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Significant Increase in Personal Guarantee Claims

Significant Increase in Personal Guarantee Claims

Negotiating Out Personal Guarantees – How Much Value Are They? – And Responding to Demands for Payment

With the majority of lenders hesitant in these uncertain times to provide funding without adequate repayment safeguards in place, we have seen a significant increase in clients seeking advice as to their exposure to claims under Personal Guarantees and how best they might respond to such claims.

In this article we look at what Personal Guarantees are, what can happen if the terms of the Personal Guarantee are not met and what options a company Director(s) who has given a Personal Guarantee has available to him/her.

It is the last part of this article, looking at practical considerations, that may be of most interest to readers.

What is a Personal Guarantee? How do They Work?

Personal Guarantees are (in theory) simple, and it is no surprise why lenders are so reliant upon them. In practice, the Guarantor (often a company Director) legally agrees to be personally liable for the company’s debts, if its obligations are not met. If the company is then unable to pay and thus fulfil its obligations to the lender, the lender can then sidestep any insolvency process the company may enter into, and look to recover the debt from the Guarantor personally, relying on the Personal Guarantee.

What are the Risks Associated with Personal Guarantees?

The risks associated with personally guaranteeing large company loans can manifest themselves with serious consequences, with potential outcomes for the Guarantor that include significant equity decreases in the family home or, in the most severe case, bankruptcy.

Can Personal Guarantee Claims be Challenged? Yes. In Particular if the Guarantee Does not Fulfil the Necessary Legal Requirement

Receiving a personal guarantee claim can be highly stressful. It is not all doom and gloom, however, as there are indeed ways and means of challenging personally guaranteed obligations.

The law imposes several formal requirements that must be met if a Personal Guarantee is to be enforced against the Guarantor. They include:

  • The form of the personal guarantee: The guarantee must be evidenced in writing. Section 4 of the Statute of Frauds 1677 stipulates that in order to be enforceable, a Personal Guarantee (or some memorandum or note of the guarantee) must be in writing and signed by the Guarantor or a person authorised by the Guarantor. The writing may be a formal contract or agreement, or it can indeed be given by simple means such as an email or memorandum.
  • It must be signed: The Guarantor should sign it themselves, or have their authorised agent sign it. It can however be signed by other modern means such as by way of email signature. The High Court in Golden Ocean Group Ltd v Salgaocar Mining Industries [2011] EWHC 56 decided that ‘signature’ should be given a wide interpretation.

If the name of a Guarantor appears in an email with the intention that it is a signature and there is evidence of an intention to contract, then the name will constitute a signature for this purpose. Therefore, as long as it is intended to operate as a signature, the Guarantor will most likely be bound by it.

  • Secondary Liability: It must be established that the Guarantor has secondary liability to perform the guaranteed obligation and the principal debtor has the primary liability to perform the contract. This will be evidenced within the terms of the Personal Guarantee document.
  • Consideration: The document should satisfy the requirements of any other contract in that there should be adequate consideration. This is however subject to general contractual principles so for example, past consideration will not usually be valid consideration.

In the absence of a clearly drafted and executed document that fails to satisfy the basic formalities of a contract and the legal requirements of a Personal Guarantee, it may not be enforceable.

Additional Ways to Challenge a Personal Guarantee Claim

There are additional ways of challenging Personal Guarantee claims, especially those that fall within one of the below categories:

  • Misrepresentation and/or Undue influence – The Guarantor may have been substantially misled before they entered into the Personal Guarantee. This could result from any undue influence or misrepresentation by a third party.
  • Repudiation – The creditor may have (unwittingly) repudiated the terms of the Personal Guarantee and that repudiation may have been accepted by the Guarantor.
  • Variation of terms – There may have been oral or written variations to the Personal Guarantee which may affect the terms of enforcement, such as extensions of time given and the waiver of one or more terms of the original document, which may raise the possibility of a successful challenge by the Guarantor.
  • Legal advice – There may be an obligation on the creditor to inform any prospective Guarantor to take independent legal advice before entering into the Personal Guarantee.  Failure to so advise, may give the Guarantor legitimate grounds to oppose the Personal Guarantee Claim.

Talk to our Specialists if you are Facing a Personal Guarantee Claim: Practical Considerations

In our experience, all is not lost, and the outcome is not inevitable, when a Personal Guarantee Claim is received.  It is not always an open and shut case for creditors to enforce Personal Guarantees Claims as each case is highly fact specific.

