My Bank Has Called in my Loan

Two years ago I took out a business loan. My business has been repaying it since then, but I made underpayments for three months due to cash-flow difficulties. When I spoke to my bank about these, I was told that there was no problem and it even increased our overdraft limit. The bank has now said it is calling in the loan and using a personal guarantee that would place me in a lot of difficulty.
Where do I stand?
This is sadly typical of cases I see where banks, having the security of a personal guarantee, act in a way that is contrary to the interests of the business, knowing that you, the owner, will ultimately pay. In these situations the wording of the facility documentation and guarantee is crucial.
In this case, the bank appears to have represented to you that it would waive the underpayments and even increased your overdraft facility.
Undoubtedly, the written loan agreement will have a "no waiver" clause. It could be argued, however, that the verbal waiver by the bank manager induced the company to extend its liabilities by an increased overdraft.
This arrangement could amount to a new agreement, one of the terms being that earlier underpayments would not be relied upon to call in the loans. As guarantor, you could argue that the bank has breached the agreement and that the granting of any waiver or further advances to the business discharges your guarantee in its entirety.
However, most bank guarantees are worded in the bank's favour. Cases such as this depend on the particular facts and early advice should be taken. Patrick Selley is a consultant solicitor at Keystone Law

www.patrickselley.com 

patrick.selley@keystonelaw.co.uk

07976 911936

Bank Guarantee Claims

Challenging a creditor’s right to call a personal guarantee
Personal Guarantees are more common now than ever and creditors can be quick to take action against a guarantor.  However, not all personal guarantees are enforceable.  Patrick Selley explains how you can defend a guarantee claim.

If you have given a personal guarantee and the creditor is seeking to enforce it, you should seek legal advice first as you may have grounds to challenge its validity.
Patrick Selley, who specialises in bringing claims against banks, financial advisors and financial institutions, explains that despite some creditor's best efforts, many individuals have successfully avoided some or all of their liability under a personal guarantee. 
In this, the first of a series of four articles, Patrick sets out the grounds for a successful challenge to the terms of the guarantee itself.
What is a guarantee?
A guarantee is a particular type of contract (suretyship) whereby one party, the "guarantor", agrees to be liable for the obligations of another party, the "principal".   
Generally speaking, the guarantee will be expressed to be in favour of a third party creditor which in most cases is a bank.  Usually, the obligation being guaranteed will be that the principal will repay the third party a sum of money on or by a particular date.  In a guarantee, the guarantor promises the third party that, in the event of the principal not performing its obligation, the guarantor agrees to perform it instead. 
Key issues for challenging a personal guarantee
When considering whether the personal guarantee can be enforced, there are four key questions to be answered:

• Are there any defences available to the guarantor?
• Has the creditor proceeded correctly against the guarantor?
• Are there any claims available to the principal against the creditor that can be relied on by the guarantor in reducing the guarantee liability?
• What documentation is there that will evidence the guarantor's arguments on one of the three grounds listed above and who has such documents?

This article concentrates on the first of these four key questions by examining the extent to which individual terms in a guarantee may be successfully challenged.
Breaching the equitable principles
When faced with a guarantee claim, one of the most important arguments that you can advance is that the creditor's actions have rendered the guarantee unenforceable pursuant to the equitable principles of suretyship. 
These equitable principles arise independently of the intentions of the parties and, to some extent, independently of the contractual terms.  Further, the creditor, its employees and on occasion its legal team often do not understand these equitable principles. 
One of the clearest examples of the operation of the equitable principles can be found where the creditor allows the principal more time than permitted in the guarantee to pay the guaranteed sums, or varies the terms of the initial loan to allow for further borrowing.  In such cases, the creditor may have rendered the guarantee unenforceable.
Other common examples of conduct on the part of the creditor that may render its guarantee unenforceable include:

• where the creditor deals negligently with other security held by it in respect of the same liabilities; and
• where the creditor alters the liability of the principal under the loan without the knowledge and consent of the guarantor.

