The exemption under s479A-479C of the Act applies to companies formed and registered under the Act.

There is no limit on the size of a company for the purposes of the exemption. A subsidiary within a small group or a dormant subsidiary may qualify for exemption from audit under other provisions without the need for a parent guarantee.

Certain types of company are excluded under s479B of the Act (see the Appendix) , including traded companies (ie a company any of whose transferable securities are admitted to trading on a UK regulated market) and authorised insurance and banking companies.

These exclusions refer to the status of the subsidiary company seeking to use the exemption. There is no concept of an ‘ineligible group’ (eg, the fact that the company’s parent undertaking or fellow subsidiary is an authorised insurance company does not affect the company’s own eligibility for the exemption), but conditions apply regarding the status of the parent company (see below).

Similar provisions also apply (with certain modifications) to Limited Liability Partnerships.

For the subsidiary to be exempt, the conditions set out in s479A must be met. See the Appendix for full details, but, in summary:

• the parent undertaking is established under the law of any part of the United Kingdom;
• all of the members of the company agree to the exemption;
• the parent undertaking gives a guarantee under section 479C;
• the company is included in the relevant consolidated accounts in accordance with the specified applicable accounting standards;
• the parent undertaking discloses in the notes to the consolidated accounts that the company is exempt from the requirements of the Act; and
• the directors of the company deliver to the registrar on or before the date that they file the accounts for that year the documents set out in the Act (see further below regarding filing requirements for the agreement of members).

The members of the subsidiary must consent unanimously. Members will include:

• holders of ordinary shares (including the immediate parent undertaking which need not be the undertaking that is providing the guarantee);
• holders of preference shares or non-voting shares;
• holders of any shares that are presented as liabilities for financial reporting purposes (the Act being concerned with the legal status of the shares and of their holders as members).

Separate consent will need to be given for each year the exemption is used because:

• under the Act consent must be specific to the financial year in question;
• the exemption is from an obligation (to have an audit) arising each financial year so to give consent in advance of a financial year, on a prospective basis, might give rise to a claim of invalidity and therefore be inadvisable. 

A single document may evidence consent by a parent in relation to multiple subsidiaries. However, separate copies of the document should be filed at Companies House for each subsidiary claiming the exemption.

There is no prescribed form in which consent must be given but the company will need evidence that consent was obtained. A written resolution signed by all the members would be satisfactory but is not the only way in which consent may be evidenced.

There is no facility in the Act for a member to withdraw consent for a particular financial year once it has been given. However, the exemption is subject to the requirements of s476 of the Act, which allows members holding 10 per cent of any class of shares to require an audit by giving notice to the company at least one month before the end of the financial year in question. This could be used by one or more members in effect to ‘withdraw their consent’.

The formalities for obtaining the exemption do not need to be completed before the subsidiary’s year end and need only be completed before the subsidiary’s accounts are filed. However, the consolidated accounts of the parent providing the guarantee must refer to the guarantee being given and the name of the subsidiary and this may impose an earlier effective deadline. In practice, a decision would have to be made early enough to be taken into account when planning whether to carry out a statutory audit or only the work needed to support the audit of the parent’s consolidated accounts.

The parent undertaking must be established under the law of any part of the UK. The guarantee does not have to be provided by the ultimate parent undertaking and could be provided by an intermediate parent undertaking although that parent undertaking would have to prepare consolidated accounts.

The consolidated accounts must be drawn up under accounting standards specified in the Act (UK GAAP or UK-adopted IFRS would, for instance, be acceptable for this purpose) (s479A).

The notes to the consolidated accounts of the parent undertaking must disclose that the company (ie, the subsidiary) is exempt from the requirements of the Act relating to the audit of individual accounts. It is therefore necessary to state the name of each subsidiary for which a guarantee has been given.

Companies House guidance states that the parent’s consolidated accounts should show the subsidiary companies’ names and registered numbers in a prominent place. This could be done by adding a column for the registered number to the listing of subsidiary companies.

There is no prescribed form for the written notice of agreement by the members of the company. Companies House guidance states that the notice of agreement by members must show the subsidiary company’s name and registered number in a prominent place.

The exemption has effect subject to s475(2) and (3) (requirements as to statements contained in balance sheet).

Companies House guidance includes example wording for the subsidiary taking the exemption to include in its balance sheet which is as follows:

• for the year ending ………………(dd/mm/yyyy) the company was entitled to exemption from audit under section 479A of the Companies Act 2006 relating to subsidiary companies.
• the members have not required the company to obtain an audit of its accounts for the year in question in accordance with section 476;
• the directors acknowledge their responsibilities for complying with the requirements of the Act with respect to accounting records and the preparation of accounts.