We frequently come across dubious documents that purport to be Personal Guarantees and which are successfully challenged.

Good Old Fashioned Negotiation

The following matters are, in practice, of enormous benefit and are very powerful negotiating tools in negotiating out liabilities claimed under Personal Guarantees and, possibly, wider personal financial obligations.

Inability to Pay

No creditor wants to throw good money after bad, incurring legal expense and wasting time pursuing a Guarantor who:

  • May have indicated a willingness and grounds to oppose the Personal Guarantee Claim.
  • May be able to demonstrate inability to pay the Personal Guarantee Claim (looked at in isolation) or inability to pay, looked at in the context of all the Guarantors debts, owed to all of his/her creditors.

On the ‘inability to pay/other creditor’ position, NDP are well used to deploying the numerous facets of such arguments to maximum effect, resulting in affordable settlement of Personal Guarantee liabilities, often with time to pay settlements over time.

Threat of Personal Bankruptcy or Individual Voluntary Arrangement (‘IVA’) for the Guarantor

Bankruptcy or an IVA (or even the threat of it) may actually be a sensible option for the debtor. Explained properly in a constructive way to a creditor, our experience is that such explanations do result in settlements for Guarantors.

The old adage of preferring to have 20% of something rather than 100% of nothing, holds true. The creditor must however be persuaded that the deal is an agreed one/the best that can be achieved by that creditor.

In the words of the late, great comedian, Frank Carson ‘it’s the way you tell them!’.  At NDP, we are well used ‘to telling them’.

Several factors come into play when deciding whether to challenge a Personal Guarantee claim. If you would like to discuss your position, please contact us or call a member of our team on 0121 200 7040 for a free no obligation chat on what approach is best in your circumstances.

Personal Guarantee Claims

Buying an Insolvent Business out of a Formal Insolvency Process

Buying an Insolvent Business out of a Formal Insolvency Process

28 Key Things to Consider When Buying Back an Insolvent Business, by Commercial and Insolvency Solicitor, Iain MacDonald

In this article, one of our Consultant Solicitors, Commercial and Insolvency Solicitor, Iain MacDonald, takes an in depth look into the key things that need to be considered when it comes to buying an insolvent business out of a formal insolvency process. He lists 28 of them and starts off by asking the question: “why would anyone want to buy back an insolvent business?” The reality is that many people do, but as Iain suggests, a good Insolvency Solicitor, with commercial as well as legal skills, is needed for the right help and advice along the way.

Buying Back an Insolvent Business

Hopefully, you have stumbled across this article prior to making any final decision as to a formal insolvency. I say that because if you have, then you may have that most precious of commodities, you remain in control, albeit of a rapidly deteriorating situation. It may not feel like ‘control’ but you are still driving a crashing vehicle. If so, please contact us or call us on 0121 200 7040 us immediately.  We can almost certainly improve your position now.

Why on earth would you buy back an insolvent business? Good question.

  • Typically, any Buyer will be the Director and possibly a Shareholder of the insolvent Company (OldCo), which is being purchased.
  • OldCo is insolvent/distressed and could already be in Administration or Liquidation, or another formal insolvency regime.
  • An Insolvency Practitioner will be required to take control of OldCo and they either already are or will be offering you terms to purchase OldCo (or its assets).

28 Key Things to Consider When Buying Back an Insolvent Company

Firstly, The Easy Part

As any Insolvency Solicitor will tell you, this is not a normal sale and purchase. How does it differ? A non-exhaustive list may assist:-

  1. There are no warranties offered by the Vendor. This is non-negotiable (usually) so do not waste time on this. Negotiate for a better deal where you can – we know where the wriggle room is.
  2. The Insolvency Practitioner as Vendor will provide absolutely no warranties but also will go further and exclude personal liability. Be sure of what precisely you are buying.  Any post purchase claims that you might wish to pursue vests against a bust business. You are likely to have no practical recourse against an insolvent entity let us be very clear on that.
  3. The Buyer must perform its own Due Diligence. Often this is unnecessary because the Buyer is the Director/Shareholder of OldCo. In any event the price payable will often be significantly less than market value, to reflect the absence of warranties and the insolvency.

Getting us involved at the beginning of the process is key. We can likely reduce the price that you pay.

