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Insolvent corporate groups with cross guarantees: A forensic-LP Case study in liquidation

Author

Listed:
  • E Houghton

    (Sydney University)

  • G Dean

    (Sydney University)

  • P Luckett

    (New South Wales University)

Abstract

In many countries a significant method of corporate-group capital raising is cross-guarantee financing, where each company within a guarantee group guarantees the performance of the others. However, implementing cross-guarantee claims in liquidations has proved difficult and they have usually been set aside. This paper investigates the administrator's settlement of a large Australian guarantee-group insolvency, after a seven year administration period. Desirable properties of cross-guarantee settlements are analysed and modelled as a linear programme, based on equity principles under English law or in other jurisdictions with a common law tradition. The LP solution for the case study gives an alternative notional settlement. A post-optimality analysis provides evidence of the liquidation principles of the administrator's settlement and demonstrates inter alia that the nature of creditor protection given by cross guarantees may be unexpected, particularly if all companies are held severally responsible for the group deficiency.

Suggested Citation

  • E Houghton & G Dean & P Luckett, 1999. "Insolvent corporate groups with cross guarantees: A forensic-LP Case study in liquidation," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 50(5), pages 480-496, May.
    • Handle: RePEc:pal:jorsoc:v:50:y:1999:i:5:d:10.1057_palgrave.jors.2600706
    DOI: 10.1057/palgrave.jors.2600706
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    Cited by:

    1. Helen ANDERSON, 2014. "Pressing the right buttons: Australian case studies in the protection of employee entitlements against corporate insolvency," International Labour Review, International Labour Organization, vol. 153(1), pages 117-142, March.
    2. Michael Bradbury & Graeme Dean & Frank L. Clarke, 2009. "Incentives for Non‐Disclosure by Corporate Groups," Abacus, Accounting Foundation, University of Sydney, vol. 45(4), pages 429-454, December.
    3. Frank Clarke & Graeme Dean & Erne Houghton, 2002. "Revitalising Group Accounting: Improving Accountability," Australian Accounting Review, CPA Australia, vol. 12(28), pages 58-72, November.

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