The group borrows. Each company answers for itself.
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
Corporate benefit is the question a lender puts to every company that will guarantee or secure a debt it did not itself borrow: what does this company gain? The answer has to come from that company's own directors, because the law treats each company in a group as separate and their duties run to it, not to the group. A guarantee the directors could not justify can be challenged later by the company, a liquidator or an outside shareholder, often when the lender most needs it. So the lender asks for the reasoning to be written down, in the board minutes, before the money moves.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
Issue 03 — Kauri Dairy Holdings. The patriarch is retiring. The bank hears about the succession plan from the accountant first. Your call first, then the senior banker's.
A business owner sees one business. The law sees a holding company, an operating company, a property company and perhaps a company that holds the brand, each with its own assets, creditors and directors. When the group borrows, the lender wants every company with assets behind the loan. But a company that guarantees another's debt takes on a liability for money it does not receive, and its directors must be able to say why that serves the company they sit on.
The duty is framed the same way in each market. UK directors must act in the way they consider, in good faith, most likely to promote the success of the company. Directors in New Zealand and Australia must act in good faith in what they believe to be, or in, the company's best interests. Each refers to the company, not to the group. A director who signs a subsidiary's guarantee because the parent asked, without asking what the subsidiary gains, has not done what the duty requires.
Benefit is usually indirect, and directors are entitled to count indirect benefit. The reasons that recur are the guarantor's dependence on the group's funding for its own working capital and investment, its trading with group companies, the shared treasury, systems and management it would otherwise pay for, and the plain fact that its business may not survive the group's failure. A guarantee fee paid by the borrower adds a direct benefit. Against these the directors weigh the size of the guarantee beside the company's own resources and whether the company stays solvent with it in place.
Two markets give directors more room inside groups. New Zealand lets a director of a wholly owned subsidiary act in the parent's best interests if the constitution expressly permits it, and a partly owned subsidiary's director do so with the prior agreement of the other shareholders as well. Australia gives directors of a wholly owned subsidiary a similar position where the constitution authorises it, they act in good faith in the parent's interests, and the subsidiary is not insolvent and is not made so. The UK has no such provision.
The room narrows as solvency weakens. The UK Supreme Court held in 2022 that once directors know or ought to know that the company is insolvent or bordering on insolvency, they must give weight to creditors' interests; courts in Australia and New Zealand have long recognised a similar duty. A guarantee that tips a company over cannot be justified by benefit to the group.
A distribution group, constructed for this page, refinances its debt with a US$32m facility at the holding company. The lender asks three subsidiaries to guarantee it and grant security. Their positions, in figures that are the example's:
Subsidiary A is the easy case. Its own trading depends on the US$6m line inside the group facility, and the minute says so. Subsidiary B has a 20% outside shareholder, a former owner who kept a stake. Its directors cannot rely on the wholly owned provisions, and in New Zealand acting in the parent's interest would need that shareholder's prior agreement. The lender asks for the minority holder's written approval and, failing that, limits B's guarantee to a sum its directors can justify from B's own position: its warehouse is let to group companies, and the rent depends on the group surviving. Subsidiary C already has a deficit of US$2m and lives on the parent's funding. A US$32m guarantee would deepen a deficit that is already there, and its directors are in the zone where creditors' interests weigh most. The lender leaves C out and tests whether A and B carry enough of the group's earnings and assets without it.
Corporate benefit is a question about directors' duties, and it arises with any guarantee for another's debt. Financial assistance is a statutory rule about one kind of transaction: a company helping someone buy its own shares or its holding company's. In Australia and New Zealand an acquisition target's guarantee of the buyer's loan needs both answered: a whitewash or statutory procedure does not show that the target benefits, and benefit does not replace the procedure. In the UK, private companies no longer need the procedure, which leaves corporate benefit doing more of the work.
Benefit also differs from authority. Company law in each market lets an outsider assume, broadly, that a company's officers have acted properly, so a lender is not defeated by an internal irregularity it could not see. The protection is lost by knowledge: in Australia, for example, a person who knew or suspected that an assumption was wrong may not rely on it. A lender that has read the group's accounts and knows a guarantor is in deficit cannot treat the paperwork as a shield.
DEFINED IN ONE PARAGRAPH → · THE UPSTREAM GUARANTEE → · FINANCIAL ASSISTANCE →
Before drawdown, the lender's lawyers ask for each guarantor's constitution, certified board minutes, often a shareholder resolution approving the guarantee, and sometimes a director's solvency certificate. In New Zealand a guarantee whose value is more than half the company's assets can be a major transaction, which needs a special resolution of shareholders. The minutes that hold up are specific: they name what this company gains and why it remains solvent. A minute copied across ten companies with the names changed records that the directors signed, not that they thought.
The test comes later, if a guarantor fails. UK insolvency law, for example, does not set aside a transaction at an undervalue where the company entered it in good faith for its business and there were reasonable grounds for believing it would benefit the company. The board minute written at signing is the evidence of exactly that.
THE BANK'S LAWYERS AND YOURS → · CONDITION PRECEDENT → · GUARANTOR COVERAGE TEST →
The documents the statements on this page rest on. Each was opened and checked when cited.
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A company fails. One lender is secured over the plant; the other is unsecured. The receiver's realisations, after costs, are below. There are no preferential claims.
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