Net Asset Limitation Clause

Insolvency Prevention

Intragroup guarantees can trigger a chain reaction of defaults if a parent company fails. Under a net asset limitation clause, the lender cannot demand payment that would reduce the subsidiary’s equity below its share capital. This protection prevents directors from being accused of making unlawful distributions or causing negligent trading.

Lender Security

Banks must assess the real value of the collateral packages they hold across a corporate group. When the net asset limitation clause is triggered, the available guarantee amount is reduced to the net book value of the subsidiary’s assets. This reduction means the lender cannot rely on the full face value of the subsidiary’s guarantee to cover the loan.

Director Protection

Board members of subsidiaries face severe legal risks when signing up to group-wide debt arrangements. This clause protects directors from personal liability by ensuring they do not agree to a transaction that would force their own company into liquidation.