Loans and invoice finance scheme facilities have been made available by accredited lenders to customers under the Coronavirus Business Interruption Loan Scheme (CBILS), either as standalone facilities or alongside existing loan, overdraft, asset based lending and invoice finance facilities.
In the event that a customer defaults on repayment of a CBIL scheme facility or its other finance facilities and either the lender does not waive, or the customer does not remedy the default, and it is not possible to agree a restructuring of the repayment terms, lenders will need to understand the actions they can take to recover payment of both secured and unsecured indebtedness due by the customer.
Lenders should also be sensitive to potential misunderstandings by customers about the terms of repayment of facilities provided under the CBILS and the potential negative publicity that may result from taking action to recover payment of indebtedness due under such facilities.
Default under a CBIL scheme facility
The CBILS provides a lender with a government backed guarantee (scheme guarantee) against the outstanding balance of the relevant scheme facility (capped at 80% of that balance), but the customer remains liable for the full amount of the facility. A lender can only look to the government to make payment under the scheme guarantee after it has undertaken an “appropriate recovery process” in accordance with their existing processes and all assets of the customer have been realised and any claims against a guarantor of the CBIL scheme facility have been pursued.
An event of default may occur under the relevant scheme facility. However,
- default under another facility with the same lender may entitle the lender to demand immediate repayment of the CBIL scheme facility if the terms of the other facility contain a cross-default clause entitling the lender to demand repayment of all indebtedness due under any facility provided to the customer by the lender;
- similarly, the cross-default clause may extend to a default under a borrowing or financing arrangement with any other creditor, so that a default by the customer under another creditor’s facility may constitute an event of default under any facility provided to the customer by the lender, including the CBIL scheme facility
Events of default contained in a CBIL scheme facility agreement will include insolvency proceedings commenced in relation to the customer. Financial contracts, including CBILS loan facilities and asset based lending and invoice finance agreements, are not subject to the restrictions on insolvency termination provisions introduced by the Corporate Insolvency and Governance Act 2020 (CIGA), so a lender will be entitled to exercise contractual rights to suspend facilities, accelerate and demand repayment of all indebtedness, charge default interest and exercise contractual rights of set-off in the event of a customer entering into an insolvency process.
If an event of default occurs, the lender must decide whether to
- declare an event of default in order to exercise its rights under the default provisions of the facility agreement or to waive the event of default;
- negotiate a standstill agreement with relevant creditors of the customer; or
- amend the facility agreement
As a condition of continuing the facility, lenders may consider asking for further security, where any additional collateral is available (having regard to the relevant “hardening periods” applicable to antecedent “reviewable transactions” entered into prior to the subsequent insolvency of the customer).
If there is a grace period during which the customer is given the opportunity to remedy an event of default (assuming the relevant default is capable of being remedied), the lender must defer action until the grace period has expired.
If a lender cannot decide what action to take, it is recommended that a reservation of rights letter is sent to allow the lender additional time within which to determine a course of action or agree terms with the customer.
If a CBIL scheme facility becomes due and payable, a lender will be entitled to make demand for immediate repayment of the facility and accrued interest (or discount in the case of invoice finance facilities) and, in default of payment, to take action to recover payment. However, the lender needs to consider carefully the available enforcement options to maximise realisations and ensure that any shortfall can be reclaimed under the scheme guarantee, taking into account the lender’s obligations under the CBILS.
Recovery of indebtedness due under a CBIL scheme facility
A lender may have various courses of action that can be pursued to recover payment of the indebtedness due by a customer under a CBIL scheme facility. The potential options will depend on the type of facilities being provided and whether security over the customer’s assets has been granted or the lender’s claim (or part of it) is unsecured.
- an invoice financier, who has taken an assignment of the customer’s debts pursuant to an invoice finance scheme facility, should be able to secure payment of the purchased debts relatively quickly to extinguish the indebtedness arising under the facility;
- however, it is conceivable that the value of the debts recovered may not be sufficient to settle the indebtedness as a result of advances being made at a higher prepayment percentage than the invoice financier would have usually offered without the benefit of the scheme guarantee. In those circumstances, the invoice financier may look to any security that has been taken to cover the shortfall and/or to pursue a claim for the shortfall against the customer and any guarantor(s) as an unsecured creditor.
