critical infrastructure

If the security is taken over a ‘critical infrastructure asset’, which includes approximately 200 electricity, gas, water and port assets, then a secured creditor may have reporting obligations under the Security of Critical Infrastructure Act 2018 (Cth) if it is in a position to directly or indirectly influence or control the asset.

The main issues involved in a company granting any downstream, upstream or cross-stream guarantee/security in respect of any obligation of a company belonging to the same group concern the existence of a valid and direct corporate benefit for that subsidiary. Under Belgian law there is no legal concept of group interest and only showing that the security would be in the interest of the group is not sufficient.

The granting of an intra-group guarantee/security must also fall within the corporate purpose of that company. The corporate purpose of a Belgian company is set out in its articles of association and Belgian companies can only act within the boundaries of this corporate purpose.

In the context of a target being acquired, the target is restricted from granting guarantees or security (financial assistance) for the acquisition of its own shares. However, this can be permitted following the adoption of a particular procedure. Given the cumbersome nature of such procedure, it is not common that companies choose to comply with the procedure and they will usually structure a transaction avoiding financial assistance.

Other conditions and/or restrictions depend on the type of guarantees/security.

All security interests under Belgian law can be created by means of a private agreement, except mortgages and mortgage mandates that must be created by means of a notarial deed and, in case of a mortgage, registered at the competent mortgage registry.

General validity requirements that are applicable to all agreements

• Consent of the parties
• Capacity of the parties
• Determination of the object of the security taking (a determined or determinable asset)
• Legitimate cause (the cause of the agreement must not be prohibited by law or contrary to morals and public order)
• In the case that security is granted by an individual – restrictions on security granted without consideration and limitations resulting from the marital status (which may require spousal consent)
• In the case that security is granted by a legal entity – authorization by the competent bodies, conformity with corporate interest, no violation of specific restrictions (eg financial assistance rules or prohibition on ‘misuse’ of corporate assets

Specific validity requirements

• Mortgages – formal notarial deed, secures a specific amount, must accurately define the mortgaged real estate
• Register pledge – all moveable assets, tangible and intangible, in whole or in part, can be pledged by private agreement (a register pledge will be valid between the parties to it from the date it is concluded but, in order to be valid and enforceable against third parties, the pledge should be registered in the yet to be established National Pledge Register)
• Pledge over receivables – effected by private agreement (under Belgian law, a pledge over receivables is valid between parties and enforceable against third parties (other than the debtor of the receivables) as from the date of its conclusion; in order to be valid and enforceable against the debtors of the receivables the debtors must be notified of the pledge)
• Pledge over bank account – an acknowledgement by the bank holding the pledged accounts is required in order to protect the pledgee against risks arising out of rights afforded to the bank pursuant to its standard account terms and conditions or otherwise
• Pledge over shares – articles of association must be reviewed, may contain restrictions to the granting of a pledge over shares; pledge needs to be registered in the shareholders register of the company

Some of the key areas affecting the giving of guarantees and security are as follows.

General comments

The creation of a security interest (in rem guarantee) is a very formal procedure under Brazilian law. In order for it to be valid and enforceable in Brazil, the underlying obligation being guaranteed and, if such obligation is related to, or part of, a more complex transaction, the transaction as a whole must be considered legal, valid and binding under the relevant applicable laws. If the underlying obligation, the transaction generally or just elements of the transaction are not valid, the guarantee or security is also invalid. Additionally, the security agreement must comply with certain conditions (which are considered below) and the parties to it must perform all required formal acts.

The conditions that a transaction (negócio jurídico – a term which includes security documents) must comply with are set out in Article 104 of the Brazilian Civil Code. The conditions concern the capacity of the parties, the existence of an object of the transaction and the form of the documents).

Capacity of the parties

Capacity relates to the power and authority of a given party to enter into a transaction. The parties to the security agreement must be properly represented and duly authorized and empowered to enter into the transaction and create a security interest over certain assets. Capacity is determined by reference to matters such as restrictions under the constitutional documents of the entity entering into the security agreement.

Object

Brazilian law prevents parties from entering into agreements in which the object is not possible or considered to be illicit under Brazilian law. An example of something that is not possible would be an agreement by two private parties to sell an asset owned by the state. An illicit object could be, for example, the exploitation of a casino in Brazil.

Form and other requirements

Security agreements must follow a form established or not forbidden under Brazilian law in order to be capable of being enforced in Brazil. For example, Article 1,452 of the Brazilian Civil Code and Article 127 of the Public Registries Law require that a pledge of shares be constituted by means of a written agreement (private or public) duly registered in the competent Registry of Documents and Deeds in Brazil.

Furthermore, the security agreement must be drafted in order to comply with the other formal requirements of Brazilian law, such as including a detailed description of the assets being pledged and the main financial terms and conditions of the obligation being secured, including:

• the principal amount of the debt;
• the repayment dates; and
• the applicable interest rate.

Economic benefit

In addition to the formalities for the creation of a security interest, the economic benefit generated or a commercial justification for the granting of such security interest by a given issuer of a security interest will have to be analysed. Although this aspect would not generally affect the validity or enforceability of the security agreement, if there is no economic benefit for the guarantor there is a risk of claims being filed by interested third parties, such as minority shareholders or other creditors of the guarantor upon the bankruptcy of the guarantor, as explained below.

Minority shareholders

As a general rule, minority shareholders of an issuer of a security interest may challenge the execution of a security agreement on the basis that the relevant transaction was not entered into in the best interests of the company. Any claim to be brought by minority shareholders on this basis would most likely relate to the fact that there was an abuse of power by the controlling shareholder and/or that the managers carried out acts that conflicted with the company’s best interests. The grounds supporting any such claim for damages placed by minority shareholders may be strengthened to the extent that the security interest is enforced.

Creditors’ claims

Creditors of an issuer of a security interest may also challenge the execution of a security agreement if the transaction is not justifiable from an economic or commercial point of view. A Brazilian court will take into account the current credit strength (ie solvency) and the outstanding indebtedness of the guarantor when considering this issue.

Some of the key areas affecting the giving of guarantees and security are as follows.

Capacity

It is important to check the constitutional documents of a corporation giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors’ powers that would be preventative. Canadian creditors generally rely on the legal opinions of debtors’ counsel as to capacity and the enforceability of loan agreements and ancillary documents.

In Québec, the Civil Code of Québec provides various obligations pertaining to the right to grant a security, notably depending on whether the grantor is an individual or a business entity.

Insolvency

Guarantees and security may be at risk of being set aside under Canadian insolvency laws and under provincial fraudulent preference/conveyancing laws if the guarantee or security was granted by a corporation within a certain period of time prior to the onset of insolvency. This would be the case if the corporation giving the guarantee or security received considerably less consideration and, as such, the transaction was at an undervalue. Guarantees and security may also be challenged on other grounds relating to insolvency.

Yes.

According to the Chilean Civil Code, the agents acting on behalf of an entity shall act within the limits of its mandate. If the agent acts without sufficient power of attorney the principal shall not be obliged toward third parties by acts or agreements entered into by agent.

In addition, corporate authorizations in some cases are needed. For example, in order to guarantee third party obligations, and if the guaranteed obligation exceeds 50% of the corporation´s assets, an extraordinary shareholders' meeting must be held to approve the transaction. However, if the company is a subsidiary, board of director approval is sufficient.

Guarantees are commonly used in transactions where the borrower is a special purpose vehicle, a shell company or a vehicle with a limited balance sheet that is part of a group of companies that may provide stronger financial support. In this case, a parent guarantee or a guarantee from one or more affiliates is common.

Guarantees are generally created by a written agreement between the guarantor and the secured creditor.

Some of the key areas affecting the giving of guarantees and security are as follows.

Capacity

It is important to check the constitutional documents of the company giving a guarantee/security to ensure that it is duly established and determine whether there are any requirements to obtain a prior separate resolution of shareholders for such a guarantee or security. All directors must be registered in the Commercial Register and act in accordance with such Commercial Register.

Insolvency

A guarantee or security must be granted by the company that has received adequate consideration. If this is not observed, the guarantee/security may be at risk of being contested in the bankruptcy proceedings. A guarantee or security may also be challenged on other grounds relating to insolvency.

