Remember when the economy was expanding and property prices were spiralling upwards? Those of us over forty years of age will certainly remember the boom years when nobody was particularly concerned about signing guarantees to support a business or development loan to their company (or even someone else’s company). No one ever seriously considered that a time would come when the economy would shrink, property prices would crash and banks and other lenders would start not only to call in company loans but also to look to guarantors for any debts and shortfalls created by the enforcement of security in a poor economic climate.
Today, as the economy continues to shrink in real terms and property prices fail to recover their previous values (upon which many loans were based), guarantors are frequently being asked to pay up. This has come as a shock to many, who never expected to be asked to pay either at all or in such large amounts.
For those who backed their guarantees with legal charges over property, the situation is even worse. Many people were persuaded to enter into legal charges to secure guarantees or legal charges/mortgagesunlimited in amount. Typically, these are known as ‘all monies’ charges, rendering the property owners liable for ‘all monies’ lent to a company (and now owed to the lender). Such individuals are often now desperate to try to understand what they can do to try to prevent the lender from enforcing such charges and making them bankrupt and/or homeless.
During periods of economic expansion, lenders in the UK have typically been reasonably lenient to such guarantors and have frequently agreed to re-schedule loans or to permit a re-mortgage in order to allow such people time to pay; they have even agreed reductions in return for firm (secured) agreements to pay over time. The current climate is not the same. Business pressures on large lenders and a chronic lack of finance available to small and medium-sized businesses have meant that lenders are now enforcing debts far more rigorously. Nowadays lenders will frequently not only evict residents and sell properties to obtain payment but, where they face a shortfall, they will bankrupt the individual concerned to extract the utmost from whatever assets that individual retains after the loss of his or her home.
Despite some creditor’s best efforts, many individuals have successfully avoided some or all of their liability under a personal guarantee. This, an article in a series on the subject of personal guarantees, sets out what the key documentation will be in such a claim and how to obtain such documentation.
What do you do when the bank calls a personal guarantee?
The first thing to remember is that just because the lender’s solicitors tell you that you owe their client money, this does not make it true. Before paying any sums at all, you should take some time to get your position checked out by someone who understands lending and the surrounding legal framework.
Set out below are the first steps that should be taken by any surety (guarantor or mortgagor) who is being asked to pay a substantial sum as a surety for company debts.
Find out what documents are being relied upon by the lender as proof that you are liable to pay sums claimed to be due. In addition to a written guarantee (and/or legal charge/mortgage), there will frequently be other relevant documents made between the lender and the company that has actually borrowed the money. Such documents will generally include the original loan agreement that has been entered into (and which was guaranteed or secured), together with any subsequent variations or alterations thereto. Guarantors of loans made to companies frequently (and surprisingly) have never seen the loan agreement between the lender and the company that is being guaranteed. As guarantor, you will not necessarily have been made aware of the initial terms of the loan (or may have only a very general idea of the loan’s terms) and also may be completely unaware of subsequent variations to the original loan agreement. Some variations to the original loan can be so great as to render a guarantor released from his/her guarantee, as a matter of law, even where the guarantee wording appears to suggest otherwise.
All relevant documents
Having found (or asked the lender for) all transactional documents, other documents will also be relevant to any accurate understanding of the legal situation. You should first look through your own documents for copies of relevant documents. These will include electronic documents such as e-mails and even texts/SMS messages; all these are technically ‘documents’. All relevant documents should be collected and put into chronological order.
Documents held by the lender
All lenders now have what they call a ‘document retention policy’. In true ‘Orwellian’ style, such a policy is inevitably not about document retention but ratherdocument destruction. Lenders regularly destroy all documents they consider not to be relevant to the transactions they enter into at the time (or in some cases possibly even documents that are seen as potentially unhelpful).
Most large banks now destroy all such documents within three years of the document being created; documents are checked, core documents are scanned and kept on electronic tape and then the original paper documents are destroyed. Most non-core documents are therefore permanently destroyed. This relatively new way in which financial institutions now fail to keep complete records can have serious consequences for those who feel that they were actively misled or even lied to by the original staff working for the lender at the time. Even if they are able to identify individual staff members, such staff will frequently have ‘moved on’ to other lenders. “Sanitising” their records in the manner described above allows such institutions to rid themselves of all of documents accompanying core transactional documents (and which may contain the only evidence of an active misrepresentation of its staff to the guarantor of some loan facility).
How to obtain documents from the lender
It is important to dispute your liability to pay in writing with the lender at an early stage. The grounds for disputing liability may not be obvious; however, disputing liability at an early stage does have the effect of putting the lender on notice that they should not destroy ‘relevant’ documents. (To make this clear, you should ask the lender to confirm that ‘relevant documents’ currently held by them will not be destroyed in the ordinary course of business and that they will be kept until any dispute is completely resolved.)
Some disputes may take some time to sort out. Disputes involving allegations of misrepresentation by the lender’s employees at the time can take a considerable period of time to resolve and you do not want important relevant documents to be destroyed by the lender before they can be disclosed to you.
