The Lending Code and guarantees – a refresher

The Lending Code and guarantees – a refresher

Many UK banks subscribe to the Lending Code. The Lending Code (published by the Lending Standards Board (LSB)) is a voluntary code that, amongst other things, addresses how banks deal with individuals and small businesses and charities. It applies only to those financial institutions that subscribe to it and sets minimum standards of good practice for them.

Scope of the Lending Code

In the context of a guarantee, the Lending Code will apply if a guarantor is either:

a consumer (defined as an individual who is acting for purposes which are not linked to their trade, business or profession);
a micro-enterprise (business which employs fewer than 10 people and has a turnover or an annual balance sheet of no more than than €2 million); or
a charity which has an annual income of less than £1 million.
The Code covers matters beyond just guarantees however, in this post we’re just taking a look at the key points that apply to guarantees for personal and micro-enterprise lending.

Top 3 things to remember

Independent legal advice
Lenders should encourage guarantors to take independent advice before providing a guarantee so that they are fully aware of their commitment and the possible implications. Guarantees should contain clear wording recommending that all guarantors take independent legal advice. The full extent of their liability should be made clear including that the guarantor may liable instead of, or as well as, the borrower to repay the loan and any other money owing.
It is likely that a prudent lender will require this in any event owing to the legal risks of related to guarantors being unduly influenced to provide a guarantee. See our previous blog on the risks of undue influencefor more on this.

No unlimited guarantees
If complying with the Lending Code, lenders should not take unlimited guarantees from individuals (other than to support their obligations under a merchant agreement). If the Lending Code applies, it is possible to limit the cap which must be imposed to a cap only on the principal amount due from the borrower (i.e. so that interest and charges remain unlimited), but this should be made explicit to the guarantor.

Disclose financial information
Regular financial information about the borrower must be made available to the guarantor so that the guarantor can make an informed decision on how likely it is that the lender will make demand under the guarantee. This helps to ensure the guarantor is fully aware of the financial position of the borrower. Lenders will want to ensure that they do not breach any of their confidentiality obligations when releasing such financial information so a waiver of confidentiality will usually have to be obtained from the borrower beforehand.
Sanctions for non-compliance

Compliance with the Lending Code is monitored and enforced by the LSB. Although the LSB investigates serious breaches of the Code however, it is the role of the Financial Ombudsman Service to investigate individual complaints. The Lending Code does not have force of law, although some of its guidelines are rooted in law (such as the need for independent legal advice mentioned above).

Subscribers to the Code have to provide an annual statement of compliance and the LSB also carries out reviews and investigations. Enforcement action is taken as a last resort and includes:

the issue of directions as to future action;
warning or reprimand;
publication of details of the breach; and
cancellation or suspension of a firm’s registration.
The reputational risk is seen as a strong deterrent. Anything greater would usually depend on the findings of FOS and any referral to the Financial Conduct Authority.

For more information, email blogs@gateleyplc.com.

Lending Standards Board: http://www.lendingstandardsboard.org.uk/thecode.html

Setting precedents

Setting precedents

This week’s blog is yet another word of caution for those navigating their way through litigation, with an eye on the concept by which English common law is defined – legal precedent.

Last year we published a blog about a High Court decision on a security for costs application[1]. The Judge in that case decided that a claimant company registered in the BVI should not have a refusal to provide information about its assets held against it when fighting a defendant’s application for security for costs. The Court of Appeal recently overturned that decision, holding that it was perfectly sound practice for security for costs to be granted against a foreign company which declines to reveal anything about its financial position. A recent case concerned with similar facts and heard only a day after the Court of Appeal decision was made public has highlighted how care must be taken when using legal precedents as the basis for tactical decisions in litigation[2].

Details

A Hong Kong company claiming in a dispute over ownership of a London casino business refused to volunteer information about its assets in the face of the defendant’s request for security for costs, so the defendant applied to court. At that point, the claimant took comfort from the decision of the High Court Judge in the Sarpd Oil case and, when a High Court Master came to hear the defendant’s application, the claimant argued that its refusal to volunteer information should not be held against it: after all, its refusal was made at a time (before the Court of Appeal had intervened) when it could expect any master hearing an application by the defendant to be bound by precedent. The Master was faced with an interesting question: would he have been bound by legal precedent to follow the High Court Judge in the Sarpd Oil case if the application had come before him prior to the release of the subsequent Court of Appeal decision?

