In the wake of the coronavirus pandemic a new buzzword in the business world has come to the fore - CBILS (the Coronavirus Business Interruption Loan Scheme) - together with a wider debate over whether Banks should be providing them with or without personal guarantees from the managers/owners of the corporate entity seeking this financial assistance.

A guarantee is a legally binding promise to a lender to pay a third party’s debt in the event of a default to repay that debt when due by that third party.

At present the Government has announced that personal guarantees can only be demanded for the 20% of the CBILS loan over £250,000 not supported by the Government scheme and no personal guarantee may be taken for an CBILS loan below £250,000.

Directors and shareholders of a borrower (and indeed maybe family members of those individuals) may be asked to sign a personal guarantee in favour of the Bank for a CBILS loan over £250,000 and independent legal advice should be taken before any such guarantee is entered into even if it is not a requirement of the Bank.

If you are being asked to give a guarantee your paramount consideration should be to ensure any cap on your liability is 100% clear

We, at Gosschalks, have already advised a number of directors and shareholders of SMEs on the terms of the guarantees being sought by Banks in connection with the provision of a CBILS loan and we highlight here a number of issues/concerns we have already identified with some of the paperwork Banks have put forward where the guarantee itself has either been unclear in a number of key areas or the effect of the guarantee was not as the proposed guarantor had understood!

Great care should therefore be taken before entering into such a guarantee and if you are uncertain of its terms or the Bank requires the guarantor to take independent legal advice as a condition of the CBILS loan, Gosschalks can provide that advice at a fixed fee with a quick 24 to 48 hour turnaround.

If the Bank permits it, we can provide that advice by video conference or if not we can provide that advice by way of a meeting with the appropriate social distancing rules being adhered to.

Common traps/pitfalls that we have seen over the last few weeks in the guarantees the Banks are seeking in connection with the provision of a CBILS loan include:

1. The cap on liability is not 20% of the CBILS loan - the underlying debt being guaranteed is not the amount of the CBILS loan being made available but is extended to include other existing and/or future debt of the lender – thereby increasing the exposure of the guarantor over and above what he had understood. Be clear on exactly what security the Bank is relying upon in relation to the various facilities it may have made available!

2. The effect on the cap of joint and several liability where two or more guarantors are providing guarantees. Make sure the aggregate cap is exactly that, an aggregate cap overall, and is not an aggregate cap per guarantor. Also be under no illusions as to the effect of a joint and several guarantee! The fact that another person is guaranteeing the debt with you does not mean your liability is less – it still means the Bank can sue you – and just you – for the full amount under the guarantee. You have no right to require the Bank to pursue any other guarantor in the event the guarantee is called. The advantage of a joint and several guarantee to the guarantors is that by giving one, the guarantors can rely on the Civil Liability (Contribution) Act 1978 which gives rise to an entitlement to a guarantor that has paid out on a joint and several guarantee (where the other or others has/have not) to a just and fair contribution from any co guarantor without prejudice to the Bank’s right to only look to you for recompense! That Act is comfort but in light of the uncertain meaning as to what a “just and fair” contribution is - is it an equal contribution from the co guarantor or should the contribution reflect the underlying equity interest the guarantors have in the borrower to whom the CBILS was made? - a separate deed should often be drawn up between the guarantors to make it expressly clear what levels of contribution each should bear in the event the guarantee is called!

3. Does the cap apply to all the obligations in the guarantee document or just the guarantee obligations relating to the underlying borrower debt? Often the guarantee document goes further and includes an indemnity (almost always!) and often separate warranties to the Bank which should also be overtly subject to any cap agreed, otherwise again the guarantor’s liability is not necessarily as the proposed guarantor understood it to be!

These are just some of the irregularities we have seen in the past few weeks as Banks, in their haste to send out documentation to reflect the loan and security arrangements “agreed” to companies in urgent need, have neglected to ensure the guarantee document exactly says what the Bank has suggested it would say in its discussions with the borrower and the guarantor. These pre signing guarantee discussions will be overridden by the letter of the documents signed and no recourse will be available to the guarantor if he later alleges the guarantee document is not as he understood it in earlier discussions with the Bank

Every Bank has its own bespoke guarantee document – there is no “one size fits all” – and indeed Banks often have numerous template documents that they use. That doesn’t mean they are always correct although very often the inference - even if it is not made express - is that there can be no negotiation on the guarantee document. That said where irregularities have been pointed out we, at Gosschalks, have had success in amending what has otherwise been termed “non-negotiable” where the guarantee document is clearly wrong or not as agreed with the proposed guarantor

One other point to consider whenever giving a guarantee as well as making sure it only covers what the guarantor believes he is signing up to is whether the guarantor should enter the guarantee at all and/or if so what recourse/comfort can he take elsewhere. The guarantor should only enter a guarantee of his own free will – he does not have to - although obviously the main implication of his not signing the guarantee document in question is most likely that the CBILS loan will not be made available! A guarantee is a continuing security in the hands of the Bank and understanding when liability under that guarantee falls away is essential – it is not as simple as saying once the underllying debt is paid it ceases – it does not! Consideration should also be given to what controls the guarantor has over the underlying debt and the borrower whose debt he is guaranteeing. Should the guarantor have rights over what the underlying borrower can and cannot do while that guarantee is in existence, should the guarantor have sight of the books and records from time to time of the underlying borrower and should the guarantor cease to be a shareholder/director/employee of the underlying borrower in the future what happens to his guarantee position. All these points ( and others!) should be considered and discussed before a guarantee is glibly entered into and often a separate agreement or shareholders agreement should be entered into documenting understandings so there can be no dispute at a later date as to what was and what was not agreed when the guarantee was entered into!

Need advice and support? Get in touch today...

If any person wants advice on any of the matters raised in this note please speak to:

Nigel Beckwith on 01482 590272 / 07949 132934 / email: njb@gosschalks.co.uk

or

Emma Walley on 01482 590169 / 07710097540 / email: elw@gosschalks.co.uk

A fixed fee in relation to the advice on any guarantee and the execution of an ILA (independent legal advice letter) for Bank purposes is available on request and a discount is available for where there is more than one guarantor.