The implications of corporate guarantee are farreaching,

and its execution requires a tedious examination of facts of each case.

Guarantees, whether issued by individuals or corporates form an essential feature of doing

business and creating or receiving credit.

Guarantees are, essentially, contracts where an individual or corporate entity promises to be

responsible for the due performance of one party's obligations to a third party e.g. the
payment of a debt. This typically arises where a company guarantees that it will repay a loan
granted to its subsidiary in the event the subsidiary defaults; or where the Managing Director
of a company, in his personal capacity, guarantees the repayment of the Company's debts.
The courts have repeatedly held that where a person guarantees the liability of another, a
distinct, separate and enforceable contract, is created between the guarantor and the
creditor.

Whilst the creation of a personal guarantee and the resultant obligation is relatively easy to
prove (except where coercion or fraud/forgery is alleged) and thus enforceable without much
ado, the same cannot be said of a corporate guarantee. This is primarily because companies
are structured such that the shareholders, board of directors, and the employees all have
different roles in the management and administration of the affairs of the company. It is
therefore important that before accepting a corporate guarantee from a borrower, the
creditor must ensure that it was properly authorised and issued.

Ordinarily, the responsibility for the day to day management of a company rests with the
board of directors which is vested with all such powers of the company as are not by Law or
the articles required to be exercised by the members in general meeting. In other words, it is
only the Board that can make decisions with respect to the management of the company's
affairs or authorize any transactions involving and enforceable against the company.
Consequently, the creation or authorization of a guarantee by a company will be the result of
a decision by its Board (via a Resolution) as part of the day to day management of the
company's affairs.

For huge corporate guarantees or guaranteeing a loan taken out by a subsidiary, having the
Board's approval is best practice.

The ITAT accepted that the two quotes could not be directly compared and reasonable adjustments
would be required to be made for the effective application of the CUP method. The corporate
guarantees, given to the banks for safeguarding the interests of the AEs, are not given on
commercial consideration, unlike banks, which provide guarantees with a profit motive. For banks,
providing guarantees was in the ordinary course of their business and their charges / rates are
always on the higher side on account of the embedded profit element. Therefore, the ITAT
concluded that “naked quotes” would need to be adjusted for risks and functions and cannot be
directly compared. This judgement considered the other judgements ratio with regard to the arm‟s
length charge and reiterated the key conclusions on the selection of comparable prices for the
purpose of determining the arm‟s length price.

A Bank guarantee is given by the bank on behalf of it's customer

(applicant) to the beneficiary of the bank, that in case of non
happening of the particular event which is being covered by that
particular guarantee, the bank ( guarantor) will pay the beneficiary an
amount, which is mentioned in the guarantee, provided the beneficiary
submit the claim under the guarantee in the agreed format and within
agreed time. The claim ( compensation) under the bank guarantee will
be financial in nature.
A corporate guarantee is a guarantee given by the corporate to cover
their own exposure or exposure of some other related entity, to the
bank. It will also be financial in nature and banks derive an additional
comfort from such guarantees when they do their lending to particular
borrower