August 2008 - Credit Crunch Encourages Business Disputes


Business Law Update
from Cousins Business Law

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August 2008

Gary CousinsWelcome to the August issue of Business Law Update from Cousins Business Law.

I hope you will find information relevant to your business in this month’s issue. We are keen to cover topics of concern to business people so if you have questions or topics you would like us to cover, email your ideas to


Gary Cousins
0121 778 3212

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Time to Review Personal Guarantees

If you have ever signed a personal guarantee, then now is the time to review what powers your bank has and the true extent of your liabilities

Every new business that needs a startup loan from a bank tends to be in a weak bargaining position. If you are forming a limited company, the bank will probably require the directors to provide personal guarantees for the loan to the company.

Do you realise the true extent of your liability under that guarantee?

Personal guarantees are promises by individuals to be responsible for someone else's debts. These guarantees can be limited or unlimited. A limited guarantee in theory states the maximum liability of the guarantor. Be aware however that the bank can almost always add interest and costs onto the maximum figure stated in the guarantee so it isn't really a maximum figure at all.

Even if the business pays off that initial loan, the guarantee will still be in force so that if your business arranges a new loan in the future or uses an overdraft facility, then the bank can rely on the original personal guarantee for those debts as well.

Guarantees are also cumulative so that if you sign a guarantee with a limit (say of £10,000) and the bank asks you to sign a new guarantee (perhaps because the business needs to increase its loan) with an increased limit (say £20,000) then, unless the bank expressly releases you from the first guarantee, your liability will now be £30,000 not £20,000.

If you have personal savings with the bank, then the guarantee will allow it to seize these at any time to pay off any monies owed by your business.

The only way to bring your liability under a guarantee to an end is either to ask the bank to release you (don't hold your breath) or to see whether there is a provision in the guarantee document allowing you to terminate the guarantee. Normally you will have to give notice to the bank (typically three or six months) and at the end of the notice period, your liability under the guarantee is capped at the amount owed by your business to the bank on the last day of the notice period.

The trick here is therefore to serve notice and make sure the business owes the bank as little as possible (preferably nothing at all) at the point the notice period ends to reduce or remove completely your liability under the guarantee.

If you have ever signed a personal guarantee (or even worse cannot remember) ask your bank for a full list of the personal guarantees it is relying on as security for the liabilities of the business and ask for copies of the guarantees if you cannot find your own copies. Then start to take steps to reduce or eliminate your liability under those guarantees.

For specific advice on how to reduce your exposure under a guarantee, please contact Steve Petty.

Legal Update

Credit Crunch Encourages Business Disputes

We’ve been hearing for some time about how the credit crunch is affecting the housing and construction markets but we are starting to see the effect on other sectors of the economy as business disputes start to increase.

Commercial litigation is often said to be counter-cyclical: the worse the economy does, the more business disputes there are. The reasons for this appear to be two-fold.

Firstly, as businesses feel the effects of the economic downturn on their cash flow, they look to delay payment to creditors, especially when it comes to large debts. One way of doing this is to raise a dispute – this will usually mean a lengthy delay until payment needs to be made and, if the issue raised is genuine, can often result in a settlement where less than the full amount needs to be paid at the end of the day. If the dispute was simply created as a delaying tactic, however, it might eventually lead to more having to be paid once costs and interest are added on to the claim.

The second reason is that businesses are more likely to fight valid claims. Frequently, contracts don’t go quite to plan, leaving one party with a claim they could make. Often these claims aren’t actually followed through but in times of economic slowdown, we see many more businesses actually making these claims.

A lot of this is down to management time; it takes a great deal of time to fight a dispute - paperwork will need to be gone through, calculations of losses prepared, and meetings with lawyers and court attendances all bite into management time. When business is good, managers might prefer to use their time doing what they do best: concentrating on sales, production and finance. When business is slow, however, managers might have more time available to fight claims and it might make economic sense to do so.

It is at times like this, when litigation is rife, that it is even more important for all businesses to take steps to avoid costly claims being made against them. Make sure you have a strong credit-control strategy in place - see our article on The Zero Tolerance Approach to Bad Debt and follow our tips on Steps to Handling Business Disputes should they arise.

If the commentators are right, we will see things getting worse before they get better, and our dispute resolution work is likely to increase even further. This is why we are planning for the recession by recruiting dispute resolution lawyers.

It is particularly important when it comes to disputes, whether you’re are at the making or receiving end of a claim, to get legal advice as soon as possible. This can often save a great deal of time and expense further down the line. Take advantage of the Cousins Business Law free legal telephone assessment to check whether you have a claim or defence in your particular case.

Plain English Legal Advice

New Rules Affect Cross-Border Trade

The Government has recently announced that the UK will be opting in to the Rome I Regulation. This Regulation aims to clarify whose laws are applicable when a dispute arises concerning a contract between people or businesses based in different EU countries. The Regulation is due to come into force in December 2009. A similar Regulation, known as Rome II, applies to non-contractual disputes and comes into force in January 2009.

The Regulations aim to give parties to a contract the freedom to decide what country’s laws should apply to their situation and set out rules as to what laws will apply if the contract does not specify the law to be applied.

The message is therefore clear: all businesses that deal with cross-border matters or who deal with customers or suppliers in other EU states should make it clear in all contracts entered into from now on whose laws should apply in the event of a dispute, whether contractual or otherwise.

For advice on the wording of your commercial contracts contact Cousins Business Law.

Useful Links

Check your Lease Now!

The vast majority of tenants never read their lease after it has been signed and frequently commit breaches of the terms of the lease through ignorance of the obligations imposed on them. For a 5-point plan for checking your lease read Check your lease now on the Cousins Business Law website.

Fraud advice guide from Equifax

Credit information company Equifax has produced a free fraud advice guide to alert businesses to the dangers of fraud. The guide includes a 12-point checklist to help small firms reduce the risk of fraud and ID theft.

Litigation Madness

Church Worker Sentenced to Jail with a Bible Quote

It never ceases to amaze how unusual a judge’s summing up can be at times but when Judge Michael Stokes QC recited a passage from the Gospel of St Matthew to sentence church worker and fraudster Terence Upton he really excelled himself.

The judge told Upton: "It brings to mind Matthew 23:14 - 'Woe unto you, scribes and Pharisees, hypocrites! For ye devour widows' houses and for a pretence make long prayers: therefore ye shall receive the greater damnation.'."

The full story is available to read on the Telegraph website.

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Cousins Business Law is a member of the Law Society & regulated by the Solicitors Regulation Authority. Head Office: Swan House PO Box 11543, Birmingham, B13 0ZL. Tel +44 (0)121 778 3212. Fax: +44(0)121 275 6155