Section 479 of the Companies Act 2006 exempts certain subsidiary companies from audit if the parent company provides a guarantee under s479C. This type of guarantee is probably better known from an audit perspective but is useful for lenders and IPs to be aware of when it comes to group company clients.

The subsidiary will be exempt from audit if, amongst other technical requirements, the parent company (which must be established under the law of any part of the UK) i) gives a statutory guarantee of the subsidiary’s outstanding liabilities in respect of the financial year in question and ii) includes the subsidiary company in its consolidated accounts drawn up for the same year.

Certain subsidiary companies are not eligible for the exemption, for instance insurance companies or certain regulated companies (see the Companies Act 2006 for more details here). However, for groups of limited companies, out with these regulated sectors, the exemption from audit (and the associated parent company guarantee) is, in certain situations, available.

The guarantee has the effect that:

1) the parent undertaking guarantees all the outstanding liabilities of the subsidiary company covered by the guarantee at the end of the financial year in question until they are satisfied in full; and

2) the guarantee is enforceable against the parent undertaking by any person to whom the subsidiary company is liable in respect of those liabilities.

The guarantee itself is a statutory form which is registered at Companies House and no separate guarantee document needs to be prepared and signed.

The exemption from audit was introduced in October 2012 and it’s fair to say that the uptake has been much lower than expected, possibly because of the requirement for the parent company guarantee, but perhaps also due to a lack of awareness.

So why is this important for you?

As a lender to a group company customer, it is a potential additional piece of collateral in your security package, depending on the structure of lending and where the assets sit within the group. With the turn of the new year, it’s certainly worth a spring clean of your due diligence and adding in a check at Companies House when you’re onboarding a new group company customer to check whether there is a guarantee registered. Likewise with existing customers, for any that fall into the bracket of group companies, it is worth undertaking fresh checks to make sure the records of your security package are up to date.

And for Insolvency Practitioners, it is worth adding to the already lengthy checklist of due diligence you undertake when accepting new appointments. This type of guarantee means that creditors have another route for recovery and could open up the pool of available assets for realisation, thereby making a better return for all creditors in the event of insolvency of the subsidiary. Again, with the new year coming in, It is worth a refresh of your existing portfolio of cases to review whether there are any group insolvencies which may have a guarantee of this nature in place.

Whilst it’s unlikely that this type of guarantee is going to be relevant on many of your cases, we understand that it is becoming more common, primarily due to the increase in audit costs (because of an increase in regulatory compliance). Where they do crop up, the wide nature of the obligations under the guarantee could make all the difference to a lender considering whether to take enforcement action, or whether to onboard a customer in the first place. It’s worth checking on each of your group company cases as you never know where it could appear. The new year, and the refresh that goes along with that, might mean more borrower companies look to take advantage of the audit exemption, especially in the current financial climate where every little helps.

Authors: Ainslie Benzie and Lorna McWilliams

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2024. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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Date published

10 January 2024

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