Corporate Guaranty; Intercorporate Guarantys, Guaranties

A corporate guaranty is a risk mitigation tool.  When a corporation intends to guarantee the obligations of another company or corporation, a corporate guaranty [often referred to as an inter-corporate guaranty] is created.  An inter-corporate guaranty is a contract.  This contract means that guarantor accepts the obligation to pay the creditor of the buyer fails to do so.  The guarantor becomes jointly liable for the debt. 

If a guarantee is issued by a corporation, the credit manager should always request a copy of the corporate resolution authorizing it and ensure that the official corporate seal is placed on the resolution and guarantee.  One of the most common uses of corporate guarantees is when a parent corporation guarantees the debts of its subsidiary.  Unless there is a clear benefit to the guarantor that is executing the guaranty, the guarantor could issue a defense relating to a lack of Consideration.  If accepted by the Court, this lack of consideration defense could result in the creditor not receiving payment from the guarantor.  For this reason among others, an attorney should be consulted when a creditor/seller is requesting or accepting an intercorporate guarantee.

There are several types of intercorporate guarantys.  An upstream guarantee is when a subsidiary guarantees the debt of its parent or pledges its assets as security for the debt of the parent;  a downstream guarantee is when the parent corporation guarantees the debts of its subsidiary;  a cross-stream guarantee is when a corporation guarantees the debt of an affiliate.

Edited by Michael C. Dennis.  Mr. Dennis is a business consultant.  He can be reached by email at mcdennis13@yahoo.com with questions, comments or inquiries.