Unsurprisingly lenders have sought to exclude these equitable principles through express wording added to the guarantee, for example:
"From time to time we may provide the customer with any credit or facilities, vary cancel or refuse credit, give the customer more time to pay, make any other arrangement, compromise with the customer, take or deal with any security ... If we carry out any of the above acts, or do or fail to do anything else this will not affect our rights under this guarantee".
The Unfair Terms in Consumer Contracts Regulations 1999
The Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR), as its name suggests, applies only to consumer contracts and has the effect of rendering unenforceable any terms which are adjudged to be ‘unfair'.
According to the UTCCR, "consumer means any natural person who, on contracts covered by these regulations, is acting for purposes which are outside his trade, business or profession".
When creditors require a director of a company to give a guarantee, it is arguable that the guarantee is not given by the director ‘as a director' but rather that it is given by him in his capacity as shareholder, and is therefore not given by the director in the course of his trade business or profession.
Often guarantees are given by the guarantor's spouse as well, so as to include the martial home as an asset which is available to the creditor should it need to enforce the guarantee.  In such a case, the spouse can also argue that the term of the guarantee that excludes the equitable principles is unfair and so the guarantee should not be enforceable. Indeed, there is a higher likelihood of success for the spouse, where they are not involved in the company. In such a case it is highly advisable to seek legal advice before reverting to the creditor.
Where a term is considered unfair where it "has not been individually negotiated [it] shall be regarded as unfair if, contrary to the requirement of good faith, it causes significant imbalance in the parties' rights and obligations arising from the contract, to the detriment of the consumer."  A "term shall always be regarded as not having been individually negotiated where it has been drafted in advance and the consumer has therefore not been able to influence the substance of the term".
The courts will assess the unfairness of a contractual term, taking into account the nature of the goods or services for which the contract was concluded and by referring, at the time of conclusion of the contract, to all the circumstances attending the conclusion of the contract and to all the other terms of contract or of another contract on which it is dependent.
Convincing the court that a term is unfair
Only the court can determine whether a term is unfair.  However, the creditor might not wish to incur the expense of legal proceedings it may lose and may therefore decide not to enforce the guarantee or to settle. 
In both cases, a guarantor will need to advance a strong argument and to produce as much supporting evidence and documents as are available.  Where the creditor holds relevant documentation, the guarantor is entitled to be provided with copies upon request.  Creditors are often slow to recognise the extent of relevant documents that they hold, or are just reluctant to produce them and therefore properly framed requests for documents are important in defending guarantee claims.
If you wish to challenge a personal guarantee, you need to plan a strategy carefully.  Given the potentially high cost of litigation, it may be preferable to reach a settlement with the creditor.  The terms of such settlement can be affected by the manner and timing of contact with the creditor.  Careful and targeted use of disclosure requests for documentary evidence of matters which would go to the question of unfairness can be a useful tool in bringing about an advantageous settlement.
Conclusion
It is often possible to challenge a creditor's right to enforce a personal guarantee.  However, doing so is rarely simple and legal advice from a specialist in this area is highly advisable.
Unsurprisingly, creditors will firmly reject any challenge to a personal guarantee and have standard methods of so doing.  The analysis of the relative merits of their counter-arguments is important. 
Also it should not be forgotten that in most cases the creditor is a bank, and that currently the banks do not wish give the courts the opportunity to strike down a personal guarantee, as to do so would set a dangerous precedent potentially affecting thousands of guarantees held by them. As a result, when confronted with a well advised guarantor, the banks' firm rejections can give way to a willingness to settle.
In his next articles looking at personal guarantees Patrick Selley will address:

• the effect of a creditor's failure to observe important procedural formalities;
• undue influence and other defences; and
• document disclosure requirements.

Patrick specialises in bringing claims against banks, financial advisors and financial institutions in relation to personal guarantees, negligent financial advice and mis-selling.  He is also is a qualified mediator and a Fellow of the Chartered Institute of Arbitrators. 

www.patrickselley.com 

Our Clients say...

 

Good to hear from happy clients:

Date: 21 June 2013
"I have used Mr Selleys services for the past 18 months on several very difficult legal matters, especially with regards to personal guarantees. He has been a tremendous help to me and he has been an absolute pleasure to deal with and I could not recommend him highly enough.
After owning many well established businesses for the past 40 years, and therefore having had the need to use many different solicitors for different legal matters over the period. I can say the service and professionalism I have had from Mr Selley, and the advice he has given me during the period have been without question the best I have ever seen."

Michael Basso
Chairman of Pan World brands/I Love cosmetics Limited/Worldwide Golf Limited
Email Patrick for a legal opinion: patrick.selley@keystonelaw.co.uk

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Banks Accused of Misconduct Against SMEs | Keystone Law

Banks Accused of Misconduct Against SMEs | Keystone Law

The government and the banks continue the war of words about lack of lending. In the meantime what do you do?