The guarantee is effected by delivering the s479C statement to Companies House. The guarantee is created by the operation of s479C rather than by contract. No contract is required between the parent giving the guarantee and the parties who benefit from the guarantee.

The statement under s479C must be authenticated by the parent and must specify:

• the name of the parent undertaking
• its registered number (if any);
• the name and registered number of the subsidiary company in respect of which the guarantee is being given;
• the date of the statement; and
• the financial year to which the guarantee relates.

The requirement for a statement referred to in s479C will be met by filing a correctly completed Companies House Form AA06 with the registrar. Form AA06 indicates that it must be authenticated by being signed on behalf of the parent undertaking rather than merely indicating the name of the parent undertaking.

A guarantee given under s479C has the effect that:

• the parent undertaking guarantees all outstanding liabilities to which the subsidiary company is subject at the end of the financial year to which the guarantee relates, until they are satisfied in full; and
• the guarantee is enforceable against the parent undertaking by any person to whom the subsidiary is liable in respect of those liabilities.

Where the guaranteed liability is an amount outstanding on an account that may be partially repaid and redrawn several times after the year end, such as a bank overdraft facility, there is case law  that monies repaid on the account are presumed to discharge the earliest debits on the account (ie, first in, first out) unless there is contrary intention or a specific direction for appropriation by the debtor.

_{¹ Clayton’s case [Devaynes v Noble (1816) 1 Mer 572]}

The question of scope is one of law and not accounting and readers should seek legal advice where appropriate. Whilst the obvious source of meaning for ‘liabilities’ is insolvency law, which brings in all types of pecuniary obligation, including contingent and prospective liabilities (eg, respectively, a litigation liability and future rentals on a lease), it is uncertain whether and, if so, to what extent a court would restrict the set of guaranteed liabilities as a result of the reference to ‘outstanding liabilities’. Ultimately these uncertainties would be resolved by the courts. In the meantime, it would be prudent for companies that are contemplating the giving of such a guarantee to establish the population of the relevant subsidiaries’ liabilities, including contingent and prospective liabilities since it is possible that they may be exposed to some or all of them.

The guarantee remains in force until the liabilities in question are settled in full. There is no provision to revoke the guarantee or novate it to another party. If a parent undertaking disposes of a subsidiary for which a guarantee has been given, it will remain liable under that guarantee until all the liabilities have been settled. It could seek an indemnity from the purchaser of the subsidiary but would remain liable to the creditors of the former subsidiary.

If the new parent also entered into a guarantee under s479C for a subsequent financial year and liabilities outstanding at a previous balance sheet date remained outstanding, it is possible that the same liabilities may have been guaranteed by more than one parent. A creditor might claim against either guarantor. The guarantor against which the claim is made is given no rights by the Act against the other guarantor but may have an equitable right of contribution from other guarantors of the same outstanding liabilities. 

No. Once the guarantee has been given by delivering the s479C statement to Companies House, there is no provision in the Act for the parent’s liability to cease except on the full satisfaction of the subsidiary’s liabilities that had been covered by the guarantee given previously. Therefore, reverting to an audit would not bring an end to those liabilities.

S479A-C of the Act concerns exemption from audit requirements under the Act. Charitable companies are also subject to audit requirements under the Charities Act 2011 (and related regulations) and a parent company guarantee under s479A-C of the Act would not exempt a charitable subsidiary from those requirements.

Where the subsidiary is not a charity but the parent undertaking proposing to give a guarantee under s479C is a charity, the parent undertaking should consider carefully whether it is able to do so under charity law and regulation.  Charity Commission guidance (CC35) states that ‘The trading subsidiary must be set up in such a way as to protect the parent charity and its assets from the risks involved in the trading. The need to protect the charity's assets from any significant risk involved in non-primary purpose trading is paramount’.

Dormant companies may be exempt from audit under s480 of the Act. However, dormant subsidiary companies that, essentially, fulfil the conditions for exemption from audit by parent guarantee are also exempt from the requirement to prepare and/or file accounts at Companies House (s394A-C and s448A-C respectively). Form AA06 referred to in question 9 above should indicate which of the exemptions is being claimed.

LR 10.2.4 requires certain indemnities and similar arrangements to be treated as class 1 transactions and therefore to require shareholder approval. However, this does not apply to an agreement or arrangement with a wholly-owned subsidiary undertaking of the listed company. It therefore appears that provided the subsidiary in question is wholly-owned, entering into a guarantee under s479A-C would not be a class 1 transaction.

Where the arrangements involve a subsidiary that is not wholly owned, it appears that the arrangements may be a class 1 transaction because the guarantee is unlimited. Companies considering entering into guarantees in respect of non-wholly owned subsidiaries should obtain their own legal advice or consult their broker and/or the UKLA.