With banks seeking ever tougher terms from borrowers and acting more quickly to protect their position when lending terms are breached, a recent decision shows the wisdom of making sure that the lending terms are well understood.
The case involved a lender who advanced to the shareholders of a company money which they then put into the business. When the loan was not repaid, the question arose as to whether they had borrowed the money as principals (in which case the bank had immediate right of recourse to them) or as ‘secondary obligors’ (in which case the bank could pursue them only after it had taken action against the company).
Regrettably for the shareholders, the loan contained a clause which allowed the bank to make a demand for repayment directly to them as signatories to the loan agreement. They were due to repay the loan ‘unconditionally’ and ‘on demand’.
If you are seeking funds for your business, it is crucial to understand the documentation you are asked to sign and its potential implications. We can assist you in negotiations for finance.
Partner Note
IIG Capital LLC v Van der Merwe. [2008] EWCA Civ 542.