The common law system is based on judicial precedent. This ensures that lower courts must take account of and follow decisions made by the higher courts, and that cases are decided the same way when their material facts are the same. This gives litigants and their lawyers some certainty in knowing how a lower court, or “court of first instance”, should treat their case. In terms of decisions made at the same level, the notion of judicial comity means that a High Court judge will usually follow the decision of a fellow High Court judge unless he or she is convinced that the first decision is wrong. In the present case, an additional question arose: did a High Court master have the same ability to depart from a decision of a High Court judge (albeit at the same court level) if convinced that the decision was wrong. The Master decided that he did.

The decisive factor for the Master, in the absence of any precedent on the specific point, was that the status of the court, rather than the judge, was what was important. In contrast with a county court judge being absolutely bound by a High Court decision, or an appeal court considering the decision of a lower court, a master exercising jurisdiction at first instance at High Court level has co-ordinate jurisdiction with a High Court judge hearing a case at the same level. Each should follow the other’s previous decisions unless convinced that they are wrong.

Regrettably for the Hong Kong company in the present case, their advisors should have warned them that they could not safely rely on the Sarpd Oil decision because there was a chance that any master deciding the defendant’s application for security for costs would decide to depart from it. As it turned out, by the time of the hearing the Master could confidently say that he would have done just that, safe in the knowledge that the Court of Appeal would have supported him.

For litigants in this jurisdiction, the case serves as a reminder that legal precedents are a valuable guide, but subject to being overturned, and so not the final word.

For more information, email blogs@gateleyplc.com.

[1] Sarpd Oil International v Addax Energy SA [2015] EWHC 2426 (Comm)

[2] Coral Reef Limited v (1) Silverbond Enterprises Limited (2) Eiroholdings Invest [2016] EWHC 874 (Ch)

Rebates: a hidden danger for invoice discounters

Rebates: a hidden danger for invoice discounters

Debtors do not have to inform invoice financiers of agreed rebates according to a recent case [1] in the Court of Appeal which upheld an earlier High Court decision. Funders will be expected to make their own enquiries; should they fail to do so, it is at their own peril.

The case involved a claim by the financier (Bibby Factors North West Limited) against a debtor whose debt had been assigned to Bibby under an invoice discounting agreement between Bibby and a company called Morleys Limited.

When Morleys went into administration, Bibby claimed against two of the debtors (HFD Limited and MCD Group Ltd) in respect of unpaid invoices.

HFD and MCD had an arrangement with Morleys whereby they were entitled to a 10% rebate on annual sales. They argued that, since they were entitled to such a rebate, they should be allowed to exercise a right of set-off against the amounts claimed by Bibby.

Unfortunately, Bibby had not made any direct enquiry of either Morleys or the debtors regarding the existence of any rebate arrangements. It had merely sent a take-on letter to the debtors at the commencement of the invoice discounting agreement, advising them of the debt purchase and stating that “any right of set-off in respect of any sale you make to our client is not permitted“. The letter also requested that the debtors inform Bibby of any potential dispute.

HFD and MCD were aware that their debt had been assigned to Bibby. They had also taken part in debt verifications over several years but had not brought the rebate arrangements to Bibby’s attention.

The Court of Appeal agreed with the High Court’s ruling that the debtors had no obligation to notify Bibby about the rebate arrangements and that Bibby should have made its own enquiries. The court also held that the fact that Bibby sought to prevent set-off in its take-on letter (which it had no power to do except by agreement with the debtors) did not oblige HFD and MCD to volunteer information about the rebates.

This decision highlights to invoice financiers that the courts are unlikely to be sympathetic to a financier that is negatively affected by a rebate which ought to have been discoverable by the financier during its due diligence process.

Financiers should examine their procedures in order to ensure that they are undertaking adequate due diligence and are aware of any rebate arrangements that their customers might have made with debtors. In particular, they should:

Include a continuing contractual obligation on their customer to declare any rebate arrangements.
Search for evidence of rebates during the take-on process.
Include a search for rebates in on-going audits.
Include a request to be notified of any reason for non-payment in notices of assignment (as opposed to just requiring notification of any dispute).
For more information, email blogs@gateleyplc.com.

