Robert Moore, chief technology officer of insolvency practice KSA Group, explains how and why personal guarantees can be risky yet also beneficial to lenders.
| Robert Moore |
Chief technology officer at KSA Group
Lenders, landlords and suppliers will usually ask for a personal guarantee (PG) from company directors before agreeing to a deal.
It is a way for lenders to protect themselves if the company becomes insolvent. The PG means an individual, such as a company director, is personally liable for the debt, not the company. Even though the loan was used for the business.
This practice is especially common in the alternative finance market and peer-to-peer lending industry. For example, Funding Circle have lent small businesses around £2bn – each loan personally guaranteed. In the event of default, the PG will be called upon.
Of course, many lenders will rarely lend on the basis of a personal guarantee. If the business is sound and has very good prospects, they will lend even if the directors do not have much in the way of personal assets.
However, lenders will want to see a degree of commitment i.e. show they have invested in the business. Sometimes wealthy people will not be approved for a loan as the proposal or even the business itself does not stand up to scrutiny.
Can PGs be risky?
What if a borrower owes many different lenders and has several personal guarantees? There is the risk that lenders are relying too much on the personal guarantee.
No one can foresee the future. If there is a recession of some kind, then many ‘sound’ businesses could fail.
This will have a knock on effect as personal guarantees begin to get called in. This should be relatively manageable if a director has taken one loan, like they would a mortgage, for their business.
The problem is quite a few directors have taken out multiple loans with multiple personal guarantees.
How do we know this?
Because we talk to directors of companies in financial distress and they tell us this is the case.
Is it possible for lenders to find out what proportion of loans a company takes out that are backed up by a personal guarantee?
The simple answer is no. Charges are registered at Companies House, mortgages are registered on properties, credit card companies liaise with other card companies by sharing information on credit check databases but personal guarantees have no register anywhere.
Many of the new lenders claim they have sophisticated systems and algorithms that go beyond the normal credit check, which to extent I’m sure they can, but perhaps these systems can only reveal the situation the business is in now.
Lenders cannot predict the future. One national lender recently told me they were concerned their book was “stacked”. They were worried the borrower had made multiple personal guarantees.
At KSA Group we are looking for partners to assist in setting up a register of personal guarantees that can be searched by potential lenders.
No lender to date has been prepared to release details of clients with PGs to any other lender for obvious reasons. It is a highly competitive market. However, insurers share information on claimants, so why can’t the lenders?
With new technology, like biometric systems, it is possible to hold information on people without any actual personal information being shared.
All that is needed is something unique to the individual and/or business. In the case of school lunches, it is the child’s finger print. For business, it could be something as simple as their email address or company registration number which won’t be shared later on.
Let me explain…
The borrower’s email address or registration number is translated into a unique reference number, plugged into a website or portal, that can be shared with other lenders.
Lots of information can be attached to this unique ref number without giving away the borrower’s identity and personal information – not even their email address.
For example, a unique reference could provide information on the number of personal guarantees a borrower has without needing to state who the lenders are.
Partner at specialist debt recovery firm Welbeck Solicitors, Jeremy Boyle, discusses the processes creditors can use to recover debt from businesses in Europe, and how they might change in a post-Brexit world
| Jeremy Boyle |
Partner, Welbeck Solicitors
So you did some work for a client in Madrid and you are based in England.
In the event of non-payment, how do you recover the sum due to you under your invoice for professional accountancy services provided?
Prior to the regulations referred to below, if a small business or consumer needed to recover money from a debtor in another EU country, such recovery was difficult, time consuming and expensive.
Challenges included differences in national or domestic laws, the cost of hiring legal expertise and translating documents.
Accordingly, the European Commission proposed a Europe-wide expedited regime aimed to ease the recovery of cross-border debts for both citizens and businesses.
Dealing as we do on a daily basis with cross-border debts at Welbeck Solicitors, we always advise clients to ensure that they regularly update their terms of business.
For the sake of expediency, one of the main clauses we like to see in agreements reads something along the following lines:
“This engagement letter is governed by and construed in accordance with English law. The courts of England will have exclusive jurisdiction in relation to any claim, dispute or difference, concerning this engagement letter and any matter arising from it”.
It is likely that post-Brexit, the EU member states will still recognise a choice of English law so its perhaps of paramount importance that such a clause is inserted into contracts sooner rather than later.
Presently, there are two useful tools in a creditor’s armoury:
European enforcement order (EEO)
The chances are that if you do have such a clause in your terms of business you can secure a judgment in the English court.
At the very least it will encourage your debtor to engage with you in the English courts which will mean they will probably have to appoint a solicitor to deal with the matter.
Who knows – the debtor may decide, at that point, that it would be more beneficial to pay the invoice rather than hire a lawyer.
If the debtor does not reject the claim, or fails to appear in the proceedings, after initially objecting to the claim and you obtain a judgment – what’s next?
Member states can enforce ‘uncontested’ judgments under the European enforcement order regulation.
