Do You Need a Corporate Resolution When a Corporation is Issuing a Cross-Corporate Guaranty?
By Richard Macias & Jane Fennelly

You will want to get that written resolution if you can, but the lack of one may not completely doom your ability to get paid.

A corporation is a “legal person” that exists as a creature of state law. Think of its articles of incorporation is a “corporate birth certificate.” The muscle and bones of a corporation are found within its bylaws: they delineate the powers and duties of the shareholders, officers, and Board of Directors and provide for management of the corporation by the Board of Directors.

In most states a majority of the Board of Directors must vote to approve any proposed act of the corporation. The Board has the power to enter into contracts, such as a cross-corporate guaranty (a guaranty of the obligations of a related entity), if it is not prohibited from such a contract by the articles of incorporation, the bylaws or any other applicable laws. For example, a banking corporation may not sign a guaranty of the debts of another. If a corporation acts beyond its powers, the act is considered to be “ultra vires” and might not be enforceable against the corporation.

Having an authorizing corporate resolution will eliminate any future argument that the guaranty was not authorized by the Board of Directors and/or its shareholders. The resolution, signed by the corporate secretary, is evidence that the Board of Directors met and authorized the signing of the guaranty. There may also be corporate minutes reflecting the authorization.

A contract, such as a cross-corporate guaranty, authorized or ratified by the Board of Directors binds the corporation. An unauthorized contract does not. Therefore, a cautious credit professional will require a corporate resolution as evidence that all necessary approvals have been obtained from the Board and the Board has authorized an officer to sign the cross corporate guaranty.

A potential pitfall of a cross-corporate guaranty may arise if the guarantor goes bankrupt. The guarantor’s estate or its creditors may claim that the execution of the otherwise legally valid cross-corporate guaranty, and any money paid to a creditor because of that guaranty, constituted a fraudulent conveyance.

Often bankruptcy courts will look to the amount of actual consideration which has flowed to the guarantor as the result of underlying transaction.

Reality often overtakes caution in business, so circumstances may arise in which you can’t get an authorizing resolution from the board. And the lack of an authorizing corporate resolution is not necessarily fatal to the prospects for enforcing the guaranty.

If there is a dispute, however, you may be involved in litigation to establish that the officers were authorized by the Board of Directors to sign the guaranty and were not signing in their individual capacity. In this situation, you have arguments in your favor, including what is known as the doctrine of “apparent authority,” which holds that the officer signing the guaranty would presumably have had the authority to sign the guaranty.

If the company is a closely held company, that is, the shareholders, directors and officers are the same group of people, the guaranty may also be enforceable based on theories such as “ratification” or “alter ego.” Even with the factual support for such arguments, however, you may face time delays and legal costs in establishing the validity of the guaranty.

In the final analysis, you should push hard for the authorizing resolution.

Richard Macias and Jane Fennelly are with the Los Angeles creditors' rights law firm of Creim Macias Koenig & Frey LLP. They may be reached by telephone at 213-614-1944 and by email at rmacias@cmkllp.com or jfennelly@cmkllp.com.