What is a Section 357 Guarantee?
An Irish private company which is a subsidiary in a group is exempted from having to publicly file its annual financial statements in the Irish Companies Registration Office (CRO) where certain conditions are met. The main condition is that there is in force, for the whole of the relevant financial year, an irrevocable guarantee from the parent company of the subsidiary which covers all commitments entered into by the subsidiary including all amounts shown as liabilities in the financial statements of the subsidiary in respect of that financial year (the "Section 357 Guarantee"). Where a Section 357 Guarantee is in place, the subsidiary must instead append the consolidated group financial statements to its annual return that is publicly filed in the CRO. Section 357 of the Companies Act 2014 (the "Act") has been amended with the effect that the requisite parent guarantee is wider than that previously required.
Previously, the parent company was required to give a guarantee in respect of "all liabilities shown in the financial statements" of a subsidiary. This guarantee is non-specific as to addressee and so could be relied upon by any creditor whose debt is included in the liabilities shown in the financial statements. Typically, the guarantee is put in place after the relevant financial year end but in respect of the full financial year and is attached to the annual return filed in the CRO. Consequently, when approving the giving of the guarantee in respect of the just completed financial year, the directors of the parent knew that the amount being guaranteed was effectively capped at the total amount of liabilities shown in the financial statements for that year.
Guarantee extended to "all commitments entered into" by the subsidiary
Directors of parent undertakings should be aware that Section 357 has been amended (by Section 55 of the Companies (Accounting) Act 2017 which was introduced into Irish law on 9 June 2017). As a result of the amendment, the guarantee must now be given in respect of not just "all liabilities shown in the financial statements" of the subsidiary for that financial year, as had previously been the case, but also for "all commitments entered into" by the subsidiary. These commitments, if any, might not necessarily be included in the liabilities shown in relevant financial statements.
The full wording of the relevant part of Section 357 is as follows:
"There is in force in respect of the whole of that financial year an irrevocable guarantee by the holding undertaking of all commitments entered into by the company, including amounts shown as liabilities in the statutory financial statements of the company in respect of that financial year." (emphasis added)
This new requirement applies to any financial year which commenced on or after 1 January 2017. The change has introduced a level of uncertainty as to what exactly is to be covered by the requisite guarantee as the term "commitments" is not defined in the Act. There is a view that as Section 357 now refers to all commitments that have been "entered into" by the subsidiary, this would capture contractual commitments entered into by the subsidiary and that contingent tortious liabilities would not be within scope. However, this has not yet been tested. In addition, it is not clear that the reference to "all commitments" entered into is limited to commitments entered into during and accruing in respect of the relevant financial year being reported on. It is open to interpretation as to whether the guarantee now extends to commitments arising from contracts entered into in that financial year but which continue to accrue after the relevant financial year, for example, a guarantee given by the subsidiary company in respect of the commitments of its subsidiary/branch entering under a new lease agreement.
In light of this change, the directors of parent companies should, before a Section 357 Guarantee is put in place, consider whether there are any "commitments entered into" by the subsidiary which are not covered in the liabilities shown in the financial statements of that year and, if so, whether these are material and would affect the decision to give such a guarantee.