If a CBILS loan facility has been provided alongside an invoice finance facility, the lender may appropriate any surplus arising under the invoice finance facility against any shortfall payable in respect of the separate CBILS loan under its contractual rights and, if appropriate, insolvency set-off rules.
If the lender has taken an all assets debenture as security for the customer’s indebtedness, assuming that such debenture contains a “qualifying floating charge”, the lender may put a corporate or LLP customer into administration. Administration can facilitate the recovery of purchased debts without the need for disclosure of the assignment of the debts to the debtors and administrators are usually co-operative in providing assistance and documents in the course of the collection process.
- the administration process may take months to produce payment from the secured assets of the customer
- additionally, there is a possibility that the value realised for the secured assets is less than anticipated, particularly as the lender’s recovery under its floating charge will be impacted by the recent change relating to Crown Preference (see our blog entitled “HMRC as a secondary preferential creditor: implications for asset based lenders – part 2”)
CVAs and business restructuring
A customer may attempt to prevent a secured lender from placing the customer into administration by proposing a Corporate Voluntary Arrangement (CVA) or proposing a moratorium or restructuring plan under CIGA. A CVA cannot bind a secured creditor without the secured creditor’s consent, so secured lenders can usually influence the approval (or rejection) and terms of a CVA.
- the new moratorium procedure is one of the permanent reforms introduced by CIGA and is designed to prevent both secured and unsecured creditors from commencing insolvency proceedings or enforcing security
- an explanation of the consequences of a moratorium and a restructuring plan on the lender’s entitlement to enforce repayment of a customer’s indebtedness is beyond the scope of this note but can be found in our separate note entitled “The impact of CIGA 2020 on Receivables Financiers and Asset Based Lenders” (July 2020), a copy of which is available upon request
Guarantees and indemnities
Claims against parties who have provided guarantees and indemnities, both corporate and personal guarantors (subject to the limit on recoverability under personal guarantees taken to cover CBIL scheme facility shortfalls), may be commenced under well drafted guarantees immediately following default by the customer under the facilities covered by the guaranteed obligations.
- such action may be considered precipitous and guarantors frequently assert defences (albeit, without legal justification) that the lender has purchased uncollected debts or taken security, the value of which covers or will reduce the outstanding indebtedness, which should be realised first before claiming on the guarantor
- such defences can usually be rebutted on an application for summary judgment in proceedings taken to secure a judgment against a guarantor
The proceeds of realisations of collateral, namely assets of the customer over which security has been taken by the lender, must be appropriated in accordance with the waterfall provisions of the CBILS. Similarly, any recoveries from a guarantor under a guarantee of the customer’s liabilities must be appropriated in accordance with terms of the CBILS. Only after such appropriations have been applied to the balance of the CBIL scheme facility can a resulting shortfall under the CBILS be claimed under the scheme guarantee.
If an unsecured claim against a customer and/or guarantor is disputed, we recommend that mediation is considered prior to commencing legal proceedings or at an early stage of proceedings that are defended. In our experience, mediation has a high chance of resolving disputes and a settlement agreement concluded at the mediation can then be enforced if the customer/guarantor defaults on its terms (see our blog entitled “Debts and Coronavirus: how best to pursue payment of outstanding debts”).
A lender’s unsecured claim against a customer and/or a guarantor may be pursued in proceedings commenced in the county court (claims up to £100,000) or high court with the objective of securing a judgment against the customer/guarantor which can then be enforced against the customer’s/guarantor’s assets. There are no COVID-19 restrictions on creditors issuing proceedings and the courts are still operating, though claims that are defended are taking longer to progress and hearings (for example, for summary judgment) are currently conducted remotely.
Upon securing judgment, the enforcement options are dictated by the assets believed to be owned by the customer/guarantor. The options include:
- execution by high court enforcement officers against goods owned by the customer/guarantor
- an application for a charging order over property owned by the customer/guarantor and, if necessary, subsequently applying for an order for sale of the property (to the extent that, if the claim includes a claim for sums due under a CBIL scheme facility, the recovery of the proceeds of sale of a principal private residence is permitted under the CBILS)
- an application for a third party debt order to secure payment to the lender of a debt owed by a third party to the customer/guarantor
The use of statutory demands and presenting winding-up petitions against corporate (or LLP) customers and guarantors was initially suspended under CIGA until 31 December 2020 where the customer or guarantor is unable to pay its debts as a result of the COVID-19 pandemic.
