Banks often require supporting security for their loan. If it’s to a group of companies it is almost inevitable that every company in the group will be required to give a cross-guarantee making all the other companies equally liable. This discourages borrowers from shifting assets around the group to “protect them” from the Bank.
If a company is heavily borrowed, or is a relatively new business, it’s likely that the directors will be asked to give personal guarantees to support the company’s borrowing and these should be limited to a fixed amount. In addition, if a director has already invested cash into the company he may be asked to “subordinate” his loan account to the claims of the Bank. On all these issues we’re familiar with all the issues in order to maximise your bargaining position.
Sometimes Banks go further and want guarantees or security from partners or spouses of directors who have no direct ownership or involvement in the company. In such cases, the Banks now have a standard requirement for “independent legal advice” or ILA as the guarantor has to have full understanding both of the risks they are taking and of the potential liabilities that the company may have to the Bank.
Guarantees can be quite complex and usually not capable of amendment, it’s critical that any guarantor should get advice well in advance of the requirement being imposed by the Bank. Glaisyers’ experience can help business owners to avoid giving a guarantee to the Bank which they later regretted.
There is no substitute for a clear explanation of the full impact and ensuring that the guarantor fully understands that it will be an enforceable.