Financial assistance

For private companies it is possible to provide financial assistance for the purchase of its own shares. This is regulated in the Czech Republic (since 2014) by the Act on Business Corporations and Act on Credit Unions and arises from the Directive No. 2012/30/EU and Regulation No. 575/2013 from the 26 June 2013.

Under Finnish law, a security interest shall be validly and bindingly given and established, provided that the following four requirements have been met:

• a pledge agreement between the parties;
• competence to give the pledge (i.e. security);
• an underlying obligation which is to be secured by the security; and
• the applicable perfection measures having been taken.

From these requirements, we would especially highlight requirements the second and last (ie competence and perfection measures) as worthy of consideration. When these four requirements are met, the pledge constitutes a valid and binding obligation of the party giving the security.

The following points should also be considered.

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' powers that would be preventative. In some cases, it would also be advisable to request a copy of the decision of the board of directors (or an extract of it), in which it was decided to enter into the transaction in question. If it is not within the company’s capacity to enter into a security agreement, but such an agreement is entered into regardless, the agreement shall be binding unless the counterparty knew, or it ought to have known, that the signatories were acting against their capacity. It should also be noted, that Section 1 of Chapter 13 of the Companies Act states how a limited liability company may distribute it assets. According to this section, any distribution of assets which is contrary to the provisions of the Companies Act, constitutes unlawful distribution of assets. Under the Companies Act, distribution of assets includes all transactions which might affect the company's liquidity. Further, under the Companies Act, a company must always ensure that entering into any transaction is in the best interest of the company.

Insolvency

In insolvency proceedings any security given may be set-aside if the provisions of the Recovery Act are met. Under Section 14 of the Recovery Act, a security may be set-aside if:

• the security was given for an already existing debt obligation; or
• if the relevant perfection measures were not taken without undue delay.

It is further required under both the above-mentioned situations that the security was given within three months prior to the beginning of the insolvency proceedings (or within two years for connected parties). It should be noted that any security given (and the related agreements) may also be subject to proceedings under alternative provisions of the Recovery Act to those listed here.

Financial assistance

Under the Companies Act it is unlawful for a limited liability company, including both private and public companies to provide financial assistance for the purchase of its own (or its holding company's) shares. Financial assistance in this context would include giving a guarantee or security in connection with the share purchase.

Natural person

If security or a guarantee is given by a natural person, there are some specific mandatory requirements which need to be taken into consideration. For example, under applicable legislation, the natural person must be given sufficient information about the pledge or the guarantee by the beneficiary.

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security and relevant provisions of French law applicable to it in order to check:

• whether such a transaction is within its corporate objects (objet social);
• who are the persons entitled to bind the company towards third parties (ie the legal representatives of the company);
• whether any corporate approval is required prior to the execution of the relevant security document by its legal representatives (In international transactions, even if not expressly requested by the articles of association of the company, it is market practice to request that resolutions be taken by a corporate body of the company so as to confirm that the transaction is useful to the implementation of its corporate object (utile à la réalisation de son objet social) and in its corporate interest. Compliance with corporate interest is a matter of fact and requires a careful review, in particular regarding any upstream or cross-stream guarantee or security provided by a subsidiary to its parent or sister company.); and
• the security document constitutes a regulated convention (conventions réglementées), as defined under French law and, as the case may be, the articles of association of the company. (Depending on the legal form of the company, French law provides for specific procedures to be complied with in the case of agreements entered into between, for example, the company and any of its shareholders holding more than 10% of its share capital. Specific advice should be sought on a case-by-case basis.)

Execution by same authorized representative

Pursuant to article 1161 of the French Civil Code (Code civil), where the same physical person acts as authorized representative of one or several other physical persons party to the same agreement, this may lead to the nullity of the said agreement, unless expressly approved or ratified by the represented physical persons. The scope of this provision has been clarified pursuant to a law n°2018-287 dated 20 April 2018 and no longer encompass the representations of companies.

Insolvency

Hardening period (période suspecte)

Under French law, security interests granted to secure previously existing debts are null and void if they are granted during the hardening period (période suspecte) (ie the period from the date the pledgor became insolvent up to the date of the opening judgement, the duration of such period being up to 18 months prior to the date of the opening judgement).

Disproportionate security interests

In the event of insolvency proceedings being opened against a company, if guarantees and security interests granted in favor of a creditor are disproportionate to the loan granted or credit extended to the company, the security interests of such creditor may be challenged and such guarantees and security interests may be nulled or reduced by a French judge.

Financial assistance

It is unlawful for any société anonyme and société par actions simplifiée to advance funds, grant loans or provide a security or a guarantee for the purpose of enabling a third party to acquire or subscribe its shares. However, the financial assistance rules do not apply to:

• operations carried out by credit institutions and finance companies in the normal course of their business;
• operations carried out for the purpose of the acquisition or subscription by employees of shares of the company, of one of its subsidiaries or of a company coming within the scope of a group savings plan (plan d'épargne de groupe) as provided by article L.3344-1 of the French Employment Code (Code du Travail); and
• any security or guarantee provided for any part of the debt which is not used to acquire or refinance the acquisition or subscription of shares.

Some of the key areas affecting the giving of guarantees and security are as follows.

Insolvency

Under German insolvency laws the fulfilment of a debt, the granting of collateral or enabling a counterparty to obtain such fulfilment or collateral may be contested by the insolvency administrator if the guarantee or security was granted by a company within certain periods of time (suspect periods) prior to the filing of insolvency proceedings against such company. This would be the case if, for example, the granting of collateral was made during the three months prior to the request to open insolvency proceedings, the company was illiquid on the date of the transaction, or the creditor was aware of his insolvency on this date (section 130 of the German Insolvency Act (Insolvenzordnung)). Awareness of circumstances indicating insolvency or to a request to open insolvency proceedings are deemed equivalent to awareness of insolvency or of the request to open insolvency proceedings. Guarantees and security may also be challenged on other grounds relating to insolvency. Outside of insolvency proceedings, transactions and payments of the company may be contested by creditors under the Avoidance of Transactions Act (Gesetz über die Anfechtung von Rechtshandlungen eines Schuldners außerhalb des Insolvenzverfahrens – AnfG) which provides rights to creditors similar to those of an insolvency administrator in insolvency proceedings.

Financial assistance/upstream security

Pursuant to German statutory law on capital maintenance requirements, a limited liability company (Gesellschaft mit beschränkter Haftung – GmbH) may, in general terms, only grant upstream security to its shareholders to the extent it has free reserves in its balance sheet. Free reserves are roughly equal to the total assets minus total liabilities and provisions, minus stated share capital. The principle also applies to the general partner in a partnership in the form of a GmbH and Co. KG. A stock corporation (Aktiengesellschaft – AG) may not grant upstream security at all. Exemptions apply under domination and profit transfer agreements and to payments which are covered by a full claim to counterperformance or restitution against the shareholder. In order to achieve compliance with the relevant statutory law, so called 'limitation language' has to be introduced in the relevant finance documentation.

Accessory security interests

Accessory security interests that depend on the existence of the underlying secured claim, such as guarantees and pledges must be granted to and held by each secured creditor and are automatically terminated and released by operation of mandatory German law upon satisfaction of the underlying secured claim. This can be an issue in certain cases, for example syndicated loans or, in case of the transfer of a lender's rights and obligations under a loan agreement, by way of novation. For such cases parallel debt structures have been established by the market.

Parallel debt structure

Non-accessory security interests (that exist irrespective of a secured claim, such as security assignment, security transfer or land charge) can be held by a security agent for the benefit of the secured parties as trustee under German law (Sicherheitentreuhänder). For more information, see Lending and borrowing. 

With respect to accessory security interests, such as guarantees and pledges, the standard technique used for sharing security between various creditors under syndicated loans is by the use of a parallel debt structure. With this structure, a second claim is created for the benefit of the security agent as an abstract acknowledgment of debt in the amount of the original payment obligations under the loan agreement (Parallel Debt). As the creditor of the Parallel Debt, the security agent can then hold and administer the accessory security. Provisions in an inter-creditor agreement or collateral agency agreement usually stipulate that the security agent acts on the instructions of the other secured parties. Please note that, although the Parallel Debt structure is commonly used in the market and generally accepted in German legal doctrine, its validity has never been tested by the German courts.