However, the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2021 (the Regulations) were laid before Parliament on 24 March 2021 and will be effective from 26 March 2021, which provide (amongst other things) that the restriction on the use of statutory demands and winding up petitions in circumstances where a company’s inability to pay is due to COVID-19 will continue until 30 June 2021. Assuming that this deadline is not extended again, these potent actions will again be available to creditors. Also, a lender will still be able to serve a statutory demand and present a winding-up petition if the lender can demonstrate that it had reasonable grounds to believe that the company’s inability to pay its debts is not the result of COVID-19. This may be difficult to establish having regard to the criteria on which CBILS facilities have been made.
There are no COVID-19 restrictions on the use of statutory demands and bankruptcy petitions against individuals. However, an individual may propose an Individual Voluntary Arrangement to his or her creditors in order to avoid bankruptcy.
The government has published non-statutory guidance on responsible behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency, which is expressly applicable to lenders, so it is imperative that lenders consider carefully how to approach the recovery and enforcement of claims against customers and guarantors, including dealing with any disputes, before embarking on a course of action (For more information on this guidance, see our blog “Government guidance on responsible contractual behaviour: key takeaways”). For example, offering to refer a disputed claim to mediation (see above) may help to substantiate that a lender’s behaviour is responsible and fair.
- it is also important that the lender complies with its obligations under the CBILS in respect of the manner in which the lender takes action to recover shortfalls under the Scheme
- lenders should take actions in a reasonable manner, show empathy with their customers and comply with requirements applicable to treating customers fairly
- this may mean that lenders proactively demonstrate more forbearance to customers suffering financial difficulties as a result of the coronavirus pandemic, including payment deferrals or holidays, before taking enforcement action
It is anticipated that there will be a significant number of complaints resulting from the enforcement against customers of balances due under CBIL scheme facilities. The complaints are likely to range from miss-selling of the Scheme to alleging that the Scheme was not suitable for the customer’s needs having regard to the customer’s financial position at the time the facility was made. Maintaining an accurate record of the due diligence undertaken at the time the CBIL scheme facility was granted and the steps taken by the lender to address and, if appropriate, accommodate a customer’s default may prove critical to rebutting customer complaints.
Lenders’ internal complaints processes will need to be conducted transparently and fairly. If a lender rejects a customer’s complaint, the customer may have other options to pursue the complaint. The increase in the jurisdiction of the Financial Ombudsman Service (FOS) to resolve financial disputes between SME customers and lenders and the introduction of the Business Banking Resolution Service, which is a dispute resolution service available to larger SMEs (who are not eligible to take their disputes to FOS) and the participating banks, provide cost-free avenues for eligible customers to pursue their complaints about lenders’ conduct and facilitate customers expressing dissatisfaction and delaying the legal process.
While legal remedies are available to a lender to recover payment of CBIL scheme facilities, when faced with a default by the customer, a lender should carefully consider all the options and assess how they will achieve the lender’s objective of making a full recovery of all outstanding indebtedness before embarking on a particular course of action.
In particular, the lender should anticipate how the customer and any guarantors will react to the lender’s demand for immediate repayment of the indebtedness and whether there is an opportunity to enhance the lender’s position by reaching an accommodation with the customer and any guarantors which may, for example:
- provide the lender with additional security, additional information about the customer’s and any guarantor’s assets (including their location)
- and a controlled reduction in the indebtedness (e.g. by increasing reserves or reducing the advance percentage under an invoice finance facility)
Time expended now reviewing and stress testing exit strategies in relation to customers’ CBIL scheme facilities could be well spent because there is no certainty that the scheme guarantee will cover all CBIL scheme facility shortfalls.
At Francis Wilks & Jones we are experienced in acting for lenders in pursuing claims against customers and guarantors that need to be handled firmly but with appropriate sensitivity. For further guidance, contact partners Andrew Bowden-Brown, Chris Willison or another member of our banking & finance team.