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

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.