Patrick Selley is a specialist in claims involving Banks and Financial Institutions with particular emphasis on assisting individuals who have entered into Personal Guarantees.
Patrick’s philosophy is to bring to the aid of an individual the same legal expertise as is routinely available to Banks.
Practical advice is a core philosophy. Knowing how Banks operate and keep records is vital, as is knowing whether to settle claims or to fight all the way.
Patrick has worked in the City of London and Hong Kong as well as a large national practice. He now practises at Keystone Law - London.


http://www.keystonelaw.co.uk/other/keynotes/2013/08/banks-accused-of-misconduct-against-smes

email: patrick.selley@keystonelaw.co.uk

www.patrickselley.com

What do I do if my Bank calls in my loan or Personal Guarantee? Financial Times April 26 2013

By Patrick Selley for: @FT - Fri April 26, 2013

 

Two years ago I took out a business loan. My business has been repaying it since then, but I made underpayments for three months due to cash-flow difficulties. When I spoke to my bank about these, I was told that there was no problem and it even increased our overdraft limit. The bank has now said it is calling in the loan and using a personal guarantee that would place me in a lot of difficulty. 

Where do I stand?
 
This is sadly typical of cases I see where banks, having the security of a personal guarantee, act in a way that is contrary to the interests of the business, knowing that you, the owner, will ultimately pay. In these situations the wording of the facility documentation and guarantee is crucial.
In this case, the bank appears to have represented to you that it would waive the underpayments and even increased your overdraft facility.
Undoubtedly, the written loan agreement will have a "no waiver" clause. It could be argued, however, that the verbal waiver by the bank manager induced the company to extend its liabilities by an increased overdraft.
This arrangement could amount to a new agreement, one of the terms being that earlier underpayments would not be relied upon to call in the loans. As guarantor, you could argue that the bank has breached the agreement and that the granting of any waiver or further advances to the business discharges your guarantee in its entirety.
However, most bank guarantees are worded in the bank's favour. Cases such as this depend on the particular facts and early advice should be taken. Patrick Selley is a consultant solicitor at Keystone Law 

email: patrick.selley@keystonelaw.co.uk

www.patrickselley.com 


http://www.ft.com/cms/s/0/784df3d4-12e9-11e2-aa9c-00144feabdc0.html#axzz2XVVbwrUc

Banks Accused of Misconduct Against SMEs

The government and the banks continue the war of words about lack of lending. In the meantime what do you do? 

The secretary of state for business, Vince Cable, has repeatedly expressed the coalition’s concerns about the failure of the banking system to lend to business. Lawrence Tomlinson, the millionaire government adviser who is the ‘entrepreneur in residence’ at the Department of Business, repeatedly accuses banks of failing to lend, often using colorful language to do so. He has compiled a dossier of complaints from businesses cataloguing instances of refusals to lend and in some instances the charging of “astronomical” fees.  

Vince Cable has asked for a number of complaints involving the state backed lender RBS to be considered under its recently announced independent review of banking practices. 

At the same time the Bank of England says that lending to small businesses rose by £238 million between May and June – the biggest monthly rise since data was first recorded in 2011. 

However the government and the banks chose to slug it out in the war of words the simple truth is that all banks have tightened their purse strings since the banking crisis. There are a number of ways that individual businesses may be affected by this. It is difficult to obtain recourse where a bank simply refuses to entertain an application for funding. However I have seen an increasing number of instances where banks have refused to lend where there is already some form of obligation to lend.  

The most typical scenario, although not the only one by any means, is where a bank has agreed to lend to a business for a particular purpose and advances part of the amount required whilst promising that if certain criteria are met the necessary further funds will be forthcoming. The business proceeds with its project in good faith incurring a liability to the bank for the funds advanced. When the further funds are required the bank refuses to advance them and the project fails leaving the business with nothing other than a liability to the bank rather than successful completion of the anticipated project. 

At one level this could be a verbal understanding reached with the business’s bank manager that may be referred to only briefly in e-mails but is not ultimately reflected in the bank’s formal documentation.  A more formal example is property development funding where the bank has lent funds for property acquisition and also agrees to provide development funding.  Contracts, usually on the bank’s standard forms, are in place.  A change in bank policy often means that the bank suddenly looks for any excuse to get out of its commitment to advance development funding.  In these circumstances it is not unusual for the bank to allege breach of some financial covenant in the lending agreement.  

It is a fact of business life that parties to business transactions may behave badly.  A bank can avoid promises to lend if the contract between it and the borrower allows it to do so.  Any business that has been affected in this way has to examine exactly what the legal obligations of the bank are. This can depend on construing not only the bank’s standard documentation but also communications passing between the bank and the borrower and the full history of the banking relationship.  

If the business owner has given a personal guarantee then his or her personal assets are potentially on the line as well.   

Once the full picture is ascertained in this way the position of the parties may not be as it appears from a first reading of the bank’s documentation and the bank may not be able simply to avoid liability for its failure to lend. The bank may also be unable to claim on any security, such as a personal guarantee, that it may have taken at the outset. 

Recourse against banks in these situations is never guaranteed but it does pay to look beyond the standard form documentation before deciding on the legalities of any given situation. 

www.patrickselley.com