Floating charges

The concept of a floating charge is not recognized as a matter of German law.

There are no statutory restrictions on the giving or taking of security. There may, however, be contractual restrictions such as negative pledges or requirements to obtain consent from counterparties to certain agreements. 

Some of the key areas affecting the giving of guarantees and security are as follows.

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and that there are no restrictions on the directors' powers that would be preventative.

Insolvency

Guarantees and security may be at risk of being set aside under the insolvency laws of Hungary if the guarantee or security was granted by a company within a certain period of time prior to the onset of insolvency.

Under Hungarian law, the creditor, and on behalf of the debtor, the liquidator may file for legal action before the court within 90 days from the time of gaining knowledge or within a one-year limitation period from the date of publication of the notice of liquidation to contest certain contracts entered into by the debtor prior to the onset of insolvency.

Financial assistance

Public companies limited by shares may provide financial assistance to third parties for the acquisition of shares issued by the public company limited by shares only under market conditions, from the assets available for the payment of dividends and provided that the general meeting has approved such decision by at least a three-quarters majority upon recommendation by the management board. No financial assistance restrictions apply for other corporate forms.

Capacity

The constitutional documents of a corporate borrower should be examined to ensure that it has the power into the guarantee or security.

It should be noted that the constitution of an LTD company does not contain an objects clause and, subject to other applicable laws, LTDs have the same capacity as a natural person.

Corporate benefit

Under Irish law, directors have a general duty to promote the success of the company for the benefit of its members as whole; as such, they will need to be able to show that adequate corporate benefit is derived from the company giving a guarantee or security. This is often more difficult in the case of upstream or cross-stream guarantees or security provided by a subsidiary to its parent or sister company. The prudent approach is often to have the members of the company approve the giving of the guarantee or security by resolution.

Financial Assistance

Under Irish law (Section 82 of the Companies Act 2014), it is not lawful for a company to provide financial assistance (this definition is broadly drafted and can be by way of a loan, security, guarantee or otherwise) for the purposes of the acquisition made or to be made by any person of shares in that company, or where the company is a subsidiary, in its holding company, unless one of the statutory exemptions apply or the company has availed of the “summary approval procedure” (a statutory procedure provided for in the Companies Act 2014) The rationale for the prohibition is the preservation of the company’s capital and shareholder and creditor protection.

Where the financial assistance is being given by a company that is a private company, it can avail of the ‘summary approval procedure’, which validates the giving of financial assistance by the company. This requires (amongst other things) that the directors of the company make a declaration that in their opinion the company will be able to pay its debts and liabilities in full as they fall due in the 12 months following the giving of the financial assistance.  If a company enters into a transaction in contravention of Section 82, the transaction will be voidable at the instance of the company against any person (whether a party to the transaction or not) who “had notice of the facts” that constitute such contravention. If a company contravenes Section 82, the company and any officer (e.g. directors, company secretary, etc.) of the company who is in default shall be guilty of an offence under the Companies Act 2014.

Unfair Preference

Any payment or other transfer of property (including security) by a company within six months of its insolvent winding up in favor of any creditor with a view to giving such a creditor a preference over other creditors, shall be deemed an unfair preference. The six-month period extends to two years where such creditor is a “connected person.” If a transaction is held to be an unfair preference, a liquidator or receiver of the company may recover the money paid or property transferred to the creditor, or may have the security set aside.

Improper Transfer

Where a company is being wound up, a liquidator or creditor of or contributory to such company can apply to court to have a disposition (which includes security) set aside, and for the return of the assets the subject of the disposal, where the disposition had the effect of perpetrating a fraud on the company, its creditors or its members. There is no time limit within which an improper transfer can be challenged.

Invalid floating charge

 A floating charge created within the period of 12 months before the commencement of the winding-up of a company will be invalid except to the extent of monies actually advanced or paid, or the actual price or value of goods or services sold or supplied, to the company at the time of or subsequent to the creation of, and in consideration for the charge, or to interest on that amount at the appropriate rate or unless the company was solvent immediately after the creation of the charge. The 12 month period is extended to 2 years where the floating charge is created in favour of a ‘connected person’.

Recharacterization of fixed charges

Fixed charges (e.g. on bank accounts) can be re-characterized as floating charges if the requisite prohibition on dealing with the account and the monies therein is not adequately provided for in the relevant security document notice to the account bank.

Some of the key areas affecting the granting of guarantees and security are as follows.

Capacity/Corporate Benefit

It is important to check the constitutional documents of a company granting a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' powers that would be preventative. Under Italian law, directors have a general duty to promote the success of the company for the benefit of its members as whole; as such, they will need to be able to show that adequate corporate benefit is derived from the company giving the guarantee or security. This is often more difficult in the case of upstream or cross-stream guarantees or security provided by a subsidiary to its parent or sister company.

Provided that the assessment of a corporate benefit is a matter of fact depending on a number of commercial and financial factors to be evaluated by the management body of the grantor of the guarantee and/or security, the market approach is often to have the members of the company approving the granting of the guarantee or security by written resolution and, if possible, to limit the guaranteed/secured amount to the direct monetary benefit arising to the issuer/grantor of the upstream or cross-stream guarantees or security (for example, the maximum guaranteed/secured amount would not exceed the amount of the intra-group/shareholders' loans made available to the issuer/grantor by the entity in the interest of which the upstream or cross-stream guarantees or security is issued/granted).

Insolvency

Guarantees and security may be at risk of being set aside under Italian insolvency laws if the guarantee or security was granted by a company within a certain period of time prior to the declaration of bankruptcy (dichiarazione di fallimento). For such a transaction to be set aside, certain statutory criteria would have to be met, including that the guarantee or security was given within six months (or one year in the event that the underlying guaranteed obligation was not undertaken prior to (and not at the same time as) the issue/granting of the guarantee/security) of the declaration of bankruptcy (dichiarazione di fallimento) of the affected party.

In case of mortgage lending transactions governed by Section 38 of the Consolidated Banking Act (the so called ‘Credito Fondiario’ providing for certain requirements and limitations for the lenders in the selection of the remedies against the borrower in case of default), the period within which the mortgage assisting the financing may be set aside is reduced to 10 days.

Financial assistance

Financial assistance is subject to stringent regulation and limitations and it is therefore quite rare in the market to encounter a company providing financial assistance for the purchase of its own shares as a complex “whitewash” procedure is required in order to legally carry out such a transaction. Financial assistance in this context would include giving a guarantee or security in connection with the share purchase.

There are some restrictions on key areas affecting the giving of guarantees and security.

Capacity

Capacity or the power of a company in such an area is to be assessed on the basis of the constitutional documents of the company granting a guarantee or security. Such giving of guarantees and security have to be approved by a resolution of the board of Directors of the company.

Insolvency

Guarantees and securities may be declared void in situations provided for under the Uniform Acts.

Acts done by the debtor during the suspicion period from the date of suspension of payments to the date of the decision to open proceedings shall as of right be non-binding or may be declared non-binding on the body of creditors as defined under Article 72 of the Uniform Act on Collective Proceedings for Debt Clearance.

The following shall as of right be non-binding on the body of creditors if and when they are done during the suspicion perios: any conventional mortgage or conventional pledge, any constitution of pledge, granted on the debtor's property for debts previously contracted, any provisional registration of a conservatory judicial mortgage or a conservative judicial pledge.

Financial assistance

A company is prohibited from purchasing its own shares. Managers are prohibited from contracting, under any form whatsoever, loans from the company, obtaining an overdraft on a current account or otherwise from the company or making the company endorse or guarantee their commitments towards third parties.

This prohibition shall also apply to spouses, ascendants and descendants of the persons referred to above, including any intermediary through whom these persons act.

Some key areas affecting giving and taking of guarantees and security are as follows.

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the powers of directors that would otherwise restrict the provision of security. For instance, a decision to borrow and/or to give a guarantee in respect of a significant amount must be made by the board of directors and may not be entrusted to any individual director. Furthermore, a transaction giving rise to a conflict of interest (such as a guarantee by a company for the obligations of its directors) must be approved by the board of directors, with the director in conflict abstaining from the vote on the relevant resolution. Each director of a company owes the duty of care of a good manager and a duty of loyalty to the company. As such, a director must be able to demonstrate that adequate corporate benefit is derived from the giving of a guarantee or security.

