Delays, guarantees, summary judgments and a return of insolvency proceedings?

What does the Government’s decision to delay step 4 of its roadmap mean for businesses that were planning to fully reopen on the 21 June?

The Government’s decision to delay step 4 of its roadmap out of lockdown came at a critical time for businesses that were planning to reopen or return to their usual capacity. The delay is a massive blow to them as well as the many, varied, businesses that supply them.

Ministers had reasons and scientific justification for their decision but comments that the delay is ‘just for four weeks’ and ‘the end is insight’ miss crucial commercial points. They will be cold comfort for anyone who now has to review plans and cashflow forecasts to factor in lost or delayed trade.

Loosing that much needed income comes as a double whammy as the scaling back of the Government’s financial support measures from 1 July 2021 will see businesses having to pay more towards the costs of furloughed staff. Both the delay to the final planned relaxation of social distancing measures and the scaling back of the Government’s financial support will inevitably stress cash flows and balance sheets. This in turn may well cause creditors, suppliers and landlords to look to existing personal guarantees and/or require new guarantees as a condition of continuing to do business as they look to protect their own positions.

Personal guarantees

Personal guarantees take many forms and cover many scenarios, from specific transactions through to all of a company’s liabilities with a funder or supplier, as well as those of its subsidiaries. They can be limited or unlimited in time and amount and, in some circumstances, may need to be backed by security such as a charge over a property.

Whatever their proposed scope, guarantee documents need careful consideration and negotiation to ensure that they are understood and properly reflect the situations and circumstances both sides want them to cover. In addition to the scope, guarantee documents should also specify when they can be called on and how demands are to be made. A good example of a point on which clarity is vital is whether a ‘guarantee’ is actually an indemnity (which imposes primary liability), or a guarantee (which imposes secondary liability contingent on a breach of an underlying contract), or a hybrid of the two. The distinction is more than just a legal nicety and can be crucial.

Care also needs to be taken to ensure that guarantees are not given inadvertently, for example in a supplier’s credit account application form. I have seen cases where directors have signed applications for supplier accounts without checking for guarantee clauses and subsequently found themselves faced with unexpected, and unwanted, demands when credit limits were breached.

Individual guarantors should also bear in mind that they cannot take advantage of the effective embargo on the use of corporate statutory demands and winding-up petitions. This was introduced by the Corporate Insolvency and Governance Act 2020 and is currently set to expire on 30 June 2021. Their creditors can therefore use bankruptcy proceedings to enforce personal guarantees.

Guarantors also need to understand the (subrogated) rights they get if they pay under their guarantee and how a creditor may be looking to vary these in their security documentation.

Return of the statutory demand and winding-up petition?

The Treasury initially indicated that wouldn’t alter its position in relation to the wide-ranging suite of Covid support measures it has put in place to stay in line with the roadmap’s now delayed fourth step. Those measures include the embargo referred to above, which has provided a welcome breathing space for debtors at the expense of the nuclear option in a creditor’s arsenal. Both sides have strong arguments for and against maintaining the current position but, following the 16 June 2021 announcement of a nine-month extension to the bar on commercial evictions for rent arrears, the odds must be on a similar treatment for the restrictions on demands and petitions.

When statutory demands and petitions are back on the menu, anecdotal evidence suggests that they will be back with a vengeance. Debtors must be ready to seek early advice on their positions and the potentially serious consequences of insolvency proceedings for their companies and directors if they are commenced. If the return of statutory demands is delayed, the additional time could sensibly be used to negotiate payment terms. Ideally, new terms should be recorded in an agreement to give peace of mind and avoid arguments. Agreements will need to comply with the terms concerning variations in any relevant contract and may need to be in the form of a deed to make sure that they’re enforceable.

If the embargo on the use of corporate statutory demands is continued, creditors may well look to any personal guarantees (or other security) they hold to leverage their positions and, again, directors will need to be ready to take steps to protect their positions where needs be.

Short circuit with summary judgment?

Where creditors cannot threaten insolvency or use a guarantee, they may well look to use the summary judgment procedure set out in Part 24 of the Civil Procedure Rules. This could enable them to obtain early judgments in cases where debtors are trying to rely on Covid-related financial issues to justify non-payment. Several recent decisions suggest that courts are unlikely to be persuaded that this type kind of argument is one that needs to go to a full trial. These decisions have seen creditors get early judgments, including orders for unpaid rent and service charges, that they can then enforce.

Our Commercial Dispute ResolutionCorporateReal Estate and Property Litigation teams all have experience of dealing with personal guarantees, insolvency issues and supporting businesses that owe, and are owed, money as a result of the pandemic’s impact. They are available to deal with any issues or advice you may need.

CONTACT SIMON

If you would like more information or advice relating to this article or a Commercial Litigation & Dispute Resolution law matter, please do not hesitate to contact Simon Walsh on 01727 798085.

© SA LAW 2021

Every care is taken in the preparation of our articles. However, no responsibility can be accepted to any person who acts on the basis of information contained in them alone. You are recommended to obtain specific advice in respect of individual cases.