As part of the Government’s measures to help businesses during these challenging times, last month the Chancellor unleashed over £300 Billion of government backed loans.
This includes the Coronavirus Business Interruption Loan Scheme (CBILS). Broadly speaking, the scheme offers loan facilities (of up to £5M) to companies with revenues of less than £45m and these can comprise normal term loans, overdrafts or invoice finance facilities. Importantly, they are both interest and fee free for the first 12 months.
Over 40 lenders have been approved to provide these facilities but a number of them have already come under fire for asking company directors to provide further security by way of personal guarantees.
The decision to give a personal guarantee (a PG) is not to be taken lightly as, notwithstanding the limited liability status of the company, a PG will expose directors to losing personal assets and savings if the borrower company defaults on the loan. Notably, under CBILS, banks are not permitted to take security over the primary residences of guarantors.
The big four banks have now confirmed that for loans of less than £250K, they will not be seeking PGs. However, for amounts greater than this, business owners and directors should be wary of their personal risk.
With that in mind, if your business is seeking to make use of CBILS and your chosen lender is requesting that you give a PG, it is very important that you take independent legal advice. In fact, the bank will require you to do so as a condition of providing the facility. This is because of the well-established body of law relating to guarantors who have successfully avoided liability on the basis that they were not advised independently of the borrower company and that they did not appreciate the personal ramifications of defaulting on the loan.
The process of obtaining independent legal advice involves a solicitor reviewing the guarantee and meeting with the guarantor to advise him / her on its terms. A real-time meeting is crucial so that the guarantor can ask any questions about the terms of the guarantee. Once the solicitor is satisfied that the guarantor has been advised, the solicitor then executes a certificate of independent legal advice (ILA) in order to confirm to the bank that appropriate advice has been given.
It is tempting to view the process as a mere formality, but it is an important part of managing the risk for both for the guarantor and the bank. In these unusual times, banks have also needed to adapt some of their standard processes and we have been working with them to ensure that the current social distancing rules can be adhered to whilst still providing virtual real-time client meetings.
To discuss any matters relating to the above or any other commercial or corporate requirements, please contact Greg Vincent, Partner in the Corporate and Commercial team by email at [email protected] or get in touch with your usual Morrisons’ advisor.