Bank Guarantee

[Henrik99]

Hi

Is it possible for the five partners in my firm to make a private side agreement that is legally binding in relation to a request from our bank to put in place personal guarantees relating to our credit facility. The bank requires the partners to all be all jointly and severally liable but is their any reason why we cannot apportion this out in a different manner to reflect more junior or senior partners?


Henry

 

[kulture]

You can try, but it's up to the bank.

 

[obscure]

Is it possible for the five partners in my firm to make a private side agreement that is legally binding in relation to a request from our bank to put in place personal guarantees relating to our credit facility. The bank requires the partners to all be all jointly and severally liable but is their any reason why we cannot apportion this out in a different manner to reflect more junior or senior partners?

You may agree between you who owes what amount but ultimately such an agreement would be meaningless. The whole point of a personal guarantee is that the bank can claim back their money from the individuals, if the firm fails to pay. The "jointly and severally liable" part means that you are liable both together and individually for the whole amount. If one or more of the partners is unable to pay, the bank will pursue the others for the shortfall regardless of any agreement between the partners.

Of course if all the partners had enough money to pay their share of the debt then the bank wouldn't care who paid what amount, just so long as they got all their money. But of course if you all had the money to pay you could just pay that money into the company and it would pay the bank so the personal guarantee wouldn't be invoked anyway.

 

[Free Lance]

There are two issues.

The 5's liability to the bank: The bank is very unlikely to agree to have differing levels of liability. They will want to be able to sue any one partner for the full amount, all five partners for 1/5 of the amount or anywhere in between (that's the essence of joint and several liability). You might be able to agree an overall cap on liability but that is rare (but not unheard of).

As between the 5: I think you're asking whether the five partners can agree amongst themselves to apportion liability so that, if the personal guarantees are called on, they bear the burden in proportions based on seniority, etc. Absolutely. That can be done. It's called a deed of contribution. It's relatively simply to draft but should be done professionally. Maybe 2 - 3 hours of work for a solicitor.

To clarify though, the bank will not be bound by your 'behind the scenes' agreement. It will pursue whoever it likes. The purpose of the deed is to cover 2 situations. Let's say bank is owed £100k and calls on guarantee. The partners are A B C D and E

(1) Bank claims £100k just from Partner A (the one with the deepest pockets). Partner A would have to pay the bank in full but would then have a claim against Partners B, C, D and E for a contribution. If there were no difference between the weigthing for Partners B, C D and E then he would claim £20k off each of them (or £25k of three of them is one is, for example dead or bankrupt).

(2) Bank claims £100k between the five partners equally. Each pays £20k to the bank but the Deed of Contribution means Partners A and B have to pay, say, 70% of debt and Partners C, D and E only 10% each. In that case, partners, C, D and E would have a claim against Partners A and B to reclaim the amount they have paid to the bank so that they have not paid more than 10% each.

And there are permutations and combinations of the above. In other words, whichever partners end up having to pay the bank, the behind-the-scenes agreement sorts it out between the other partners.

Of course, the deed of contribution only works perfectly if all the partners have the funds to pay the others.

PM me if you need more details.