There is a steady stream of information being published regarding the Coronavirus Business Interruption Loan Scheme (CBILS). However, it has been somewhat overlooked that, in order to participate, borrowers still must satisfy banks’ normal loan criteria. The 80% government guarantee does not therefore appear to be sufficient by itself, for many banks to provide CBILS facilities to SMEs during these uncertain times.
The BBC has published an article (see here) criticising banks for often insisting on personal guarantees (PGs) being provided as part of CBILS lending. As well as PGs, banks are often asking for these PGs to be secured by charges over the guarantor’s assets. Although the British Business Bank states that “primary residential property cannot be taken as security under the scheme” (see here), banks can still request security over other assets such as personal savings, shares or second homes.
Security under CBILS
As a summary:
- a lender will not offer finance under CBILS if they can lend on their normal commercial terms
- for loans of £250,000 and under, lenders can choose to use the CBILS for unsecured lending
- for loans above £250,000, before borrowers can access the CBILS, it must be established that they are otherwise unable to provide adequate security.
Despite the above, it has been reported that HSBC’s current requirements is a form of PG for loans over £100,000. Barclays is apparently insisting that business owners need to sign a PG before they can access any CBILS lending. Royal Bank of Scotland, on the other hand, has confirmed that it will offer loans without asking for PGs.
It will be interesting to see in the coming days and months, if mounting pressure will cause other banks to follow in RBS’ footsteps.
Why should I be wary of giving a PG?
A UK company is a separate legal entity which is solely responsible for any debts it incurs; directors and shareholders sit behind the ‘corporate veil’ and are protected through limited liability. Providing a PG pierces this ‘corporate veil’, which means that the guarantor’s personal assets are at risk.
This only happens in other very limited circumstances such as:
- serious breaches of Health and Safety legislation
- failure to file accounts at Companies House
- wrongful trading (suspended currently from 1st March 2020 due to the crisis)
- breaches of Directors’ Duties.
Eight key points for potential guarantors
- Consider alternatives to offering a PG e.g. charges over other assets of the borrower or re-valuing freehold property to hopefully give the bank additional comfort.
- If it proves impossible to negotiate out of a PG, ensure that you agree certain conditions with your bank manager as to when the PG could fall away e.g. after an agreed period or on a certain turnover figure.
- Make sure that you only agree to grant an unsecured PG (as it is easier for the bank to proceed against the guarantor’s main assets if the bank holds a secured PG).
- The limit on the director’s exposure should not necessarily equate to the bank’s overall exposure but should reflect other security held.
- If other guarantors are prepared to share the burden, follow on negotiations should include whether liability is several or joint and several. Consider deeds of contribution where the guarantors each agree a percentage liability. The borrower company may also be asked to pay the guarantors a fee (check whether this is permitted under the PG).
- Agree that the guarantee is limited to new facilities only.
- Banks will usually insist that guarantors take independent legal advice. This may sound very caring. However, this is in fact to ensure the enforcement of the PG is harder to challenge!
- Be aware that if payment is made under a PG, the guarantor has a right of reimbursement from the borrower and possibly from other security/PG providers.
Potential guarantors should not be pressured to sign the personal guarantee proposed by their bank. Before committing, it is vital to always take proper legal advice. If you are concerned with any of the above, please contact a member of the team using our website, or your usual Fox Williams contact.
Articles and commentary by our legal experts on the impact of COVID-19 are all available here.