A judgment is considered ‘uncontested’ if it comes via a consent order approved by a court or if the defendant did not reject the claim, or failed to appear in the proceedings, after initially objecting to the claim.
If the EEO regulation applies, a creditor may apply for an EEO certificate from the court where the judgment was entered.
Once certified, the judgment is automatically enforceable in the court of any other member state as if the judgment had been made in that particular state.
European order for payment (“EOP”)
Although a judgment on an ‘un-contested’ claim may be obtained as above, in addition as of December 12 2008, use may be made of the uniform procedure called a European order for payment process.
If a European order for payment is obtained, this order is automatically enforceable once a declaration of enforceability has been obtained without having to get a European enforcement order certificate.
An EOP is automatically enforceable in every EU country if it is uncontested by the defendant.
What is the position post-Brexit?
It is unlikely that there will be an immediate change.
The procedure for a member state that withdraws from the EU is set out in Article 50 of the Treaty on the European Union.
It provides for the UK to negotiate a withdrawal agreement with the EU and for the treaties to apply to the withdrawing state after two years, unless there is unanimous agreement to extend that period.
On October 7, the Court of Appeal ruled in Horton v Henry that pensions not yet in payment are protected from bankruptcy. Graham McPhie explains the implications for creditors
| Graham McPhie|
Partner, Moon Beever
The issue at the crux of Horton v Henry was to what extent, if any, is a pension not yet in payment, available to be taken into account on an application by a trustee in bankruptcy for an income payments order?
Relevant factors for the profession before the Court of Appeal decision were:
1. What does “entitled” mean in section 310 Insolvency Act 1986? Does it mean only that money which the bankrupt has elected to take from the pension pot? Or does it include the funds for which the bankrupt could elect to take but has not yet done so?
2. Is it possible for the court to make an order requiring the bankrupt to take certain steps in relation to the pension pot?
3. What are the true effects of the amendments made to section 310 Insolvency Act 1986 by, progressively, the Pensions Act 1995 and the Welfare Reform and Pensions Act 1999? Do they allow only actual payments to be taken into account for income payment purposes? Or is the cumulative effect of those amendments to make the entire pot available?
The Court of Appeal has decided that:
The pension pot remains an asset excluded from the estate and income to which the bankrupt is entitled only applies to a pension fund that is actually in payment.
There is no right on the part of a trustee in bankruptcy to compel a bankrupt to take any particular election in relation to a pension scheme.
1. The clear rationale from the 1995 and 1999 Acts was to exclude pensions from the bankruptcy estate;
2. A trustee in bankruptcy cannot have rights to compel a bankrupt to take an action in relation to an asset that is not part of the estate;
3. It would drive a coach and horses through bankruptcy legislation if this were so;
4. The bundle of rights that the bankrupt has in connection with a pension fund do not naturally fit within the definition of “income” under section 310 Insolvency Act 1986;
5. The bankrupt was only “entitled” to the income that was actually in payment.
The decision at least has now settled the issue of the position of pensions and their interaction with the income payment regime of the Insolvency Act.
There has always been a balancing act to ensure that pension pots have a measure of protection.
However, creditors are not prejudiced by this result, because income from the pension can be taken into account for income payment purpose. Plus, excessive contributions to a pension can be recouped in certain defined circumstances.
The 2012 decision in Raithatha v Williamson had cast doubt on this. That doubt has now firmly been quashed.
The Court of Appeal has restored a position that many considered it should be, i.e. that pension pots are protected, and this was the legislative intention.
The court used statutory explanatory notes as an aid to interpretation.
This made it plain that the intention was for a trustee to be able to seek an income payments order on pension plans, which were in payment and not otherwise. These notes had not been referred to in Raithatha.
Ultimately, the court agreed that the aim of the exclusion of pensions from a bankruptcy estate and the income payments regime was that only pensions in payment were susceptible to an income payments order.
The trustee has no right to force an election on a non-bankruptcy estate asset, in much the same way that there was no right to force a bankrupt to work, nor to request a payment from a discretionary trust.
Next month the formerly known Insolvency & Rescue (I&R) Awards will re-emerge as the re-branded Turnaround, Restructuring and Insolvency (TRI) Awards. Content writer, Amber-Ainsley Pritchard, digs out one of last year’s most exceptional winners to highlight the importance of this event.
| Amber-Ainsley Pritchard |
Content writer, Credit Strategy and Insolvency News
When companies, individuals and teams win awards at any of our events, most of the audience is unaware of the backbreaking and often pioneering work that secures a winning spot.
Guests may wonder how and why our independent judging panels (in place for all our award schemes), decide that one entry is so overtly impressive; it deserves recognition above all others.
That’s particularly true of our TRI Awards scheme – formerly the Insolvency & Rescue (I&R) Awards.
But throughout the event’s nine-year history, we’ve never documented the fascinating details of winning entries. This year, we’re changing that.
We’ve started by choosing one of the truly outstanding winning entries from last year.
