TNAG-2412-FCO40-3507-Hong-Kong-Port-and-Airport-Development-Strategy-(PADS)-pres-1992 — Page 69

DEBT, GUARANTEE, CALLABLE EQUITY, SHAREHOLDER'S OBLIGATION

Main features

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Debt. A borrower enters into a contract with a lender and the contract will set out the conditions of repayment of the principal and interest. By law, he is bound to repay in full and according to the terms of the contract.As he is bound to pay, his accounts will show his debt as a liability under "liabilities" in his financial statements.

Guarantees are also made under the common law of contract. If a guaranteed borrower fails to meet his obligation to repay, the lender can take legal action to recover the principal and interest from the guarantor. A guarantor's obligations are disclosed in the accounts (usually as a note to the accounts), but they are not part of the guarantor's liabilities (unless the borrower has defaulted and the guarantor has become liable to pay.) They are disclosed as contingent liabilities. Where a loan is guaranteed, the contingent liability of the guarantor will be reduced every time the borrower makes a repayment of principal or

interest.

If a shareholder company has promised to pay additional callable equity to a subsidiary to support it in specified adverse circumstances, that promise should be reflected in its accounts as a contingent liability. It may have to show 100 per cent of the promised amount on the first day. But if the adverse circumstances do not materialize, then the amount disclosed can be gradually reduced (just as when a guaranteed borrower makes a repayment, the outstanding debt to guaranteed is less and the contingent liability becomes smaller.)

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The MTRC and the PAA are limited liability statutory corporations. The Government, as shareholder, is obliged under the law to cover their debt only to the extent of the Government's equity : not to the full amount their debt. If the PAA and the MTRC between them borrow $80 billion, the Government is not liable in law for these debts : the Government is only liable for the amount of equity subscribed.

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