Module 3 · Chapter 7

The Guarantor, the Group and the Negative Pledge

A bank that lends to a parent company wants something from its subsidiary too, and wants no other lender ahead of it. This chapter shows how the Debenture and the loan papers deal with both.

≈ 11 min read 8-question test

In this chapter

  • What the Bank holds from Tooling, and where that puts it if Tooling fails
  • Why a subsidiary's directors must record a benefit to it before they sign
  • How the negative pledge keeps other lenders out, and the one exception the Company kept

7.1A loan to a group in one paragraph

The Bank lends to the Company, which owns all the shares in Tooling and can reach Tooling's value only through them. If Tooling fails, its own creditors are paid first from its assets: the landlord, the suppliers and the staff. Only what is left goes to the shareholder, and so to the shareholder's lender. Lawyers call this structural subordination.

Key point

A lender to a parent stands behind the subsidiary's creditors because of where it sits in the group. Everything the Bank took from Tooling is an answer to that.

Also in this chapter

  1. What the Bank holds from Tooling
  2. Why Tooling's directors must record a benefit
  3. Why the shareholder approves the guarantee too
  4. Why financial assistance does not arise here
  5. Why a lender with everything fears one more charge
  6. What gives the promise force
  7. Permitted Security: the one exception
  8. Your job

Preview

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