Intra-group loans and guarantees are frequently encountered in the activity of group companies, especially when centralized capital and liquidity management systems are in place. Intra-group loans are often used as tools to maximize liquidity at the group level while reducing the cost of funds, while the guarantees provide group companies with better access to external financing or high-value commercial contracts.
Romanian law does not expressly prohibit granting loans to or guaranteeing the obligations of affiliated companies, but there are certain restrictions and limitations provided under Companies Law No. 31/1990 which should be observed. These mainly relate to: (i) justifying the commercial benefits of the transaction; and (ii) managing conflict-of-interest situations.
Under Romanian law, the purpose of any company is the performance of profit generating activities. To this end, operations must justify a corporate interest, including in the case of intra-group transactions. The concept of corporate interest has not been expressly defined in law, but is instead a doctrine created by Romanian scholars, requiring that any action taken must aim at generating profit as an effective gain, at avoiding or reducing the risk of loss, or at satisfying an economic interest.
In case of group companies, the corporate interest of the company is joined by the group’s interest. The relationship between companies within the group should not be overlooked, but identifying a group interest (e.g., when a loan is used for funding the development of the group business activities through new acquisitions) is not enough to justify the commercial benefit of the group company.
A commercial benefit can be the revenues directly generated by the transaction (i.e., the interest on the loan or a fee for issuing the guarantee), but it can be also an indirect benefit. Downstream guarantees from the parent company can be often easily justified by such indirect economic benefits. Similarly, the creation of security in the interest of the group company could be commercially justified even where a security grantor does not receive a fee, but still enjoys indirect benefits (such as better access to funds at lower costs).
In addition, these transactions should be scrutinized to identify if they have the potential to adversely affect the solvency or liquidity of individual entities within the group so that such risks can be effectively managed and mitigated. Difficulties may arise, especially when there is a discrepancy between the corporate interest and the group interest, for example when the loans or guarantees are extended in distressed cases. Such discrepancies may also raise additional concerns, as the directors have obligations of loyalty and to act in the best interest of the company.
As a specific restriction, Romanian law prohibits a company from granting loans or guarantees to a company which has the same director or in which the director holds, either directly or indirectly, a participation in excess of 20%. Agreements concluded in breach of this prohibition would likely be sanctioned with absolute nullity. Such restrictions are in principle applicable to joint stock companies, but not to other types of companies, such as limited liability companies.
Shareholder having an interest contrary to the company’s should abstain from voting on transactions that require the approvals of the shareholders. This conflict of interest could arise when the subsidiary decides to create a security for the obligations of its direct shareholder. The shareholder failing to abstain may be held liable for damages caused to the company. In addition, there is a risk that the resolution (and of the underlying transaction) could be annulled if the court considers that the transaction was contrary to the company’s interests and the approval represents an abuse of power by the majority shareholder.
From the perspective of the requirements of the Romanian Company Law, best practices would be to: (i) identify the commercial benefit for the transaction and address this specifically in corporate resolutions, (ii) confirm that there are no prohibitions against concluding the transaction, and (iii) clear potential conflict-of-interest situations.
By Gabriela Anton, Partner, Tuca Zbarcea & Asociatii