[1] Bibby Factors North West Limited v (1) HSB Limited (2) MCD Group Limited

Gateley Plc increases Banking team

Gateley Plc increases Banking team

The UK’s first commercial law firm to become a publicly-quoted company, Gateley Plc, has announced two more appointments to its national Banking and Finance team.
Christopher Fanner, formerly Head of Corporate Lending and Leveraged Finance at Herbert Smith Freehills, joins the firm as partner and Richard Cowan has joined the firm from Pannone Corporate as senior associate.

Christopher, who for the past 14 years has been ranked in Chambers, Legal 500 and Legal Business as a ‘leading individual,’ has been appointed as London Head of Corporate Lending and Leveraged Finance.

With over 25 years’ experience in a wide variety of corporate and leveraged debt financings, Christopher boasts a client list that includes UK and international lending banks, investment banks, debt funds, private equity funds, portfolio companies and both investment grade and sub-investment grade corporate borrowers.

On joining Gateley Plc, Christopher commented: “It’s an excellent time to be joining a banking and finance practice which is growing quickly and is winning great mandates here in London and around the UK from the leading corporate banks, corporates and private equity funds. I’m particularly looking forward to working with the team across the country to grow our existing bank and private equity relationships and in the immediate future to help to build our finance team here in London and the Thames Valley.”
Richard joins from Pannone Corporate, where he headed up the Corporate Banking and Finance Practice and will be based at Gateley Plc’s Manchester office.

Richard has almost 10 years’ experience of acting on leveraged finance transactions, real estate finance, refinancings and restructurings, and general corporate banking. He has acted for a range of banks and financial institutions, funds and trusts, and corporate borrowers, developing a strong reputation in Manchester and the North West, and he is recognised by Legal 500 for his work in the region.

Commenting on the appointments Andrew Madden, national Head of Banking at Gateley Plc, said: “The Banking & Finance team is an important part of the Gateley Plc business and has seen a prolonged period of growth as financial institutions across the UK respond positively to our commercially focused, partner-led approach to service. The signs are that this growth will continue, with increasing numbers of lending options available to businesses to support their investment across all markets, I am excited that we have been able to bring on board lawyers of the calibre of Chris and Richard to join our team, help us to continue our journey and further expand the reach of our practice.”

Open or closed?

Open or closed?

The phrase ‘by close of business’ is one that anyone in business is extremely familiar with in relation to receipt of documents or monies. Given the frequency with which it is used in day to day business, it is surprising that there is no set definition of what the phrase actually means.

So when faced with a request for something by close of business, how can you interpret when the deadline actually is? From a business perspective, some context may provide guidance. Obviously when used in internal correspondence it can be taken to mean the normal hours of the relevant business. Indeed in general the safest approach would be to assume that it means 5pm, given that the majority of business’ stated business hours end at this time. However, in other circumstances, for example in sectors where late hours are the norm, it may reasonably be taken to mean before opening of business the next day. The situation of course becomes more complicated when dealing with businesses in different time zones; which close of business will apply?

This uncertainty can have more serious implications when there is a legal element to the request. In some circumstances where the phrase is used in a contract, it may be an explicitly defined term, or if not may be constructed by reference to business hours elsewhere in the document, for example in the notice clause, in which case the deadline is clear. But what about when it is not clear from the document? The law in England and Wales has not yet stepped in to provide an answer to this, so there is no definitive answer yet.

However, there has been case law in other jurisdictions which may provide guidance on the subject. For example, in a recent case[1] the Irish Supreme Court has considered the meaning of the phrase in relation to the appointment of a Receiver by a bank. Here, the bank had notified the Appellants that they would appoint Receivers unless they received payment due under a number of mortgages “by the close of business on 17 February 2012”. Payment was not made, and the court heard evidence that the bank appointed a Receiver at 4pm that same day, which was accepted by the Receiver at 4.15pm.

The Appellants sought to have the Receiver’s appointment declared invalid, since, they argued, he was appointed prior to ‘close of business’. The court agreed with the bank, stating that the phrase needed to be interpreted in ‘its ordinary meaning…in the particular context that it is used’. Here, the end of a banking business day was when the bank ceased to do banking business with its customers, therefore at 4pm. It was irrelevant that employees of the bank may have continued to work in the bank well after that time, the point was that no payment could be made by the Appellants after this time and therefore an Receiver could be validly appointed after this time on the same day.

