Enforcing a Cross-Company Guarantee Under s479C: Pentacle Disputes Limited v MoneyPlus Holdings Limited

Rather than awaiting the appointment of a liquidator and, more likely than not, receiving nothing, PDL took the decision to pursue proceedings against MPH to enforce the Judgment, seeking order for payment by MPH of all sums ordered (and to be ordered) in the MPL Claim.

Pentacle relied on a guarantee given by MPH pursuant to section 479A and s479C of the Companies Act 2006 in respect of the outstanding liabilities of MPL.

The provisions are as follows:

“479A Subsidiary companies: conditions for exemption from audit

1. A company is exempt from the requirements of this Act relating to the audit of individual accounts for a financial year if—
   (a) it is itself a subsidiary undertaking, and
   (b)  its parent undertaking is established under the law of any part of the United Kingdom.
2.   Exemption is conditional upon compliance with all of the following conditions—
   (a)  all members of the company must agree to the exemption in respect of the financial year in question,
   (b)  the parent undertaking must give a guarantee under section 479C in respect of that year,
   (c)  the company must be included in the consolidated accounts drawn up for that year or to an earlier date in that year by the parent undertaking… […]

 479C Subsidiary companies audit exemption: parent undertaking declaration of guarantee

1.  A guarantee is given by a parent undertaking under this section when the directors of the subsidiary company deliver to the registrar a statement by the parent undertaking that it guarantees the subsidiary company under this section.
2. The statement under subsection (1) must be authenticated by the parent undertaking and must specify—
   (a) the name of the parent undertaking,
   (b)  the registered number (if any) of the parent undertaking,
   [(c)]
   (d)  the name and registered number of the subsidiary company in respect of which the guarantee is being given,
   (e)  the date of the statement, and
   (f)  the financial year to which the guarantee relates.
3.  A guarantee given under this section has the effect that—
   (a)  the parent undertaking guarantees all outstanding liabilities to which the subsidiary company is subject at the end of the financial year to which the guarantee relates, until they are satisfied in full, and
   (b)  the guarantee is enforceable against the parent undertaking by any person to whom the subsidiary company is liable in respect of those liabilities.”

There were no prior reported cases of this guarantee being relied upon for these purposes. Accordingly, reliance had to be placed on the intention of European Parliament, UK Parliament and the various impact reports to establish the mischief and policy intended when introducing the law, as to the reach of the provisions.

One quote from the assessment report is that:

“[t]he parent company guarantee reduces the risks for creditors of the subsidiary”

Specifically in respect of potential inaccuracies in the accounts of the subsidiary, the assessment report states:

“A cost of misstatement of subsidiaries’ financial position is not a cost, as unsatisfied debts will be guaranteed by the parent”. 

Also the following concluding comments is particularly relevant:

“The decision by the Government to take up this exemption is a continuance of the historical process in the UK of such exemptions being granted by the EU and implemented in stages over a number of years by the UK to minimise the risks of systemic misstatement in the accounts of audit exempt companies, harming shareholders and third parties.”

The principle point of dispute was the meaning of “all outstanding liabilities”. PDL contended that the phrase extends to all liabilities, including contingent and prospective liabilities. By contrast, the MPH’s position was that the phrase relates only to debts subsisting, and due and payable, at the financial year end.

Given MPH’s position, that the provision in fact covered subsisting debts, PDL sought summary judgment in respect of admitted liabilities in MPH’s Defence which even on MPH’s reading, were covered by the Guarantee.