As set out in update 1, this update is focused on personal guarantees (PG’s) being those given by a third party individual (the “guarantor”) to satisfy the contractual obligations of another party, in the event that party fails to do so.
These have been topical in terms of applications by businesses under the Coronavirus Business Interruption Loan Scheme (CBIL), which provides the lender with a government-backed guarantee against the outstanding balance of the facility.
There had been issues both about the roll out of the scheme and lenders asking for directors to put up their own property and savings as collateral before any loan could be approved. This was then changed so that Lenders would be prevented from requesting PGs – which mean borrowers often have to put their homes on the line – on loans under £250,000.
The confusion may not have been helped by the original documentation for the scheme said the lending banks had to use their “normal lending criteria” – for most loans, normal lending criteria almost tends to included a request for a PG.
Whether this was the banks or Treasury’s fault, for non-CIBL finance, understanding PG’s can be really important.
A lender may ask for a PG to be granted by the directors of a borrowing company to which it will advance a loan. The PG is usually given by the guarantors as a part of a larger package of financial security for the lender, which is all there to protect its position and offer it remedies if the borrower defaults on the loan.
The package will vary depending on the purpose of the loan, the sector, the loan to value and asset base of the borrowing company and the commercial relationship, but could include a legal mortgage over specific property, a charge over the assets of the borrowing company generally and/or a charge over its shares
Increasingly, lenders ask the guarantor to obtain ‘independent legal advice’ (or, “ILA”) from a solicitor who is unconnected to the loan transaction.
This is to ensure the guarantor(s) understand the implications of what is being entered into. The lender will then require the appointed solicitor to sign a certificate confirming the guarantor(s) has/have been properly advised on the relevant documentation.
What lenders sometimes also don’t say is PG’s can often be much more one sided and more onerous than mortgages, hence why the guarantor has to take the steps outlined above.
We have set out below some key points for prospective individual guarantors, to look out for:
- Who is giving the PG? Are the guarantors ‘jointly’ or ‘jointly and severally’ liable?
If more than one person is giving a PG in connection with a loan, then usually the guarantors will be ‘jointly and severally liable’. This means that the lender can pursue any or all the guarantors for the full amount. If, for example, there are two guarantors, they will both be liable for the full amount due under the PG and the lender can choose which guarantor to pursue, if not both. It will then be a matter for the guarantors to consider separately themselves, whether any money is owed between them and many will look to have any agreement between them where one indemnifies the other in the event that the lender pursues one of them.
- Is it a guarantee or an indemnity?
In most PG’s, the lender will include indemnity wording which also creates a primary obligation on the guarantor. This means that if, for any reason, the underlying agreement between the lender and borrower fails, the lender can still rely on its indemnity. The lender can also pursue the guarantor straight away, without needing to pursue the borrower first, in the event it defaults on its obligations under the loan.
- Checking the cap on the amount that the lender can pursue the guarantor for and can further advances be made to the borrower?
The extent of the guarantor’s liability under the PG should ideally be limited to a certain amount. If not, it will cover the full balance owed by the borrower to the lender including any fees, interest and expenses. Please note that the full amount that could become payable under the PG, is therefore unlikely to be certain. It is for this reason that a guarantor must be sure that he/she can discharge the obligations if demand is made. A big part of any advice sought should be around looking at affordability, in other words how any amounts due under the PG could be paid. This is really important given the primary obligation referred to above. We also ask our clients to consider if any further loans are to be made to the borrower by the lender, whether these will also be caught by the PG (this will usually be the case where the PG extends to “all monies” owed by the borrower).
- What of the guarantor’s assets are at risk?
Any court proceedings against the guarantor will put the guarantor’s personal assets at risk – it is vitally important for any guarantors to understand that unless agreed with the lender and carved out of the PG, all their assets are at risk including the family home, even if it is owned jointly with someone else.
- What representations and warranties will the guarantor give and can they be given?
The guarantor will give certain representations and warranties under the PG. These are statements which if found to be untrue, the lender can initiate legal proceedings against the guarantor for breach of contract. We always review these with guarantors and advise that any that cannot be given or need qualifying should be raised with the lender, and negotiated.
We sometimes find that the PG can get ‘lost’ in terms of understanding the risk when arranging and negotiating loan facilities. They should always be entered into with both care and caution.
The best advice we can give is to get in early – here ILA is required to be given, get advice as early as possible, to avoid both any undue delay but more importantly signing in haste and then repenting at leisure.
This weeks’ round up
Our final thought for this week revolves around business planning, which has been a theme of discussions with clients. One idea on this comes from the investment world and is one that we had with thanks from Nigel Cushion at Nelsons Spirit (http://www.nelsonspirit.co.uk/).
It revolves around the difference between a Bull market (all share prices going up) and a Bear market (all share prices going down).
In a Bull market adopt a Bullish mind-set:
- You risk your assets in order to make a return, this drives growth.
- There are lots of opportunities, usually found at the margin.
- Biggest strategic risk: over-activity.
- It usually lasts a long time and ends in a crash.
In a Bear market adopt a Bearish mind-set:
- You protect your assets, focus on cash not profit, this leads to survival.
- There are lots of opportunities, usually found laterally.
- Biggest strategic risk: in-activity, or doing too little too late.
- It usually lasts for a short time and ends in a recovery.
Questions for you all would be:
- Are you in a bear market?
- If so, would it help to adopt Bearish thinking?
- If so, what are your 5 assets classes and what are you doing to protect them?
For me, they would be Health/Well-being, Relationships, Reputation, Cash, Property and other physical assets.
Take care and stay safe.
Roger
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