Insolvency

Guarantees and security may be at risk of being set aside under Japanese insolvency laws if they are:

• provided with little or no consideration within six months of or after the company's suspension of payment;
• provided after the company becomes unable to pay its debts generally and the creditor is aware of the suspension of payment or the company's inability to pay its debts generally; or
• provided after the application for commencement of bankruptcy proceedings and the creditor is aware of such application.

Guarantees and security may also be challenged on other grounds relating to insolvency.

Provision of profit

A company may not provide any benefit to its shareholders in relation to or in connection with the exercise of shareholder rights by a shareholder.

Obligation of a lender taking a guarantee from an individual

A lender taking a guarantee from an individual is required to use credit information held by a designated credit bureau to verify the individual's credit worthiness. However, the Total Volume Control lending requirement (that the amount of total lending against the individual's annual salary must be one third or less) does not apply to guarantees given by an individual.

Upstream guarantees

Upstream guarantees are possible. However, if there is no adequate consideration for or corporate benefit derived from such guarantee, a breach of the directors' duties would be an issue.

Some of the key areas affecting the giving of guarantees and security are as follows.

Capacity

It is important to verify the constitutional documents of an entity giving a guarantee or granting security to ensure it has an express (or ancillary) power to do so and that giving a guarantee or granting security is not a (shareholder) reserved matter. If the provision of a guarantee or security exceeds the corporate object of the entity, it will still be bound to third-parties (ultra vires), unless there is evidence that the beneficiary of such act knew that the acts exceeded the corporate object of the entity or could not, in the light of the circumstances, have been unaware of that fact.

Corporate interest

The entry into the guarantee or security must be in the interest of the entity, which is a subjective and factual concept. The corporate interest must be assessed on a case-by-case basis by the board of the entity. The granting of a guarantee or security interest for the obligations of its parent (upstream) or its sister companies or affiliates (cross stream) is often more difficult. The concept of 'group of company' is not recognized as such and the interest of the group is not sufficient to justify the granting of upstream or cross-stream guarantees/security interests. Therefore, the Luxembourg entity giving the cross stream or upstream guarantee/security interest should:

• have some personal interest in granting such assistance (notably through the expected benefits) and act independently from third party considerations;
• take a commensurate risk in regard of the benefit deriving from the operation; and
• not face a financial exposure exceeding its financial means.

It is standard to include a guarantee limitation to address this issue, except for security interests which are deemed to be limited per se.

Financial assistance

It is unlawful for certain companies to provide financial assistance for the acquisition of its own shares by a third party. A whitewash procedure is envisaged by the Luxembourg law on commercial companies dated 15 August 1915, as amended from time to time, but it is rarely applied in practice.

Insolvency

Contractual commitments and guarantees are affected by the opening of insolvency proceedings. In case of such opening of insolvency proceedings secured/guaranteed creditors are registered as members of the general body of creditors. The Law of 5 August 2005, on financial collateral agreements, as amended from time to time, institutes however a framework whereby:

• Luxembourg or foreign bankruptcy and pre-bankruptcy rules are excluded in respect of financial collateral arrangements.
• Immunity from annulment risks in bankruptcy proceedings applies to collateral arrangements governed by the Law of 5 August 2005, on financial collateral agreements, as amended from time to time and to similar collateral arrangements governed by foreign law (provided that the collateral provider is established or resident in Luxembourg).
• There is primacy of financial collateral arrangements over (certain) foreclosure measures.

There are restrictions pertaining to the type of entity taking the security and the type of property which may be given as security.

Some of the key areas affecting the giving of guarantees and security are as follows.

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the signatories’ powers that would prevent them from executing such documents.

Insolvency

Guarantees and security may be at risk of being set aside under Mexican insolvency laws if the guarantee or security was granted by a company with a certain period of time prior to the onset of insolvency (fraudulent conveyance). This would be the case if the company giving the guarantee or security received considerably less consideration, and as such, the transaction was at an undervalue. For such a transaction to be set aside, certain statutory criteria would have to be met, including that the guarantee or security was given within 270 calendar days prior to the declaration of insolvency of the affected party (or 540 calendar days for inter-company claims). Guarantees and security may also be challenged on other grounds relating to insolvency.

Financial assistance

The concept of unlawful financial assistance is not recognized in Mexico. However, fair consideration, corporate benefit, arms-length transactions and related concepts are relevant, particularly in insolvency situations.

Corporate benefit rules

The granting of downstream guarantees and security interests by a parent company to secure a loan to its subsidiary would generally be valid.

Capacity

The creation of a guarantee or security by a company implies that the latter has the ability to act on it, regarding its corporate documents and provisions applicable under Moroccan law.

In particular, the following conditions must be met:

• the act must fall within the company's corporate purpose;
• the act must not be contrary to the social interest of the company;
• authorization given by the competent corporate bodies of the company to conclude the act;
• power of the signatory;
• where applicable, compliance with the regime of regulated agreements.

Insolvency

The court could cancel any provision of a guarantee or security when it is made by the debtor after the date on which payments are suspended.

Financial assistance

The principle of prohibition of financial assistance is the prohibition on a company financing or guaranteeing the purchase of its own shares.

Some of the key areas affecting the giving of guarantees and security are as follows.

Perfection pledges over moveable assets and receivables which are pledges on a non-disclosed basis need to be registered with the Dutch tax authorities in order to become effective. Pledges over receivables pledged on a disclosed basis need to be notified to the relevant debtors concerned, whereas mortgages over real estate and registered vessels and aircraft need to be registered with the Dutch registrable property registry (kadaster).

When receivables are pledged on a non-disclosed basis, the debtor remains entitled to validly discharge the debt by paying the pledgor (as opposed to the pledgee) until the debtor has received notification of the pledge.

Guarantees have essentially three forms under Dutch law, ie joint and several liability (whereby all debtors are obliged, as their own debt, to pay the relevant obligations concerned), a suretyship (whereby a debtor guarantees the performance of the obligations of another person) and an abstract guarantee (being a guarantee payable on demand, irrespective of the existence of any underlying obligation).

Some of the key areas affecting the giving of guarantees and security are as follows.

There are no general restrictions in New Zealand on the giving and taking of guarantees. Guarantees are usually taken in the form of a deed, with appropriate witnessing, to avoid the need for the guarantor to receive consideration or benefit in order to enforce the guarantee.

Lender responsibility principles

Lender responsibility principles exist when giving and taking guarantees in relation to a consumer credit contract. Every creditor that takes a guarantee of a consumer credit contract has disclosure obligations to the guarantor as part of this obligation.

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' powers that would be preventative. Under New Zealand law, directors have a general duty to promote the success of the company for the benefit of its members as whole; as such, they will need to be able to show that adequate corporate benefit is derived from the company giving the guarantee or security. This is often more difficult in the case of upstream or cross-stream guarantees or security provided by a subsidiary to its parent or sister company. The safe approach is often to have the members of the company approve the giving of the guarantee or security by resolution.

Insolvency

Guarantees and security may be at risk of being set aside under New Zealand insolvency laws if the guarantee or security was granted by a company or individual within a certain period of time prior to the onset of insolvency. This would be the case if the company giving the guarantee or security received inadequate consideration, and as such, the transaction was at an undervalue. For such a transaction to be set aside, certain statutory criteria would have to be met, including that the guarantee or security was given within two years of the onset of insolvency of the affected party. Guarantees and security may also be challenged on other grounds relating to insolvency.

Major transactions

In respect of companies incorporated in New Zealand, if the amount guaranteed is greater than half the value of the gross assets of the company, the approval of 75% of the shareholders of the company is generally required before the grant of the guarantee, unless the grant is conditional on later approval in that manner.

Financial assistance

It is unlawful for a company to provide financial assistance for the purchase of its own (or of its holding company's) shares unless relevant shareholder and director approvals are obtained and a certificate from directors relating to solvency given. Financial assistance in this context would include giving a guarantee or security in connection with the share purchase.

Guarantees

Guarantees are extensively used in Norway, and can be considered as a highly heterogeneous instrument. Guarantees may be issued by both private individuals/companies, credit institutions and public entities. They may guarantee both existing and future liabilities. The underlying claim may be a claim for money, contribution in kind or performance. Norwegian law recognizes the concept of on-demand guarantees. Recent court practice suggests, however, that careful structuring of on-demand instruments will be required to ensure their enforceability.

