Concern guarantee better than a 403 statement

Construction companies are regularly expected to have the top holding company within a group guarantee liabilities of subsidiaries. So far so good. However, being a guarantor can be done in several ways.

In practice, there are two variants, namely the contractual group guarantee and the 403 declaration. It is important to distinguish these properly, and in construction practice this does not always go well. In essence, the group guarantee means that a top holding company (read: the company in the group that is in charge in terms of management and finances) contractually guarantees a principal. In principle, after all, it is only the subsidiary in question (for example, a company set up for the realization of the project) that is liable for the fulfillment of obligations under the construction contract, so it is not surprising if a principal demands security in the form of a group guarantee. It is important to remember that a group guarantee entails liability only for the top holding company for the benefit of the principal, not beyond.

What is the difference with a 403 declaration? The term "403 declaration" comes from accounting law (Article 2:403 of the Civil Code). If a top holding company does not wish to publish the statutory financial statements of group companies but only consolidated figures, it must file a 403 declaration with the trade register. In that declaration, it assumes liability for all debts arising from legal acts of the subsidiary in question. The difference with a contractual corporate guarantee is that the contractual corporate guarantee only creates liability to the principal. The 403 declaration, however, creates liability to all creditors of the subsidiary in question. Thus, the 403 declaration has very far-reaching consequences. It is important to realize that it makes no difference to a principal (for its right of recourse) whether a group guarantee is issued or a 403 statement is filed. In either case, the principal would be able to recover from the top holding company. For the construction company required to provide security, however, it is a world of difference. After all, the potential liability arising from the 403 declaration is much greater. Because those risks are so much greater, if security is sought, a construction company would be well advised to offer a group guarantee to the principal rather than file a 403 statement. Even the principal should ask itself whether it would not rather receive a corporate guarantee than a 403 statement. After all, the effect of the 403 declaration is that not only the principal but also other creditors can recover from the top holding company. Consequently, the cake must therefore be shared with several creditors if things go wrong at the subsidiary.

Therefore, it is hard to understand why clients (especially those subject to tender) require a 403 declaration and are not satisfied with a group guarantee. If a construction company does not meet the formal requirement of submitting a 403 statement when tendering, but submits a group guarantee, that tender is set aside. This is remarkable, as a contractual group guarantee could (and should) suffice from the perspective of the contracting authority. In my opinion, a contracting authority should not expect a construction company to file a 403 statement with the trade register, when a contractual group guarantee could (and should) suffice from the contracting authority's perspective, or even be more beneficial to both parties.

Because of the very far-reaching consequences of the 403 statement, any construction company that has filed a 403 statement would be well advised to reconsider the considerations on which it was based. After all, a 403 statement can be withdrawn and sometimes the remaining liability can even be terminated. The (contracting) principal reading this should ask himself the question who is helped by requiring a 403 declaration instead of a group guarantee. If the 403 declaration is still part of exclusion criteria, this is the time to ask whether a contractual group guarantee would not be better for both parties.