  1. What About the Employees? This is tricky, but the rule of thumb is that a going concern sale (i.e. a sale of a business as a going concern) will mean that the Buyer inherits all of the employees and their potential and actual accrued claims against OldCo as their employer.
  2. A Buyer must consult with the duly elected employees’ representatives or recognised trade unions regarding the purchase. Failure to do so places the Buyer in danger of having a financial award made against it.

Encumbrances?

  1. You will be buying subject to these pesky things. In essence, this refers to the position whereby another party (e.g. a bank or a supplier) has an interest in an asset ahead of you. Such interests include a mortgage/charge or a retention of title (‘RoT’) claim over assets (usually, stock) or a hire purchase agreement.
  2. It is vital that these are examined and suitable releases/transfers obtained prior to or at purchase insofar as this can be achieved. Sometimes the solution lies elsewhere. It is frequently the case that a buyer will purchase assets subject to some encumbrances.
  3. It is often the case that these encumbrances can be reduced in impact. That could, for example, involve RoT stock being purchased from its owner for a very favourable price. Often a deal is struck at a mid-point communication is key here.

Leasehold Property

  1. It is not usually easy to acquire leasehold property prior to a purchase. Therefore, a Licence to Occupy the trading premises is given by either the Administrator and/or the Landlord. Before you do this, engage with the Landlord and flush out their attitude to your proposal. Without the Landlord on board you have no premises.
  2. Administrators now have to pick up the costs of their occupying and/or using the premises. Therefore if a company enters into Administration it is a good idea to plan ahead so that the rent is paid up to date to the point of Administration in order for the Administrators and/or NewCo benefit from a ‘rent free’ period during this time.

Making it Pay

  1. We make no apologies for talking about the folding stuff. This is where you can turn the business from an unsuccessful one into a roaring success.
  2. Assets: Who owns them and what are the encumbrances? Get releases where available. What are they? Am I buying what I need? What am I buying?
  3. Contracts: Ensure that these will be valid and therefore valuable after purchase. Ensure that they can be novated or the benefit transferred to NewCo.
  4. Customers: What is their attitude? Will they exist post purchase?
  5. Deal: is it bad? If so, walk away. Do not get emotionally involved.
  6. Debts: Offer to help to collect the debts of OldCo. This will require time and effort and perhaps rectification of works but should pay insofar as:

a. It preserves trading relationships; and

b. You can negotiate for a percentage of recoveries from the Insolvency Practitioner, to be paid to NewCo.

  1. Employees: Check how many there are and what their liabilities are e.g. pensions and any outstanding employment claims. The Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’) are not your friend. Consider leaving these behind if you can (see below). The best way to do this is a purchase from a Liquidator.
  2. Failure: Why did this happen and who was responsible. Why will this not happen again? Think hard on this. Then think more.
  3. Finance: This is a complex area but without it there is usually no business. Some may find it hard to believe that in the world in which we live some of these people offering finance to NewCo are actually not a good fit for you and may eat you rather than feed you. Perhaps we can change the profile of that risk for you? We know the insolvency and ABL market.  We know the good guys who will genuinely try and work with you.
  4. IPR: These are the ‘intellectual property rights’. They could be rights to use IT or a trademark by way of example only. Can they be transferred, and do you own them?
  5. Legal Wrangles: Ensure compliance with:

a. Section 216 Insolvency Act 1986 – you may need to go through one of three processes if you wish to re-use the OldCo name if you are previously connected to OldCo. Failure here is punished severely. It is a Criminal offence to breach section 216 and can have serious financial consequences for the Directors and Managers of OldCo.

b. Substantial Property Transactionssection 190 Companies Act 2006. Most connected Purchasers require approval by ordinary resolution of the Sellers’ Shareholders. Failure can be catastrophic.

  1. Personal Guarantees: Are you giving these? Really? Why? Have you already given them?
  2. Price: The sooner you call us the cheaper the purchase may be for you. Late on in a procedure we can achieve less. If we are involved very early on i.e. before any Insolvency appointment is made then the story may have (we put it no higher than that) a very happy ending.
  3. Procedure: Administration vs Liquidation. Few consider the latter route but it is worth considering on occasion because it can reduce purchase costs and leave behind the TUPE liabilities. There are also VAT implications, which must be considered.
  4. Property: Can you ensure that the Lease will be assigned? Seek agreement from the landlord and negotiate a rent reduction if available.
  5. Speed: The Administrator or Liquidator will be advertising nationally, and you may need to be able to beat competitors to the drop. Points to consider include:

a. Have cash available;

b. Negotiate purchase payment over time – you may need to offer security in respect of deferred payments;

c. Have a SPV (Special Purpose Vehicle) ready and waiting. A SPV has nothing to do with Captain Scarlett. It is a standalone entity designed to purchase OldCo/its assets and if necessary sink alone, without causing collateral damage.

d. If OldCo is you then use a pre-pack procedure if you can. These have a bad name but they are usually clean and straightforward.