In the event that the guarantee is provided by a consumer in favor of a finance institution as the beneficiary, certain mandatory rules set out in the Financial Contracts Act of 1999 will apply. These rules contain:

• certain information requirements applicable to the beneficiary before entry into the guarantee;
• an obligation to dissuade the guarantor (if required);
• requirements in respect of the specific content of the guarantee document (eg information on the maximum guaranteed amount);
• certain notification requirements of the beneficiary (eg when security is not furnished as premised, in the event of default and deferral of payment); and
• restrictions in respect of when the guarantee may be enforced (The beneficiary may not make a claim against the guarantor until legal steps have been initiated to obtain a basis for enforcement against the principal. As a result of this, a consumer may not grant a traditional on-demand guarantee or an unconditional guarantee where the beneficiary is a financial institution.).

The same rules are applicable for non-consumer guarantees where the beneficiary is a financial institution (regardless of the type of guarantee provided). However, most of these rules are non-mandatory and routinely waived in guarantee agreements.

The guarantee must:

• be entered into in writing;
• contain details of the size of the maximum guaranteed amount; and
• contain information in respect of mortgages or other security for the beneficiary's claim, whether the guarantee shall encompass older debt, and, if so, whether the principal has defaulted on such debt, as well as other circumstances which the guarantor in accordance with honesty and good faith is entitled to be informed of.

General rules in respect of contractual invalidating factors also apply to guarantees and securities.

Note also that Norwegian company law contains financial assistance restrictions. Section 8-7 of both the Private Limited Liability Companies Act of 1997 and the Public Limited Liability Companies Act of 1997 (together the Limited Liability Companies Acts) limit a Norwegian limited liability company's right to grant credit and security (including guarantees) for the benefit of its shareholder or a party closely related to a shareholder or for the benefit of a shareholder of another company in the same group or any of its closely related entities. Such guarantees may only be granted:

• within the limits of the assets which the company may legally use for distribution of dividends (free equity); and
• only if adequate security is furnished for the claim for repayment or recovery.

The restrictions described above apply to a company's right to issue security for the benefit of a member of the board of directors, general manager or a member of the corporate assembly of the company or another company within the same group of companies, or any of their related parties, with certain exceptions in respect of issuing security for the benefit of employees.

There are, however, certain other important exceptions from the restrictions discussed above where:

• the security is of customary duration in connection with commercial agreements;
• the security is provided for the benefit of the parent company or another company within the same (Norwegian) company group;
• the security is granted in favor of a legal person that has controlling interest over the company, or in favor of a subsidiary of such legal person, provided that the credit or security shall serve the group's economic interests; or
• the security is granted for the benefit of a shareholder (owning less than 5% of the share capital in private companies and less than 1% in public companies) or related parties when the debtor is employed with the company or another company of the same group, such employment is his main occupation and the security is granted in accordance with customary rules for financial assistance to employees.

Pursuant to section 8-10 of the Limited Liability Companies Acts, a company may only provide security (hereunder provision of a guarantee) in connection with a third party's acquisition of shares or a right to shares in the company or the company's parent company within the scope of the funds that the company may use for distributing dividend and only if certain formal requirements are met, such as approval from the general meeting with 2/3 majority and satisfactory security for the recourse claim.

Exceptions to this restriction may be granted by regulations or individual decisions made by the King.

A transaction in violation of the financial assistance restriction is null and void, however, such invalidity may not be asserted against a counterparty in good faith. In extreme cases, a violation of the financial assistance restrictions may lead to criminal charges.

As guarantees are frequently granted from one company on behalf of other companies in the same group, the formal procedures set out in section 3-8 of the Limited Liability Companies Acts are of relevance. As a general rule, agreements between a company and its shareholders, the parent of the company's shareholders, or a person closely related to these, will not be binding upon the company unless the agreement is approved by a shareholders' meeting of the company.

In addition to this, there are also further formalities which must be complied with, such as:

• the requirement of a formal statement from the board of directors containing, inter alia, a declaration that the compensation that the company receives by providing the guarantee corresponds reasonably with the value of providing the guarantee (and a confirmation from the company's auditor regarding the same); and
• registration of the transaction in the Norwegian Register of Business Enterprises.

There are certain important exceptions from the main rule, such as agreements that are entered into in the course of the ordinary business of the guarantor on customary terms and conditions (eg cash pooling arrangements), agreements where the guarantor's consideration has a real value below 1/10 of its share capital (1/20 for public companies) and guarantees issued by a guarantor which is a 100% owned subsidiary of the legal person In favor of whom the security is granted, provided, however, that the security is given to serve the group's financial interests.

The main risk of non-compliance with section 3-8 is that the agreement (ie the guarantee) may be deemed void and not binding on the company, and any performance according to such an agreement shall be returned.

Pursuant to section 3-9 of the Limited Liability Companies Acts, transactions between companies of the same group shall be based on customary business terms and principles. To the extent that the value of the benefit/payment received by a Norwegian limited liability company in providing a guarantee does not correspond with the value of contribution provided by the company, such transactions may also be considered illegal distribution of dividends pursuant to the Limited Liability Companies Acts section 3-6. The consequence of an illegal distribution is that the distribution must be reversed, ie the guarantee will be invalid (with a reservation for a receiving party in good faith). An illegal contribution may also be subject to claims for compensation for loss or criminal sanctions.

It should be noted that even though interest expenses, as a general rule, are tax deductible, certain limitations apply to interest relating to intra-group loans, and guarantees and security granted in favor of a closely related entity.

Security

By agreement, a mortgage may be validly created only where authorized by the Mortgage/Liens Act of 1980 or other statue. In addition, a mortgage may not be validly attached as a whole to all the present and future property of the mortgagee.

When a right cannot be assigned, or can be assigned only on certain conditions, the same limitation applies in respect of attaching a lien to the right. However, one may always pledge the shares in a limited liability company unless the contrary is stipulated in the company's articles of association.

If a person owns only parts of an asset, this part may be pledged, but only if it is pledged in its entirety (ie if the person owns 50% of a property, then the entire 50% must be pledged).

A mortgage must set out the maximum amount (in Norwegian Krone, or in foreign currency for which a stock exchange rate is normally quoted in Norway) secured by such mortgage and is perfected by registration in a register of real property or in the movable property register.

Please see the rest of this answer in respect of guarantee limitations for further restrictions that apply equally to taking security.

Some of the key areas affecting the giving of guarantees and security are as follows.

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' or attorneys'-in-fact powers that would be preventative. Under Peruvian law, directors have a general duty to promote the success of the company for the benefit of its members as whole. Directors will need to be able to show that adequate corporate benefit is derived from the company giving the guarantee or security. A safe approach is often to have the shareholders or authorized members of the company approve the giving of the guarantee or security by resolution.

Insolvency

Guarantees and security may be at risk of being set aside under Peruvian insolvency and bankruptcy laws if the guarantee or security was granted by a company within a certain period of time prior to the onset of insolvency. This would be the case if the company giving the guarantee or security received considerably less consideration, and as such, the transaction was at an undervalue. For such a transaction to be set aside, certain statutory criteria would have to be met, including that the guarantee or security was given within one year of the onset of insolvency of the affected party. Guarantees and security may also be challenged on other grounds relating to insolvency.

Some of the key areas affecting the giving of guarantees and security are:

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security, as they often provide that corporate authorization is required in connection with granting a guarantee or security.

Actio pauliana

If a third party has gained a benefit as a result of a legal transaction effected by a debtor to the detriment of its creditors (ie where the debtor became insolvent or became insolvent to a greater extent as a result of the transaction), each of the creditors may demand that the transaction be recognized as ineffective, if the debtor consciously acted to the creditors' detriment and the third party knew or with due diligence could have known about it (and it is alleged that the third party knew that the debtor acted to the creditors' detriment, if the third party remains in a permanent or close economic relationship with the debtor) or the third party obtained the benefit free of charge.

Insolvency and restructuring

Guarantees and security may be at risk of being set aside under Polish insolvency and restructuring laws if the guarantee or security was granted by a company a certain period of time prior to the onset of insolvency or restructuring proceedings.

