Cross guarantees

External parties dealing with a corporate group member may require guarantees or letters of comfort from a subsidiary's holding company, other corporate group members or the entity's director.

If a company (usually the holding company) gives a guarantee in respect of another company (usually the subsidiary), the holding company may then be liable to the external creditors of the subsidiary in the event of default. A deed of cross guarantee makes each group company who is a party to the deed liable to the external creditors of each other company in the event of company default. Creditors may also require personal guarantees to be given by the directors of the company with which the creditors have contracted.

Letters of comfort are given by holding companies to an external party who requires a written expression of the holding company's ongoing financial support for the subsidiary. Generally, letters of comfort are not enforceable undertakings but can be legally binding depending on the terms and circumstances of the letter and the companies involved.

See Cross guarantees.