4.4. FACTSHEET-PARENTAL COMPANY GUARANTEE

A parent company guarantee is a legally binding guarantee by an operator’s parent company (or another affiliate) to pay or satisfy the operator’s environmental obligations if the operator fails to do so. It is often limited to a specified amount (i.e. an unlimited guarantee may not be given.)

Parent company guarantees could potentially be used to cover foreseen and unforeseen liabilities. However, they have particular risks and their usage is often restricted in practice.

ADVANTAGES

DISADVANTAGES

✓ Does not oblige the operator to set aside funds so does not tie up capital.

✓ Overrides the parent’s immunity under corporate law (e.g. the separate legal personality of companies and the limited liability of their shareholders) from responsibility for the operator’s environmental liabilities.

✓ Incentivises the parent to reduce the prospect of the operator incurring environmental liabilities in the first place.

The particular risk with parent company guarantees, as against financial provisions from other third parties (e.g. financial institution guarantees and insurance) or which involve securing money (e.g. cash deposits, pools), is that the guarantee could become devalued or worthless if the financial strength of the parent/group declined alongside that of the operator, the worst case being simultaneous insolvency or dissolution. Other disadvantages are:

X Only available to operators with parents with the requisite financial strength.

X May require complex and time-consuming financial strength tests which burden the operator, parent and regulator.

X May require legal proofs and checks around the operator and parent’s corporate capacity to enter into the guarantee.

Important considerations – financial institution guarantee

Basic considerations	The parent must be authorised to provide that financial provision in the jurisdiction. The parent must have sufficient financial strength for the amount of the potential liability. The parent must have the corporate legal capacity to enter into the agreement. The parent must not be reliant on the financial performance of the operator. Whether the financial provision provides for the estimated environmental liability. Whether the financial provision is payable to the regulator on demand. Whether the financial provision provides protection against insolvency or dissolution of the operator and is protected from inflation.
Documentation	The following documents are generally required: Legally binding financial provision document, details of the amount of cover and the cost profile, evidence of authorisation of the institution or parent to provide the financial provision and evidence of any supplementary cover required to cover gaps in the primary cover, guarantee, evidence of financial strength of the parent. Template documents can help ensure the key aspects are covered.
Documentation specification	Generally, the documents will specify: the triggering event, that the regulator may make a demand in the case of a triggering event or insolvency or winding up, requirements in relation to reporting, notifications of cancellation/expiration and replacement and inflationary adjustment and specification that the regulator may require provision of alternative financial provision upon cancellation/expiration, that the regulator may make a demand on the parent and how the guarantee can be drawn down with reference to the cost profile of the operation.
Reporting and monitoring	This will include triggering events, developments that affect ability to ensure provision, withdrawals or demands, performance of the institution/fund/asset, environmental compliance, the level of the liability against the value of the financial provision, and (for foreseen liabilities) restoration progress reports, notification of cancellation, expiration, renewal or non-renewal and expiry dates, annual audited financial statements, notification if the parent is likely to no longer meet specified financial criteria, progress on cost profiles and restoration and expiry dates of the financial provision.
Enforcement	A demand will be made on the financial provision if the triggering event arises. The regulator may need to take enforcement action in the event of declining financial health, value or performance or where the required reporting is not provided. The regulator will need to make sure that the financial provision is maintained/renewed/acceptable or require a replacement financial provision and may need to act in the case of declining financial health of the parent.