Financial assistance

A joint-stock company may, directly or indirectly, finance the acquisition of or subscription for the shares that it issues, in particular by making loans, providing advance payments, or creating security, provided that the financing is granted on market terms and after the solvency of the debtor has been checked, the acquisition or subscription is for a fair price, the financing is made from the reserve capital created by the company for that purpose, and the financing is based on and is within the limits set out in an earlier resolution of the general assembly of the company. In the case of a limited liability company, the shareholders may not receive, under any title, any payments from the company's assets needed to fully finance the share capital.

Some of the key areas affecting the giving of guarantees and security are as follows.

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' powers that would be preventative. Under Portuguese law, directors have a general duty to promote the success of the company for the benefit of its members as whole; as such, they will need to be able to show that adequate corporate benefit is derived from the company giving the guarantee or security. This is often more difficult in the case of upstream or cross-stream guarantees or security provided by a subsidiary to its parent or sister company. The safe approach is often to have the members of the company approve the giving of the guarantee or security by resolution.

Insolvency

Guarantees and security with a determined term prior to the onset of insolvency may be at risk of being set aside under Portuguese insolvency laws. Guarantees and security might also be challenged on other grounds relating to insolvency.

Purchase of own shares

It is unlawful for a public company to grant loans or issue guarantees or to provide financial assistance for the purchase of its own shares (however the law expressly provides for limited exceptions).

Some of the key areas affecting the giving of guarantees and security are as follows.

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' powers that would be preventative. The safe approach is often to have the members of the company approve the giving of the guarantee or security by resolution.

Insolvency

Guarantees and security may be at risk of being set aside under Federal bankruptcy laws if the guarantee or security was granted by a company with a certain period of time prior to the onset of insolvency. Insolvency proceedings in Puerto Rico are of the exclusive jurisdiction of the United States Bankruptcy Court.

Security interest

Puerto Rico and US states apply statutes derived from Article 9 of the Uniform Commercial Code (UCC) for constituting a security interest over personal property. Article 9 of the UCC governs security interests in personal property as collateral to secure a debt. While Article 9 does not govern security interests in real property, it does cover fixtures to real property. Security interests in real property are secured by a mortgage and governed by the Real Property Act. In order to create a security interest a security agreement must be executed. In order to perfect a security interest, generally a financing statement has to be filed at the Puerto Rico Department of State, unless it is a fixture filing, which is filed at the corresponding Real Property Registry, or a security over titled automobiles which are filed with the Puerto Rico Department of Transportation and Public Works.

Some of the key areas affecting the giving of guarantees and security are as follows.

Corporate benefit and misuse of corporate assets

Upstream or cross-stream guarantees or security usually raise corporate benefit issues under Romanian law. Each guarantor or security provider must receive a real and adequate corporate benefit from assuming such guarantee obligations. Additionally, the absence of any corporate benefit may be construed as a lack of cause for the guarantee or security, with the risk of the respective guarantee or security agreement being invalidated on these grounds. Corporate benefit is, however, a matter of fact assessed on a case-by-case basis by the courts.

Furthermore, the directors or officers and the (founding) shareholders of a Romanian company are criminally liable if they intentionally misuse the assets (including moneys or loans) of the company for a purpose contrary to the company's interest or in its own interest or in order to favor another company in which such persons have a direct or indirect interest. As a consequence, if there is a misuse of corporate assets, the related transactions may also be invalidated.

Prohibition from securing loans granted to directors

Romanian law prohibits a (joint-stock) company to conduct credit activities to the benefit of its directors through various operations, including through the creation of security aimed at securing, totally or partially, any loans granted to the respective director(s). The same prohibition applies to operations in which the respective directors' spouses, certain relatives or in-laws are interested, as well as in case the security is granted to another company with which it shares one (or more) directors (or the directors which are relatives) or to any companies in which such a person is director or manager, or holds 20% or more of the share capital. Transactions may be invalidated for this reason and there may be also criminal sanctions. There are certain exemptions from this prohibition provided by Law No 31/1990 on companies.

Insolvency

Insolvency proceedings may have various impacts on receivables which are preferred by law and rank above any other receivables (eg privileges, mortgages, pledge over assets of the insolvent debtor) and the creditors which have such type of receivables. By way of example, following the commencement of insolvency proceedings, all court and out-of-court actions or enforcement measures for the settlement of claims over the debtor are suspended by operation of law. Also, security created for a prior, existing, but unsecured receivable, within the six month period prior to the opening of insolvency proceedings may be invalidated. Similarly, fraudulent acts committed by a debtor during the two years preceding the commencement of insolvency proceedings may also be invalidated.

Financial assistance

According to Law No 31/1990 on companies, a (joint-stock) company cannot create any security in favor of another party in order for such other party to acquire that company's own shares. Breach of this rule renders the guarantee null. Such prohibition is not applicable to transactions carried out in the ordinary course of business of credit institutions or any other financial institutions or to transactions carried out with a view to acquiring shares by or for that company's employees, provided that such transactions do not trigger the reduction of the net assets of the company below the aggregated value of the subscribed share capital and the reserves that cannot be distributed according to law or constitutive act.

Corporate approvals

The borrower should ensure that it has in place all necessary corporate approvals taken at the approval level required by its articles of association and other applicable corporate decisions setting forth the competences of its corporate bodies. In practice, these are either a shareholders' resolution or a board decision. In case of a joint-stock company, a shareholders' resolution is mandatory if the facility exceeds 50% of the book value of the assets of the respective joint-stock company.

As a matter of Russian law, a guarantee is not regulated separately – it is one form of security which shares common features with other forms of security.

Some of the key areas affecting the giving of security are as follows.

Form of a contract

Granting security that breaches certain mandatory form requirements specified by the law will lead to its invalidity. The requirements differ depending on the type of the security. For example, a pledge of a participation interest must be notarized, while agreement on penalty must be in writing regardless the form of the primary obligation.

Insolvency

For a period after a new security interest has been granted (known as the hardening period), security may be at risk of being set aside under Russian insolvency laws if the security was granted within a certain time period prior to the insolvency of a company and a company received considerably less consideration for it or if a deal was made with the purpose of prejudicing the property rights of the creditors. Another ground for setting security aside is where the court qualifies the deal as leading to preference of one creditor over the other creditors.

Subsequent pledge

Pursuant to recent changes to the law, a subsequent pledge cannot be prohibited by the first ranking pledge agreement. However, if a first ranking pledge agreement specifies the terms on which a subsequent pledge is to be concluded, the breach of such terms entitles the first ranking pledgee to claim from the pledgor compensation of any losses incurred by such breach.

There are some restrictions on key areas affecting the giving of guarantees and security.

Capacity

The capacity or power of a company to grant a guarantee or security is to be assessed on the basis of its constitutional documents. Such granting of guarantees and security have to be approved by a resolution of the company’s board of Directors.

Insolvency

Guarantees and securities may be declared void in situations provided for under the Uniform Acts.

Acts done by the debtor during the suspicion period from the date of suspension of payments to the date of the decision to open proceedings shall, as of right, be non-binding or may be declared non-binding on the body of creditors as defined under Article 72 of the Uniform Act on Collective Proceedings for Debt Clearance.

The following shall, as of right, be non-binding on the body of creditors if and when they are done during the suspicion period: any conventional mortgage or conventional pledge, any constitution of pledge granted on the debtor’s property for debts previously contracted, any provisional registration of a conservatory judicial mortgage or a conservative judicial pledge.

Financial assistance

A company is, in principle, prohibited from purchasing its own shares. Managers are prohibited from contracting, under any form whatsoever, loans from the company, obtaining an overdraft on a current account or otherwise from the company or make the company endorse or guarantee their commitments towards third parties.

This prohibition shall also apply to spouses, ascendants and descendants of the persons referred to above, including any intermediary through whom these persons act.

Some of the key areas affecting the giving of guarantees and security are as follows.

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' powers that would be preventative. Under Singapore law, directors must act bona fide for what they consider to be in the best interests of the company and not for any collateral purpose; as such, they will need to be able to show that adequate corporate benefit is derived from the company giving the guarantee or security. This is often more difficult in the case of upstream or cross-stream guarantees or security provided by a subsidiary to its parent or sister company. The safe approach is often to have the members of the company approve the giving of the guarantee or security by resolution.