In 2015 KPMG won the category: Business Rescue of Year- up to £20m turnover.
Due to commercial sensitivity the recovered business wished to remain anonymous and will be referred to here as ‘Business A’.
KPMG pulled out all the stops to save crisis-stricken ‘Business A’ from going under.
The second generation family-run business was at risk of watching years of hard work, blood, sweat and tears slip through their fingers.
More than 100 employees were at risk of losing their jobs, millions of pounds of tax would have been pumped into the government’s buckets of debt.
But, with the help of KPMG this nightmare turned fairy-tale became the success story of the year.
During the time spent restoring ‘Business A’ for operation it successfully traded through a period when no less than six government agencies took enforcement and action against the project.
These included the Environment Agency, HM Revenue and Customs (HMRC), Health and Safety Executive and several reviews from a well-known high street bank.
A series of unfortunate events
‘Business A’ create a range of recycled wood-based products and won a contract in 2011 with E.on to supply wood into a new biomass plant set to be commissioned in early 2014.
E.on suffered delays but the business continued to take landfill wood on site and two fires broke out.
The Environment Agency instructed the fire brigade to use millions of gallons of water to extinguish them which caused water to run over into acid-filled lagoons.
‘Business A’ was forced by the Environment Agency to spend £20,000 a day to pay for the transfer of the lagoon water to an effluent works in Leeds.
The biomass plant was eventually commissioned and granted ‘Business A’ a £40,000 loan to cover wages and critical payments whilst the plant was being set up.
Amid all this, KPMG had to manage the relationship with the Crown.
Although the Environment Agency had agreed to keep the site open, ‘Business A’ did not generate any cash and eventually built up HMRC arrears which resulted in a winding up petition for £1.1m.
While operating under this threat from HMRC, KPMG managed the payment of more than £1m of tax arrears.
KPMG then agreed a repayment plan with HMRC stating that if just one payment was missed – there would be an automatic winding up hearing, advertisement and insolvency.
Finally, in March 2015, after three months of supplying the E.on plant at full capacity, HMRC was repaid its last instalment and the winding up petition was lifted.
Somehow, KPMG also restored shareholder value from zero to more than £10m.
This year’s TRI Awards will take place at the London Hilton, Park Lane, October 19. To book one of the few tables left, call 020 7940 4848.
Associate at Reed Smith, Colin Cochrane, has analysed an unusual case where the high court decided against issuing an administration order to two insolvent companies.
| Colin Cochrane |
Associate at Reed Smith
A high court judge recently made an unusual decision that could have major consequences for insolvency practitioners by reaffirming the discretionary nature of the court’s right to grant an administration order.
In August Judge Purle found that two companies, Oak Property Partners and Oak Forest Partnership, were technically insolvent and the statutory purpose of administration would likely be achieved.
Despite this, the court refused to grant an administration order on the basis that it would be better for creditors to give the two companies more time to turn themselves around.
If the companies eventually enter into an insolvency procedure there would be questions around how the appointed insolvency practitioner would consider the question of wrongful trading, given that the court has allowed the companies to continue trading notwithstanding their insolvency.
An application for an administration order had been brought by the creditors of Oak Property Partners and Oak Forest Partnership.
The business of both companies was to sell off hotel rooms on long leases.
The applicants acquired leases from the companies on terms entitling them to serve notice on the owner to repurchase the lease, they also served notice on the companies and made their application as prospective creditors.
Judge Purle considered the pre-conditions to making an administration order.
The conditions are that the court must be satisfied:
1) The company is or is likely to become unable to pay its debts.
2) The order is reasonably likely to achieve the purpose of administration.
On the first pre-condition Judge Purle considered the cashflow projections produced by the companies to be “highly optimistic” and did not have any confidence they would be able to pay their debts.
On the second pre-condition Judge Purle agreed with the applicants that an administration would likely achieve a better result for creditors than a winding up.
However, he considered that compulsory liquidation was not the only alternative to this “premature” administration.
The other option was to give the companies time to bring their businesses round.
Therefore, while the two pre-conditions to administration were “technically satisfied”, Judge Purle exercised his discretion not to grant an administration order as it would be better for creditors to give the companies more time.
The judgment is particularly interesting as the courts have traditionally refrained from exercising discretion to refuse an order when the pre-conditions are satisfied.
From a wrongful trading perspective, it will raise some potential concerns for directors of companies if the court has found them to be insolvent but allowed them to continue trading.
It will be interesting to see what recourse insolvency practitioners may have against such directors for wrongful trading claims.
Whether this case sets a precedent whereby judges are more willing to allow insolvent companies the opportunity to trade their way out of insolvency remains to be seen.
Such decisions could have far-reaching implications for creditors who may feel aggrieved that they are not able to best protect their interests.
The time period that the applicants in this case must wait before they make another application to the court is unclear from the judgment.
This may be a concern because the court will not wish to delay proceedings to the point where the companies are in an even worse position.
Co-authored by Elizabeth McGovern, counsel, at Reed Smith.