Although this case was decided in Ireland, it is likely that an English court would take a similar view and therefore this case provides useful guidance as to how ‘close of business’ would be interpreted in a banking context. However, it highlights the fact that the phrase ‘close of business’ is surprisingly ambiguous given how frequently it is used in everyday business. It is unlikely that any party would wish to incur costs by testing its meaning in the courts, and therefore it is advisable to clarify the actual time that the relevant documents or goods are expected where possible.

This post was edited by Rachael Bentley. For more information, email blogs@gateleyplc.com.

[1] McCann v Haplin & anor[2016] IESC 11

Another wind up – insolvency & employment

Another wind up – insolvency & employment

A case in the Employment Appeal Tribunal (EAT) has considered the difference, from an employment point of view, between administration and the appointment of provisional liquidators.

Details

The claimants worked for a company which provided care home attendants. On 26 March the directors resolved that it was in the best interests of the creditors to apply to have the company wound up. A winding up petition was lodged on 30 March along with an application for provisional liquidators to be appointed.

On 1 April the provisional liquidators were appointed. To ensure that the services provided by the employees of the company would continue uninterrupted, the company made arrangements for the employees to transfer to another company and the employment of the claimants with the transferee company began on 2 April.

On 27 April a winding up order was granted and joint liquidators were appointed on 18 June.

The claimants sought payment of arrears of wages, holiday notice and redundancy pay, and the issue was whether the insolvency exception set out in TUPE applied in the case of the appointment of a provisional liquidator.

TUPE Regulation [1] states that where the transferring business is the subject of bankruptcy or insolvency proceedings instituted “with a view to the liquidation of the assets of the transferor”, the employees will not transfer and any dismissals connected with the transfer are not automatically unfair.

The Court of Appeal has previously decided that administration proceedings are not capable of coming within the insolvency exception. The normal TUPE rule that employment obligations transfer will therefore always apply in an administration. Initially, the tribunal found that there was no transfer. This was appealed and the second tribunal held that there was a transfer and that the appointment of a provisional liquidator was similar to administration proceedings. Therefore the insolvency exception did not apply and all liabilities would pass to the transferee company.

That decision was appealed and the EAT held that the two sets of proceedings were not, in fact, similar. In allowing the appeal the EAT found that the second tribunal had failed to provide sufficient reasons for its decision. In particular, it had failed to explain why it felt the case was analogous to administration proceedings rather than liquidation proceedings. The key point in administration proceedings is that an administrator’s primary objective is to rescue the company as a going concern, which is not the case when provisional liquidators are appointed.

The case has therefore been remitted to the Tribunal for a fresh decision. We will keep you posted!

This post was edited by Lisa Smith. For more information, email blogs@gateleyplc.com.

[1] 8(7) of The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE)

LMA publishes template broker letter

LMA publishes template broker letter

The LMA has recently announced the publication of its own form of insurance broker letter for use on real estate finance investment transactions. Broker letters are used to provide comfort to lenders that the obligors are complying with their insurance obligations under the loan agreement, and that the lender (or agent, on syndicated transactions) will be made aware of any issues that arise with the insurance cover in place (such as non-payment of premiums). This is particularly important for the type of transaction where the lender(s) may only have limited recourse (restricted to the properties and related assets).

Problems

For a number of years broker letters have now and again reared their head on transactions as far more problematic than they should be. Different brokers take different approaches regarding the level of comfort they are willing to provide lenders, and they do not want to risk liability when they do not have to. It is hoped that the introduction of an LMA template will help smooth the way here.

As is usual with LMA documents however, the template is issued with the reminder that it is a starting point for drafting only, and needs to be tailored to the relevant transaction. The provisions, naturally, reflect the insurance provisions in the LMA REF Single Currency Term Facility Agreement for Multiproperty Investment Transactions, including the requirement that the security agent be composite insured in respect of its own separate insurable interest. This has been a point of negotiation on many transactions since the LMA first published the insurance provisions in its Real Estate Finance documents as insurers sometimes increase premiums in response to the request that the security agent (or lender on bilateral transactions) be named as composite insured.

Why Composite insured

The legal effect of co-insurance on a composite basis is that the rights of each co-insured are separate to those of the insured obligor. This means that, provided the policy contains the appropriate provisions, if one co-insured does something which vitiates (invalidates) its cover under the policy, this does not vitiate the other co-insured’s cover as well. This differs to joint insurance so the distinction is of particular importance to finance parties.

For more tips on dealing with insurance in loan transactions see our Top 10 tips here.

For more information, email blogs@gateleyplc.com.