Insolvency

Guarantees and security may be at risk of being set aside under Singapore insolvency laws if the guarantee or security was granted by a company with a certain period of time prior to the onset of insolvency. This would be the case if the company giving the guarantee or security received considerably less consideration, and as such, the transaction was at an undervalue. For such a transaction to be set aside, certain statutory criteria would have to be met, including that the guarantee or security was given within six months (or two years for connected parties) before the presentation of a winding-up petition. Guarantees and security may also be challenged on other grounds relating to insolvency.

Financial assistance

It is unlawful for a public company to provide financial assistance for the purchase of its own (or of its holding company's) shares unless a whitewash resolution is obtained from the shareholders. The prohibition against financial assistance for private companies whose holding company or ultimate holding company is not a public company was abolished on 8 October 2014. Financial assistance in this context would include giving a guarantee or security in connection with the share purchase.

Some of the key areas affecting the giving of guarantees and security are as follows.

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security to confirm whether it is duly established, and whether a separate resolution of the shareholders is not required in order to duly provide such guarantee or security. The safe approach is often to have the shareholders of the company approve the giving of the guarantee or security by resolution. Furthermore, it is necessary to ensure that the directors of the company act on behalf of the company in compliance with the way of acting prescribed by the constitutional documents and way of acting registered in the Commercial Register.

Insolvency

Guarantees and security may be at risk of being contested in bankruptcy proceedings, if the guarantee or security was granted by a company without adequate consideration, caused the debtor's bankruptcy or made during the debtor's bankruptcy and granted during one year prior to the initiation of bankruptcy proceedings. If it is a legal act without adequate consideration made in favor of a party related to the debtor, it is also possible to contest the guarantee or security made during the three years prior to the initiation of bankruptcy proceedings.

Some of the key areas affecting the giving of guarantees and security are:

Financial assistance

When providing a guarantee or security for the obligations a related or inter-related company the guarantor or security provider must be able to comply with the financial assistance provisions and solvency and liquidity requirements as contemplated in the Companies Act. The Companies Act considers the entry into of a guarantee and/or the provision of security for the obligations of a related or inter-related company as the provision of financial assistance. Financial assistance may only be provided if the shareholders of the company, as a first step, have passed a resolution authorizing the provision of that financial assistance, in particular, or financial assistance generally. In order for a company to provide financial assistance, the shareholders of that company must have passed such a shareholder resolution within the preceding two years.

As a further step, the directors of the company will need to pass a separate resolution authorizing the provision of the financial assistance and confirming that the company will comply with financial assistance provisions as contemplated in the Companies Act which require the directors to confirm that:

• the guarantor's/security provider's assets (fairly valued) exceed its liabilities (fairly valued);
• the guarantor/security provider will be able to pay its debts as they fall due for the 12 months; and
• the terms under which the financial assistance is proposed to be given are fair and reasonable to the company.

Distributions

The companies act includes, in its definition of a distribution, the incurrence of a debt or other obligation by a company for the benefit of one or more holders of any of the shares of that company or of another company within the same group of companies. The provision of a guarantee or security by a company in respect of the obligations of a company within the same group of companies would therefore be classified as a distribution. Accordingly, the company providing that guarantee and/or security will need to comply with the applicable provisions of the Companies Act and the directors of that company will need to pass a resolution confirming that, at the time if the provision of such guarantee and/or security:

• the guarantor's/security provider's assets (fairly valued) exceed its liabilities (fairly valued); and
• the guarantor /security provider will be able to pay its debts as they fall due for the 12 months.

Capacity

The guarantor's/security provider's constitutional documents must make provision for that guarantor/security provider to enter into a guarantee and/or provide security for the obligations of a related party or a third party;

Agency

For information regarding the provision of security in favor of an agent, see Lending and borrowing – agency and trusts.

Some of the key areas affecting the giving of guarantees and security are as follows.

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' powers that would be preventative. The safe approach is often to have the directors of the company approve the giving of the guarantee or security by resolution. Likewise, if the guarantee or the security is going to encumber an asset which is considered as ‘essential’ for the relevant company (an asset shall be considered as essential if its value exceeds 25% of the total value of the assets of the company according to the latest approved balance sheet), the approval of the shareholders' must be also obtained by resolution.

Fiduciary duties

Although Spanish law does not recognize a legal concept of ‘corporate benefit’, there might be a breach of fiduciary duties by the directors of a Spanish company giving a guarantee or security to the extent that the transaction pursuant to which the guarantee or security is given is not found to result in the ultimate corporate benefit of the company (the referenced directors must act diligently and loyally in the best interest of the company (i.e., judgement business rule and risk/benefit approach) and, in any case, in accordance with any applicable laws and the company's by-laws).

Insolvency

Pursuant to the Spanish Insolvency Law, any agreement entered into by a Spanish company within the two-year period preceding the adjudication of bankruptcy may be set aside by the relevant insolvency court if the insolvency officials can prove that it was detrimental to the insolvent estate

Upstream restrictions

Spanish private limited liability companies (sociedades de responsabilidad limitada) cannot grant loans, issue guarantees or provide financial assistance in favor of shareholders or directors, unless such transactions have been authorized on a case-by-case basis at the shareholders' meeting.

Financial assistance

Under Spanish law, the scope of the financial assistance prohibition varies depending on the corporate nature of the relevant company:

• a public limited liability company (sociedad anónima) may not advance funds, grant loans, grant guarantees/security or provide any kind of financial assistance whatsoever for the acquisition of its shares or of the shares of its parent companies (sociedades dominantes).
• a private limited liability company (sociedades de responsabilidad limitada) may not advance funds, grant loans, grant guarantees/security or provide any kind of financial assistance whatsoever for the acquisition of its shares or of the shares of any of its group companies.

Breach of financial assistance regulations may result in fines for the directors of the company granting the guarantee or security, and may also result in the guarantee or security or the relevant underlying transaction being deemed void. Any objection to the financial assistance must be invoked by the shareholders (usually minority shareholders) or the company’s creditors.

As a general rule, the Swedish Companies Act 2005 (Aktiebolagslagen (2005:551)) provides that all transactions of a Swedish limited liability company must provide commercial benefit for the company. In evaluating what constitutes commercial benefit, several factors shall be considered. This is primarily a factual matter rather than a legal one and it is the responsibility of the board of directors to ensure that commercial benefit accrues to the company.

Some of the key areas affecting the giving of guarantees and security are as follows.

Insolvency

If a company becomes insolvent, any guarantees and security given by the company may become worthless as the company will not have the monetary power to support its commitment, and they would be susceptible to being challenged in bankruptcy proceedings.

Financial assistance

The Swedish Companies Act 2005 (Chapter 21, Section 5) stipulates an absolute prohibition on the provision of advances, loans or security for the purposes of assisting in the acquisition of shares in the company providing the assistance or any parent company in the same group of companies. However, ‘group’ in the context of financial assistance, means a group where the parent company is Swedish.

General upstream restrictions

The Swedish Companies Act 2005 further stipulates that a Swedish limited liability company may not provide loans, guarantees or security to or for the benefit of anyone owning, directly or indirectly, shares in the company (including instances of cross/side-stream debt or security). The most notable exception to this rule is the group exception which provides that upstream loans and security are permitted where the debtor/beneficiary is a company in the same group as the company lending the funds or granting security. ‘Group’ in this context means a group of companies where the parent is a legal entity domiciled in the EEA.

A further exception to the upstream restrictions is where an upstream loan, or security, is provided exclusively in relation to the parent's business operations and the company lending the funds or providing the security does so for purely commercial reasons.

Swedish law is largely silent on how commercial reasons and commercial benefit should be assessed. However, by way of example, it would generally be possible to demonstrate commercial reasons and commercial benefit where loans are made or security is provided to an entity which is important for the lending or charging company's business. This may be the case if a loan is made to a servicing company (providing certain services to the lending company) or a group's primary trading company. A government ruling has clarified though that inter-company lending in the form of cash-pooling should be allowed and is thus considered a commercial benefit and reason.

