It is a common requirement in business life that the directors of small to medium sized businesses are required to give personal guarantees. Any number of suppliers and landlords may require guarantees. Here we focus on bank guarantees.
If you receive a demand under a guarantee then the first golden rule is do not panic. The second golden rule is do not take advice from the man in the pub.
You have received either a formal letter demanding payment and threatening litigation or a letter in more gentle terms asking for your payment proposals. Either way do not be lulled into a false sense of security or be overly alarmed because litigation is threatened.
How can the bank demand payment under the guarantee after all this time? We see increasing numbers of cases whereby many years have passed since the date of the guarantee and the insolvency of the company before the bank demands payment.
Isn’t the guarantee time barred? Briefly a guarantee tends to be under deed. The much talked about limitation or time bar period is in general terms 12 years under a deed (as opposed to six years for a straight debt claim). There are then issues as to the history of events since the guarantee. We won’t say anymore as to limitation periods as it isn’t always the most exciting subject (we would hope you read to the end of this article) and in any event, every case is different: it is another area of law whereby the man in the pub can be very unhelpful.
The guarantee will, on the face of it, be worded so that the bank is entitled to demand payment from you, without you having any right to defend or object; for example, that you guarantee any money owing whatsoever at any time by the company to the bank: whether that debt was owed at the date of the guarantee or was later. Further, the guarantee will probably say that if the bank were to let the customer off the hook in some way as guarantor would still be liable.
Unsurprisingly, the guarantee is worded very much in favour of the bank. Despite that one sided wording, the law may still intervene on the part of the individual guarantor as against the bank. For example, did the banking facilities materially change after the date of the guarantee? If yes, were you as the guarantor consulted by the bank as to such changes and agree to them? It may be that you are able to say that the bank imposed unilateral changes to the banking facilities that you did not contemplate as possible at the time of the guarantee. If the bank chose not to seek your agreement as guarantor to the change in those facilities, it may said to have effectively abandoned the guarantee.
Has there been any unlawful or irregular action on the part of the bank over the years that again will provide at least a partial defence to a guarantee claim? The media is awash with details of the “special measures/recovery units” employed by certain banks. We can’t be the only professionals to cynically laugh when the term “support” was used. Did the company take out interest rate hedging products with the bank? If yes, has compensation been paid and was that a fair amount?
Is the bank really intent upon suing you if you do not pay it all or at least close to the total claimed? Or is the bank merely “trying it on” with a view to clearing off old guarantees and in the absence of its reaching a payment deal with you it then closes its file and nothing more is heard.
Another golden rule: do not ignore the bank. It may be the letter demanding payment proposals was little more than the bank trying to discover whether it can recover any money but the odds are that ignoring the bank’s letters will provoke it to take further action, even suing you or trying to make you bankrupt.
A response to one of these claims under a bank guarantee should be measured, reasonable and clear. You need to be aware of what, if any, legal arguments you could be able to use to defend the claim and demonstrate to the bank that you will argue your corner.
Avoid the temptation to make threats of running to the press or local MP. Certain banks in particular have managed to ruin their own reputations to such an extent that the threat of bad publicity is like water off a duck’s back. In any event as a point of principle banks, similar to other businesses, do not take kindly to threats which may be seen as tantamount to blackmail. If you want to report this matter to the press then the bottom line is get on and do it but without attaching any conditions to the bank. You may though find that burns your boat in terms of later attempting to settle. We suggest restraint: there is always time to complain or look for publicity in future if that is really in your interests.
Delay: as we say, we are seeing large numbers of cases whereby many years have passed, sometimes more than six, since the company went bust and the bank now looks for payment. Depending upon the history it may be that the bank having waited to demand payment has harms your ability to defend their claim in court; documents have been destroyed and witnesses’ recollections have faded. Whilst rarely a conclusive argument it can be a relevant and fair issue to raise.
If your response is to try to settle, be careful. A pleasantly worded letter asking that you complete a statement of finances may be regretted later. Also beware a tactic frequently used in trying to agree a settlement payment: you are invited to make an offer and do so. The bank rejects that offer. You ask what the bank will accept only for it to reply that it is for you to make an offer. You make an increased offer and that is again rejected with the same response to the first time you asked. The bank in refusing to say what payment it will accept is looking to frighten you into making ever higher offers.
Finally, view a bank guarantee claim in the round: what is your appetite for risk, desire to settle and your own personal financial circumstances? Some banks may be sympathetic in considering a settlement payment. The bottom line as ever is, you wish to know as soon as possible what is the true position of the bank in terms of its determination to sue you and its willingness to settle,
It may be that an investigation by lawyers reaches the conclusion that there is no real ground to defend the guarantee claim and that the bank is intent upon extracting every £ that it can. Whatever the case, if you receive one of these claims you will want to know what you face and all the possible outcomes and risks.
For any issues relating to Guarantees or any other Corporate Recovery or Insolvency matters please contact Stephen Wiles, Partner and head of our Corporate Recovery and Insolvency department.