Contingent liabilities
What are contingent liabilities, and how does a lender treat them?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
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A contingent liability is an obligation that depends on something that has not yet happened — a guarantee of another company's debt, a bank guarantee or performance bond issued on the business's behalf, a legal claim, recourse on receivables it has sold. It may never become a cash outflow, which is why the accounts disclose most of them rather than record them. A lender reads the note anyway, because contingent liabilities tend to crystallise together and in bad years: the bond is called in the same quarter the loan breaches its covenants.
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.
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