A corporation seeking to borrow funds is often unable to provide a prospective lender with independent assurance that it will repay the indebtedness. Consequently, the lender may require a loan guarantee1 from a third party before extending credit to the corporate borrower. More specifically, the lender may request guarantees of repayment from the borrower's principal shareholders, parent corporation, subsidiary corporations, or affiliated corporations. Inter corporate guarantees5 are a common means of assuring a lender that its loan will be repaid. Nevertheless, reliance on intercorporate guarantees does not eliminate all risks to the lender. In addition to the clear possibility that the guarantor may not possess sufficient assets to satisfy its obligation if and when the borrower defaults, there is a risk that the guarantor may avoid its obligation in bankruptcy because guarantees are obligations subject to avoidance as fraudulent conveyances under sections 548 and 544(b) of the Bankruptcy Code (“Code”).
Scott F. Norberg,
Avoidability of Intercorporate Guarantees Under Sections 548(a)(2) and 544(b) of the Bankruptcy Code
, 64 N.C.L.REV. 1099
Available at: http://ecollections.law.fiu.edu/faculty_publications/234