  1. Suppliers: You will need to pay some perhaps in order to maintain supply. Others you can fold into the insolvency and lose the debt. Caution – some may be secured or personally guaranteed.
  2. Tax: This area is frequently overlooked for reasons, which do not baffle us, most are too intimidated to approach it. There are tax efficient mechanisms to invoke. These can benefit both the Liquidator/Administrator and the Buyer. Free money is sometimes available but only to those who know how to ask

Contact our Insolvency Solicitors for Expert Help and Advice

In essence, when the bad times roll, there is an opportunity for the brave and the educated. If they are rolling, then contact us or call us on 0121 200 7040 for a FREE initial discussion.  We are specialist insolvency solicitors and the Director’s friend and not many in our business can honestly say that.

Many Lawyers do not have the commercial skills to do anything other than the legal mechanics of a rescue. Plucking you out of the creek and placing you alone on dry land is not the ideal way forward.

About the Author of This Blog

Iain MacDonald is a Commercial and Insolvency Solicitor who has spent most of his working life in London and the South East trying to help business men and women to increase their net worth.  He has worked in both regional and top ten national practices. He is a Consultant Solicitor to NDP.

(Please Note: This blog is not formal legal advice and should not be relied upon in isolation, it is merely a puff piece intended to drum up business in case I have a spare moment and is issued for general information purposes only and does not constitute legal or professional advice. It should not be used under any circumstances as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the publication date of this article.)

 

Insolvency Law Solicitors Can Help Businesses in Tough Economy

Insolvency and Restructuring Specialists Needed to Assist UK Businesses in Challenging Economic Conditions.

Many more UK Businesses are likely to need access to Insolvency and Restructuring Specialists as economic conditions are set to remain difficult throughout 2016. As Insolvency Law Solicitors we know that SMEs are more likely to be exposed to insolvency than larger businesses, and we know that it’s important that business owners act fast when facing financial difficulties. This article looks at the reasons behind the economic conditions, and how we can help businesses.

What are the Reasons for the ‘Challenging’ Economy?

With 6% of all UK businesses out of pocket as they find themselves to be creditors in an insolvency procedure, as reported by R3, The Association of Business Recovery Professionals, it seems likely that the Chancellor of the Exchequer’s recent warning was not without foundation. In a dramatic speech, George Osborne warned that the UK economy faces a ‘dangerous cocktail’ of risks’, including the ongoing economic problems in China, Brazil and Russia, falling oil prices and the political crises in the Middle East.

The Chancellor’s view is backed up by the ‘Red Flag Alert’ from Begbies Traynor, which highlights the serious rise in UK businesses experiencing significant financial distress in the final quarter of 2015. Approximately 270,000 businesses are thought to be affected – a figure which is up 17% year on year.

Further economic uncertainty comes from the possibility that the United Kingdom may vote to leave the European Union.

How Can NDP Help Businesses Facing Insolvency?

Even in difficult economic times, there are always options and Insolvency and Restructuring Solicitors can assist business owners in finding the most appropriate solutions.

Aside from formal arrangements with businesses creditors such as a Company Voluntary Arrangement and other formal insolvency procedures, a distressed business could consider reaching an informal arrangement with its creditors. This could include a time to pay arrangement, which is something that HMRC will often agree to, or it may involve a smaller full and final settlement payment.

As Insolvency Law Solicitors in Birmingham, NDP is experienced and well placed to advise and assist with the best options for businesses, throughout the UK, in financial distress and their directors, partners or other stakeholders.

If it is not possible to reach an informal arrangement with businesses creditors, then NDP have access to a network of business recovery professionals, including trusted insolvency practitioners and refinancers who can help to find an appropriate solution for the directors and their business.

If your business is in financial distress, please do not delay. Contact NDP, the Insolvency and Restructuring Specialists, who have recently been shortlisted for Birmingham Law Society’s Law Firm of the Year Award for 2016 (up to 4 partners).

 

The sooner you take action and contact us, the more likely it is that we can help you to find an agreeable solution to your financial challenges. Call us on 0121 200 7040 or contact us for a free initial discussion.