In the current climate, lenders are having to adapt their policies to accommodate the Government's restrictions on movement and requirements for social distancing. Whilst most focus has been on the formalities of electronic signatures, lenders should not lose sight of the other aspects to lending processes – which are designed to mitigate against the risk of later challenges.
Taking new security
The introduction of the Coronavirus Business Interruption Loan Scheme ("CBILS") enables small to medium enterprises ("SMEs") to apply for loans of up to £5m from accredited lenders to support their businesses through the current Covid-19 crisis.
Structured in a similar way to the Enterprise Finance Guarantee scheme launched in 2009 in the wake of the global financial crisis, under the CBILS up to 80% of the lender's exposure will be guaranteed by the Government.
While a lack of security is no longer a condition for getting a CBILS loan, each accredited bank will need to make a credit assessment of the borrower's ability to take on the additional debt. The government have now expressly said that for loans of less than £250,000 the banks cannot ask for personal guarantees. However, for loans over that amount, a bank may ask for a personal guarantee. The guarantee must only be in respect of 20% of what the bank is owed after the bank has been paid out of any security over the business' assets. Importantly, banks are not allowed to take security over the principal private residence of such guarantors.
Lenders will be under enormous pressure over the coming weeks to support SMEs by offering CBILS-backed lending and other facilities. However, the current restrictions on movement present challenges to a lender's ability to comply with their prudent lending requirements.
Royal Bank of Scotland Plc v Etridge (No 2)
Whilst most commentary has focussed on the recognition of e-signatures (see our note here), an acute example of the current challenges is the processes lenders have adopted to ensure there is no undue influence (presumed or otherwise) described by the decision in Etridge.
Looking back at the Etridge guidance, where the security is, for example, a jointly owned investment property, it requires lenders to attend face to face meetings with the non-borrowing party (in the absence of the borrower) to explain the risks associated with granting security. It is longstanding practice for lenders to rely on certificates signed by independent solicitors confirming that they have provided the surety with that advice, following a series of steps prescribed in the Etridge judgment.
As yet there has been no guidance from the Government, FCA or PRA as to how lenders can continue to ensure their compliance with Etridge which, like other legal principles, do not simply fall away because of the current crisis.
Lenders will be balancing compliance obligations against demand and the challenges presented by the restrictions on movement. The challenges presented by these restrictions include:
- Solicitors as non-key workers are prohibited from travelling to work unless they absolutely cannot work from home. Typically, a lender may require the non-borrowing giver of security to meet a local solicitor to obtain independent legal advice ("ILA") and often to witness the deed.
- Individuals are urged to stay at home except for travelling to work if absolutely necessary, exercising and shopping for necessities. Attending a solicitors' office (or home) does not easily fit within these exceptions.
- Where a face to face meeting cannot take place, telephone and video conferencing may be a possibility. However, even video conferencing between the solicitor and non-borrowing party does not ensure the ILA is conveyed and understood or free from influence by the borrower – as would be the case in person.
- However, even video conferencing between the solicitor and non-borrowing party does not ensure the ILA is conveyed and understood or free from influence by the borrower – as would be the case in person.
No lender will be considering breaching the Government's directions, either directly or by mandating that their borrowers do.
And whilst ILA can be given over the telephone or video conference (and is often relied upon in non-Etridge circumstances), there is no direct equivalent to the face to face ILA which is prescribed by Etridge, very few lawyers will give lenders assurance that they are not bearing at least some risk.
Consequently, we consider some of the best (workable) alternatives in the circumstances:
- Use of regional solicitors who are willing/able to offer ILA at an appropriate distance.
- The lender (or the solicitor) could use a recorded telephone and/or secure video-conference with the non-borrowing party. Whilst this does not guarantee freedom from influence of the borrowing party (or others), it is the closest equivalent using technology that was not viable at the time of the decision in Etridge.
- Using a suite of documents/letters that can be issued prior and immediately after the security is granted – which affirm the non-borrower's commitments – with appropriate record keeping in place for the duration of the security.
- A condition subsequent in the facility which obliges the borrower to reconfirm the non-borrower's commitment (via a typical ILA process) at a time when movement restrictions are no longer in place. Failure to do so would allow the lender to terminate or accelerate the obligations if alternative security was not provided.
The judgment of Lord Nicholls in Etridge expresses that the non-borrowing party should have a face to face meeting to discuss the risks involved with the transaction. Lenders who follow the guidance in Etridge gain protection against later allegations by the non-borrowing party that they were unduly influenced into signing the security, or that they did so as a consequence of misrepresentation.
However, the obligation to have a face to face meeting is not absolute. The other steps taken by the lender to ensure, as far as is reasonably possible, that the risks of signing the security have effectively been brought home to the non-borrowing party, will still have a material impact on the determination on whether the security was signed as a result of undue influence or misrepresentation.
For further information or guidance, please get in touch.