"An important fact needs to be pointed out concerning the topic of corporate guaranties.

"It is misleading to believe that one corporation has the legal right to unconditionally guaranty the payment of debts for another. The general rule is that no corporation is given the power to act as a guarantor or lend its creditworthiness to another. This power is nowhere stated within the Charter of Incorporation to allow for such actions.

"The reason for this is simple: Stockholders' capital cannot be put at risk for such a contract without their acceptance first. The only way in which this guaranty may be deemed valid is if:

1. You obtain a corporate resolution or some other document to support the guaranty.
2. The guaranty is a personal guaranty.
3. The corporation providing the guaranty is the parent company of a subsidiary in which it has a valid interest for the subsidiary to succeed. In this instance, the stockholders' capital is not being unjustly risked.
4. The entering into of a guaranty by one corporation for another is incidental to the business as authorized by the Charter and not just for the benefit of increased sales. It would still be a good idea to obtain a corporate resolution to do so."

Thanks to:
Chaun Bodin
Assistant Credit Manager
US Brick
Fort Worth, Texas

Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by CollectionForum.com in 2006. This article originally appeared prior to 2000.

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