Loan relationships: is a guarantee a loan relationship: subrogation
Guarantee payments: example
A Ltd borrows £100,000 from Bank Ltd (Bank).
As part of the conditions for getting the loan, A Ltd obtains a guarantee from G Ltd.
There is a loan relationship between A Ltd and Bank. There is no loan relationship between G Ltd and Bank.
A Ltd defaults and G Ltd now owes Bank £100,000 under the terms of the guarantee.
There is a money debt between G Ltd and Bank arising from the guarantee. However, there has been no ‘lending of money’ so there is no loan relationship between Bank and G Ltd. G Ltd’s costs under the guarantee are not loan relationships debits.
Once G Ltd has paid its money debt to the Bank, G Ltd might acquire a loan relationship with the borrower, A Ltd, by virtue of ‘subrogation’ rights.
The subrogation principle is that, once a guarantor has paid the money under a guarantee, it acquires the lender’s rights against the borrower. That is, it replaces the lender as the creditor party for the original lending, with the same effect as if it had acquired the loan relationship by purchase. Subrogation happens either by operation of common law, or because the particular guarantee contract includes a subrogation clause.
Position following subrogation
- G Ltd and A Ltd
G Ltd has acquired the Bank’s asset - its loan relationship with the borrower, A Ltd. The amount paid to acquire it is the amount paid under the guarantee, £100,000. A Ltd now owes the £100,000 to G Ltd, not to Bank. If A Ltd cannot repay, or is unlikely to be able to repay, any amount that G Ltd writes off or releases could be claimed as a debit
However, if G Ltd and A Ltd are connected, the debit would be disallowed (CFM35000).
- G Ltd and Bank
It should be emphasised that subrogation does not change the relationship between the guarantor and the lender. As above, a guarantee is not a loan relationship, and is not transformed into one by the subrogation process. G Ltd’s costs under the guarantee do not ‘become’ allowable under loan relationships.