Value transfer

In addition to the restrictions described above, it should also be noted that enforcement of upstream security in Sweden is always subject to certain restrictions which aim to protect the restricted equity of the company. Depending on the conditions on which security is given, it may be considered a value transfer to the shareholders of the company. As such, it will only be enforceable if and to the extent that:

• it is equal to or less than the unrestricted shareholders' equity (free capital reserves) of the relevant company at the time of the granting of security; and
• it is justifiable in view of the amount of equity and cash required for the running of the company's business, having due regard to the type, size and risks of the business.

The Swedish Companies Act 2005 (Aktiebolagslagen (2005:551)) provides that anyone who has received a payment which was not made in accordance with the foregoing must repay those funds.

Some of the key areas affecting the giving of guarantees and security are as follows.

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' powers that would be preventative. Under Thai law, directors have a general duty to apply the diligence of a careful businessman in their conduct of the company's business; as such, they will need to be able to show that adequate corporate benefit is derived from the company giving the guarantee or security or that such guarantee or security granted as it is necessary in the course of ordinary business of the company and the best interests of the company. The safe approach is often to have the members of the company approve the giving of the guarantee or security by resolution, however, shareholders are generally able to ratify the actions of the company directors. Thai law does not prohibit upstream guarantees and therefore guarantees may be provided by a subsidiary to guarantee the performance of its parent company obligations provided such action is contemplated in the company's objectives.

Insolvency

Guarantees and security may be at risk of being set aside under Thai insolvency laws if the guarantee or security was granted by a company within a certain period of time prior to the onset of insolvency. This would be the case if the company giving the guarantee or security received considerably less consideration, and as such, the transaction was at an undervalue. If such undervalued transaction is made within the period of one year prior to the insolvency petition or after that, it can be revoked. If the company provides security with an aim to give advantage to one creditor over other within three months before the insolvency petition or thereafter, such security can be revoked. If fraudulent motive can be shown, the company and/or its directors may be liable for a fine and / or imprisonment.

Some of the key areas affecting the giving of security are as follows.

Capacity

It is important to check the constitutional documents of a company giving security to ensure it has power to do so and there are no restrictions on the directors' powers. Ukrainian law does not recognize the 'corporate benefit' concept. Under corporate law, certain transactions (including the granting of security) are subject to corporate approval by a company's shareholders/participants or the board of directors at a general meeting.

Insolvency

Security may be at risk of being set aside under Ukrainian insolvency law if the security is granted by a company within a certain period of time prior to the onset of insolvency. This would be the case if the company giving the security received considerably less consideration, and as such, the transaction was at an undervalue. For such transactions to be set aside, certain statutory criteria needs to be met, including the requirement that security has been given within three years prior to the onset of insolvency of the affected company. Security may also be challenged on other grounds relating to insolvency.

Financial assistance

This applies to certain types of legal entity including banks and joint-stock companies. For example, banks are not allowed to extend loans to third parties for the purposes of acquiring the bank's shares or any third party bank's shares (this includes subordinated loans to banks). Joint-stock companies are also not allowed to lend funds (including the granting of security) for the purposes of acquiring their shares or securities.

Some of the key areas affecting the giving of guarantees and security are as follows.

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' powers that would be preventative. Under English law, directors have a general duty to promote the success of the company for the benefit of its members as whole; as such, they will need to be able to show that adequate corporate benefit is derived from the company giving the guarantee or security. This is often more difficult in the case of upstream or cross-stream guarantees or security provided by a subsidiary to its parent or sister company. The safe approach is often to have the members of the company approve the giving of the guarantee or security by resolution.

Insolvency

Guarantees and security may be at risk of being set aside under England & Wales insolvency laws if the guarantee or security was granted by a company within a certain period of time prior to the onset of insolvency. This would be the case if the company giving the guarantee or security received considerably less consideration, and as such, the transaction was at an undervalue. For such a transaction to be set aside, certain statutory criteria would have to be met, including that the guarantee or security was given within six months (or two years for connected parties) of the onset of insolvency of the affected party. Guarantees and security may also be challenged on other grounds relating to insolvency.

Financial assistance

It is unlawful for a public company to provide financial assistance for the purchase of its own (or of its holding company's) shares. The prohibition against financial assistance for private companies was abolished on 1 October 2008. Financial assistance in this context would include giving a guarantee or security in connection with the share purchase.

Some of the key areas affecting the giving of guarantees and security are as follows.

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' powers that would be preventative. Under Scots law, directors have a general duty to promote the success of the company for the benefit of its members as whole; as such, they will need to be able to show that adequate corporate benefit is derived from the company giving the guarantee or security. This is often more difficult in the case of upstream or cross-stream guarantees or security provided by a subsidiary to its parent or sister company. The safe approach is often to have the members of the company approve the giving of the guarantee or security by resolution.

Insolvency

Guarantees and security may be at risk of being set aside under Scottish insolvency laws if the guarantee or security was granted by a company with a certain period of time prior to the onset of insolvency. This would be the case if the company giving the guarantee or security received considerably less consideration, and as such, the transaction was at an undervalue. For such a transaction to be set aside, certain statutory criteria would have to be met, including that the guarantee or security was given within six months (or two years for connected parties) of the onset of insolvency of the affected party. Guarantees and security may also be challenged on other grounds relating to insolvency. Note that where a guarantee is given to a related company, the circumstances in which it can be set aside are far wider and, in particular, there is no requirement in these circumstances that the chargor was insolvent at the time the guarantee was given.

Financial assistance

It is unlawful for a public company to provide financial assistance for the purchase of its own (or of its holding company's) shares. The prohibition against financial assistance for private companies was abolished on 1 October 2008. Financial assistance in this context would include giving a guarantee or security in connection with the share purchase.

Some of the key areas affecting the giving of guarantees and security are as follows.

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' powers to do so. In general, the directors'/managers' duties requirements under the Companies Law require the directors/manager to ‘preserve’ the company's rights which is similar to the English law requirement that directors act in the best interests of the company. However, provided that the giving of a guarantee or the granting of security is considered to be in the best interests of the group as a whole, there should be no issues from a directors' duties perspective. This should be recorded in the authorizing resolutions when the security is granted.

Public joint-stock company (PJSCs)

Special care needs to be taken if a PJSC is granting security or giving a guarantee. Article 154 of the Companies Law requires directors to have express powers to enter into mortgages (over moveable and immoveable property). Consequently, a separate shareholders' resolution will be required if such express powers are not already provided in, for instance, the company's constitutional documents. Although the legislation would appear to capture LLCs as well, it was clarified by a 2016 Ministerial Decision that this requirement does not apply to LLCs.

In addition, there is a broad prohibition on PJSCs providing financial assistance for the purchase of its own (or of its holding company's) shares. It is important to note that there is no ‘whitewash’ procedure available of the type seen in other jurisdictions.

Insolvency

Guarantees and security may be at risk of being set aside under the UAE Insolvency Law if granted by a company within a certain period of time prior to the onset of insolvency.

No concept of trust

There is no concept of trust as exists in common law jurisdictions and the use of a local security agent holding security for the benefit of lenders through a parallel debt mechanism has become market practice (although has not been tested by the courts).

Notarization

With respect to security over certain assets (such as share security taken with respect to certain companies), it is necessary that the signing of the security is notarized in front of a UAE notary public. In order to notarize the signing of a document, the notary public will generally require all relevant documents (such as constitutional documents of the grantor, required board or shareholder resolutions and licenses to be translated into Arabic, notarized in the relevant jurisdiction of the shareholders and then legalized both in the country of the shareholder and then brought onshore and stamped by the Ministry of Justice).

Below are some of the key areas affecting the giving of guarantees and security.

Capacity

It is important to check the law of the state in which the company is organized, as well as the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' powers that would be preventative.

Consideration

Many state statutes require that the guarantee be in furtherance of the company’s purpose and that the company receive a benefit in exchange for providing such guarantee. This is often more difficult in the case of upstream or cross-stream guarantees or security provided by a subsidiary to its parent or sister company. The safe approach is often to have the members of the company approve the giving of the guarantee or security by resolution. Some state statutes also provide a safe harbor if the company and borrower are part of the same corporate group.

Insolvency

Guarantees and grants of security may be at risk of being set aside under US bankruptcy laws if the guarantee or security was granted by a company that was insolvent at the time of such grant and the company received less than reasonably equivalent value for the guarantee. Guarantees and security may also be challenged on other grounds relating to insolvency.