It’s nothing something that many business owners want to think about, but consider the following scenario:
John Smith, owner of Company X, takes out a loan for his business and uses it to fund a new product range. He plans to use the profits from this range to repay the loan at a rate of £500 per month.
Contrary to Mr Smith’s robust financial plans, the new product fails to make enough income to repay the loan.
After meeting his essential business costs, John Smith must default on his loan as he cannot spare £500 from his business accounts per month.
His loan provider is forced to commence recovery proceedings – putting John’s assets at risk.
Take a look at the facts
John is an amalgamation of any number of business owners who have taken out a loan to grow their operations and, for a range of reasons, cannot make the agreed repayments.
Depending on the type of security John has granted to the lender, his assets may be a risk.
Assuming he has granted a legal charge, debenture and a personal guarantee, the assets that are at risk if he does not comply with the terms of the loan agreement and the security documents would be the property over which the legal charge has been granted and all of John’s assets (including all properties).
Ultimately any assets that John owns in his name personally could be at risk if the lender instigates bankruptcy proceedings against him.
When his lender decides to commence enforcement action, any costs associated with this (including the costs and expenses of an insolvency practitioner) will be added onto the loan and will be deducted from the proceeds of the sale of assets.
If there is a surplus, this will be repaid to John, although there is rarely a surplus once all sums due to the lender have been paid.
Depending on the terms of the loan, the lender may be entitled to charge default interest if John fails to pay the loan.
In some circumstances, the lender could even charge a management fee for the time it takes the lender to manage John’s account.
Banking and Finance Associate Solicitor, Dashna Morarji-Sagoo, concludes: “In my experience, in order to prevent the lender from enforcing the security, it is best for borrowers to communicate with the lender and be transparent, otherwise there could be severe costs implications and assets put at risk.”
We can provide impartial, straightforward advice to anyone considering taking out a loan where there is increased risk to their business or assets.
Contact Dashna Morarji-Sagoo by emailing DashnaMorarji-Sagoo@palmerslaw.co.uk or calling 01375 484443 or BJ Chong by emailing BJChong@palmerslaw.co.uk
The contents of this article are intended for informational and educational purposes only.