Is it require to create a charge on corporate guarantee?

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Nayak (Querist)
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12 January 2015 Is it require to create a charge if one company gives corporate guarantee to other company which is obtaining loan from Bank?

Ex: Say Company A and B. Company A is obtaining loan from Bank and providing its own land as security in consideration of loan. B is giving corporate guarantee. Is it require for company B to create charge?

Aashok Kumar Sharma online

Aashok Kumar Sharma

(Expert)
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01 August 2024 Yes, it is generally required to create a charge if a company (Company B) provides a corporate guarantee for a loan obtained by another company (Company A). Here’s a detailed explanation:

### **Corporate Guarantee and Charges**

1. **Understanding Corporate Guarantee:**
- A corporate guarantee is a commitment by one company (the guarantor, in this case, Company B) to cover the debt or obligations of another company (the borrower, Company A) in case of default.

2. **Creation of Charge:**
- **For Corporate Guarantees:** Typically, providing a corporate guarantee itself does not create a charge on the assets of the guarantor company. Instead, it is a form of assurance to the lender that if the borrower defaults, the guarantor will be liable to repay the debt.
- **For Secured Loans:** If the guarantor company provides any form of security or collateral, such as assets of its own, to back the guarantee, a charge may need to be created over those assets.

### **Regulatory Requirements:**

1. **Companies Act, 2013:**
- Under Section 77 of the Companies Act, 2013, companies are required to register charges created on their properties or assets with the Registrar of Companies (ROC).
- A charge is required to be registered if a company creates a charge on its own assets to secure a debt. This is not directly applicable to just providing a guarantee unless there is collateral involved.

2. **Corporate Guarantees Without Security:**
- If Company B is only providing a guarantee without pledging any of its assets as security, then the Companies Act does not require registering a charge in this case.
- However, the guarantee and its terms must be documented and approved according to the company's board resolution and the terms set out in the agreement with the lender.

3. **Filing and Documentation:**
- Even if a charge is not required for a simple corporate guarantee, proper documentation and board resolutions are necessary to formalize the guarantee and ensure compliance with legal and regulatory requirements.

### **Key Points:**

- **Charge Creation:** Required if the guarantor provides security or collateral; not required for a guarantee alone.
- **Documentation:** Maintain proper records and resolutions for the guarantee.

### **Consultation:**

- For specific scenarios, such as whether additional requirements apply or for any changes in the law, consulting with a company secretary or legal advisor is advisable. They can provide guidance based on the latest legal provisions and the particular circumstances of the guarantee.

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