Telling the lender in clear terms that you dispute liability should stop their destruction of non-core documents, but it is safer to ask that this is expressly confirmed in writing.
Once a ‘dispute’ has arisen, reference should be made immediately to the Civil Procedure Rules (CPR) Practice Direction relating to Pre-Action Conduct which imposes upon prospective parties to litigation a duty to provide documents reasonably requested by the other unless there is a good reason not to. Even if at this stage if a party refuses to supply a document so requested, the fact that an early request is made will create severe difficulties for the refusing party should it transpire that relevant documents were subsequently destroyed.
Should the dispute then escalate into litigation, it will be necessary for the parties to disclose documents relevant to the dispute. The minimum requirement will be for ‘Standard Disclosure’.
What is a ‘relevant’ document for the purposes of disclosure (CPR 31.6.2)?
For the purposes of disclosure, the CPR separate documents into classes of document, each with its own test of relevance:
1. Supporting documents
These are all the documents upon which a party relies as helping to establish his/her case. All of these documents will be relevant to the factual issues and supporting of the claimant’s claim or the defendant’s defence.
2. Adverse documents
These are documents that adversely affect a party’s case or which support the other party’s case.
3. Relevant documents
These are documents that are relevant to the factual issues, but not so relevant that they fall into categories 1 or 2 These documents might help ‘tell the story’ but do not clearly support either party’s case. In a typical claim (and in any application for pre-action disclosure), documents in classes 3 and 4 will not normally have to be disclosed by either party.
4. Train of inquiry documents
These are documents that are not strictly relevant to any of the issues but which might lead a party to a train of inquiry that may assist his/her case or which might damage the other party’s case.
Under CPR 31.6, ‘standard’ disclosure is normally limited to all those documents falling within categories 1. and 2.
In order to obtain disclosure of documents falling within categories 3. and 4., the case needs to be one involving dishonesty, such as allegations of misrepresentation, fraud and/or conspiracy.
Documents checklist: documents to request from the lender
Obviously this will depend to some extent on the way in which the lender has organised itself. However, there are certain key categories of document that are always worth asking for from any lender seeking to enforce a guarantee of a company loan:
- Copies of the original loan documentation and loan application form;
- Copies of any variations made to the terms of the original loan;
- Copies of any correspondence between the company and the lender;
- Copies of any demands made by the lender on the company;
- Copies of any other security held by the lender for loans made to the company:
- The lender may have a fixed and/or floating debenture and/or other mortgages or legal charges over property owned by the company. The existence of other loans and other security will almost always be relevant to issues of enforcement of a company guarantee;
- Copies of the lender’s lending criteria:
- This will be an internal document of the lender setting out the basis on which the lender’s employees are authorised to agree a loan. A loan made to a company in breach of such lending criteria can be attacked by a guarantor even if the guarantor did not know that the lending criteria was not complied with at the time the loan was made;
- Copies of all credit committee authorisations and/or credit committee memoranda:
- Again, these are internal documents of the lender that are not normally seen either by the debtor or by guarantors, but which are essential to be seen in any dispute with a lender. Usually the employee within the lender’s organisation who actually approves any particular loan will do so by reference either to a standing set of lending criteria (which he/she will have judged to have been met) or by reference to a particular authority given to him/her by the credit committee. Often such authority is bestowed subject to terms or conditions that the credit committee feels should be met before authority to lend can be granted. These documents are often essential for guarantors as they may enable them to establish that the lending criteria were not met or that certain lending conditions remained unfulfilled at the time the loan was made. Again, guarantors are not normally allowed to see such documents at the time of lending and so these documents need to be specifically requested;
- Copies of the terms and conditions of business of the lender at the time the loan was made to the company and any subsequent alterations to such terms and conditions;
- Copies of any general agreement between the company and the lender and any mandates or authorities given to the lender:
- Where the lender is a bank, there will frequently be not only a loan agreement but also authority as regards general banking business overdrafts etc. Where there are other loan accounts or overdrafts at the time the loan was made to the company, a guarantor can ask for disclosure of the documents showing the financial position of the company at that time. These matters ought to have been disclosed to the guarantor at the time but frequently this can be overlooked. Where the financial situation of the company was far more perilous than the guarantor thought at the time, this may be grounds for the guarantor to avoid the guarantee;
- Copies of all other agreements of any kind between the company and the lender either at the time of the loan or subsequently.
Organising one’s own documents and clearly asking the lender to provide any relevant documents is an essential first step in any dispute. However, requests to lenders to provide documents are inevitably refused for some reason or other (often the Data Protection Act is quoted as preventing the provision of such documentation – but this is incorrect). If such disclosure is refused, consider seeking legal advice and assistance with a view to forcing the lender to disclose relevant documents. Having politely asked the lender for such documents before instructing solicitors will be a very helpful tool in not only obtaining proper disclosure but, importantly, making the lender pay the costs (or part of the costs) incurred by your solicitors in obtaining such documents.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.