“The name’s Bond, Demand Bond.”

Banks aren’t the only ones facing the dangers of commercial borrowing. Stephen Netherwood explains.

Our commercial clients tell us that it’s very difficult to obtain business capital from banks, and has been since 2008.
Maybe it’s a coincidence, but there’s something else that business lenders have been doing for the last few years that can make business borrowing more risky than it ever used to be.
For decades, business lenders have followed a policy of demanding personal guarantees from company directors as a condition of providing loans to the company. Lenders don’t much care about the corporate veil – they just don’t want directors liquidating the business then smiling sheepishly and explaining that they just wish they’d been able to pay back the loan beforehand.
The recent development has been to strengthen these guarantees into what has been called by the Court of Appeal a demand bond. In the words of a judge:

…it is a particularly stringent contract of indemnity….Sometimes the wording of the contract has the result that the liability of the guarantor arises on mere demand by the lender, although it might be that the borrower has not done anything wrong or even that the lender itself is in default under the loan agreement. ¹

If that doesn’t leave you as shaken as James Bond’s martini, then your business must be as strong as Fort Knox!
Business loans, overdraft facilities, invoice factoring – all these arrangements are usually packaged with guarantees. If you have one of these – or you’re thinking of entering such an arrangement – contact our commercial team who can advise you exactly how dangerous the guarantee might be.
And if you’re already in trouble because such an arrangement has collapsed, contact our litigation team to find out whether you can live to fight another day…

¹ In the case of Vossloh Aktiengesellschaft v Alpha Trains (UK) Limited [2010] EWHC 2443 (Ch), at paragraph 28. (Adapted to make sense to a non-legal audience.)