Guarantee as a Regulated Deployment
Section 186 covers “giving a guarantee or providing security in connection with a loan taken by any person or body corporate”. The guarantee is counted in the aggregate of loans, guarantees, securities, and investments for the purpose of the 60%/100% limit. A company that treats a guarantee as a contingent liability outside the Section 186 computation will overstate its headroom and may approve a guarantee that crosses the ceiling without the required special resolution.
The Board Resolution Is Always Required
Every guarantee covered by Section 186 requires a board resolution before it is issued, irrespective of amount. The resolution should identify the beneficiary, the underlying loan, the guarantee amount, the tenor, the security or counter-security, and the Section 186 headroom after the guarantee. A board resolution that merely “approves the execution of a guarantee in favour of a bank” without identifying the underlying exposure is inadequate for Section 186 purposes.
When the Special Resolution Is Triggered
The special resolution is triggered when the aggregate of loans, guarantees, securities, and investments exceeds the prescribed limit. Because a guarantee is included in the aggregate at its face value, a single large guarantee can push a company over the limit even if its loan book is modest. The special resolution must be passed before the guarantee is issued. A “conditional” guarantee issued pending shareholder approval is a guarantee issued without approval.
Guarantee for a Subsidiary
The exemption for a loan to a wholly owned subsidiary does not automatically extend to a guarantee for that subsidiary’s borrowings. The statutory text exempts loans, guarantees, and securities in respect of a wholly owned subsidiary from the special resolution requirement, but the board resolution and the interest-floor discipline remain. For a joint venture or an associate, the exemption is unavailable and the aggregate test applies in full.
The Section 185 Overlap
A guarantee for a loan taken by a director or a person in whom the director is interested is governed by Section 185, not merely Section 186. Section 185(1) prohibits such a guarantee unless the special resolution gateway under Section 185(2) is satisfied. Advising on a guarantee therefore requires two separate inquiries: is the beneficiary a director-interested person under Section 185, and does the guarantee fit within the Section 186 aggregate? A single special resolution that recites both sections without separate recitals is weak documentation.
Guarantee Register and Disclosure
The company should maintain a guarantee register recording the beneficiary, the underlying lender, the amount, the validity period, the security held, and the board or shareholder approval reference. The financial statements must disclose the guarantees outstanding, and the board’s report should explain the commercial purpose. A guarantee that is not in the register but appears in the bank’s records creates an unexplained exposure in the company’s books.
Enforcement and Subrogation
On enforcement, the company steps into the shoes of the lender by subrogation. The board should record the enforcement event, the amount paid, and the recovery proceedings against the principal borrower. A guarantee enforced without a prior board note on the subrogation strategy weakens the company’s position in subsequent recovery litigation.
Call to Action: For corporate guarantee approval structuring or Section 186/Section 185 overlap review, contact office@anujdesaiassociates.com or 9619456656. Website: https://anujdesaiassociates.com. LinkedIn: linkedin.com/in/ca-anuj-desai-122547230.