Personal guarantee

What is a Personal Guarantee?

When money is lent to a company or person, a lender will usually seek some form of security over the borrower’s assets so that those assets can be realised (sold) in the event that the borrower cannot or does not pay. That might take the form of a mortgage over real property, a fixed charge over assets, or a debenture over all of a company’s property.

If a borrower’s existing assets are deemed insufficient to repay a lender, or even if a lender simply requires an extra layer of protection, the lender may also seek a “personal guarantee” as a further form of security for its borrowing. A personal guarantee works by way of an individual who is not the borrower essentially promising to repay – “guaranteeing” – the debts of the borrower in the event that the borrower defaults on repaying the lender.

In practice, personal guarantees are most commonly seen in corporate borrowing, where a lender will require a personal guarantee from a company’s directors or shareholders as a condition of the lending. That will mean that if a company defaults on its loans, the lender can pursue the directors personally– as “guarantors” – for the outstanding sums. In practice, many personal guarantees may be “capped” at a lower amount than the total of the borrowing, meaning a lender may in many circumstances not have the option of recovering their full loan from a guarantor.

When can personal guarantees be enforced?

The practicalities of enforcement on a personal guarantee will largely be governed by the loan documentation and the document recording the guarantee itself. These will specify the circumstances in which the guarantee becomes enforceable – usually referred to as an “event of default”. Common events of default include, among other things, the failure by a borrower to meet a repayment of its loan on a repayment date; the occurrence (or non-occurrence) of a particular event (most commonly seen in loans advanced for a specific purpose, such as a property development); or the commencement of insolvency proceedings against the borrower.

Personal guarantees will usually become automatically and immediately enforceable upon the occurrence of an event of default. Most guarantees will not require the lender to exhaust all avenues of enforcement against the borrower before enforcing against the guarantor (although in practice it is advisable to make some form of demand on the borrower, if only to demonstrate an inability to pay).

How can a personal guarantee be enforced?

When a personal guarantee becomes enforceable, it will be considered a “liquidated sum”, meaning that insolvency proceedings can be commenced immediately against the guarantor without the need to first establish a debt through the Courts. In practice, the lender will usually make a written demand of both the borrower and the guarantor, following which, if no acceptable proposals for repayment are forthcoming, bankruptcy proceedings can be commenced against the guarantor. That will involve the presentation of a statutory demand against the guarantor, followed by a bankruptcy petition if the demand is unpaid (or unsecured, or unchallenged).

Can a guarantor challenge a personal guarantee?

Generally speaking, if an event of default has occurred and the borrower cannot pay, it will be very difficult for a guarantor to challenge their liability under a personal guarantee. However, guarantors should carefully examine the wording of personal guarantees to determine precisely when their obligation to pay crystallises, how that takes effect and importantly what sums exactly the guarantee covers. While most institutional lenders have fairly comprehensive guarantee clauses, the documentation of other lenders or providers may be less clear.

It may also be possible for a guarantor to avoid liability even if a guarantee has crystallised in certain other, very limited circumstances. If a guarantor can establish that they entered the guarantee under duress, for example, or if it can be shown that the lender somehow caused the event of default by the borrower, then these may be grounds to prevent enforcement of a personal guarantee. These will, of course, be heavily fact-specific, and courts are unlikely to consider “commercial pressure” to be “duress” in any but the most extreme cases.

Warranty claims

What is a Warranty?

A warranty is a contractual statement of fact or assurance given by a seller to a buyer that a certain state of affairs exists. The contractual statement is often drafted along the lines of, “save as disclosed, a warranty is true, accurate and not misleading at the date of this agreement”.

A warranty may give rise to damages if it transpires that the warranty is untrue. Warranties differ from indemnities. Typically, you will see the inclusion of both in commercial contracts. In contrast to a warranty, an indemnity is an enforceable promise and generally relates to losses suffered following completion of an agreement.

In the context of a sale of a business or shares and commercial agreements, there are various types of warranties including those relating to ownership of company assets, compliance with relevant laws, the accuracy of accounting records, environmental matters, tax matters, legal disputes and employment issues.

The purpose of Warranties

Warranties can have considerable commercial value and give buyers important assurance and comfort regarding the due diligence exercise and the ability to claim for breach of contract if a warranty turns out to be untrue. Additionally, warranties can often have the effect of forcing a seller to give further disclosure.

When negotiating a contract, risk is apportioned between a buyer and seller. The buyer will inevitably seek to incorporate warranties and indemnities into the sale agreement to shift risk to the seller to secure protection and security for the future.

Sellers will strive for certainty. They will be interested in limiting the warranties and disclosing items to protect against the risk of breach of warranty claims and will seek to avoid a situation where there is a breach that could reduce the consideration received for the sale. Another means by which a seller might impose a contractual limitation on a warranty is to include a notice of claim clause requiring a buyer to notify the seller of a potential breach of warranty claim and stipulate what that notice must cover, for example, details of loss.

In the event that a dispute arises between parties to a sale agreement, the Court will focus on the specific provisions agreed between the parties.

The role of disclosure

A disclosure letter acts as shield to a breach of warranty claim and is a mechanism that allows the seller to disclose qualifications to the warranties to limit their scope. Disclosure letters are often a feature of business sales used by the seller to give formal disclosure to a buyer of circumstances which are or may be inconsistent with representation and warranties contained within the sale agreement and therefore qualify those representations and warranties. For example, a disclosure letter may state that all matters which would be apparent from an inspection of the business premises are deemed disclosed to the buyer.

We often see cases where the party alleging that there has been a breach of warranty fails to give proper consideration to the disclosure letter and the party who purportedly committed the breach is able to defend a claim by arguing that the disclosure prohibits the buyer from bringing a claim.

To avoid claims, sellers should be cognisant of the importance of providing accurate responses as part of the disclosure exercise.

Notification requirements

Ordinarily, a sale agreement will specify how a warranty claim is to be notified and the time within which notification must take place. Strict timeframes dictate the period of time within which to notify of a claim (typically 1 or 2 years) and is commonly shorter than the statutory limitation for bringing a claim for breach of warranty (6 years from the date of the contract in the case of a simple contract i.e. not a deed).

It is also usual for a notice of claim clause to specify what is to be included and the method of service. For example, requiring the buyer to specify the type of claim and the provisions upon which it relies, and providing details of the alleged breach. Careful scrutiny should be applied to ensure that a buyer is not precluded from bringing a claim due to a failure to properly comply with the notice of claim provisions. In such cases, it is possible that a seller could well succeed in having a claim struck out on the basis that the notice is defective, insufficient and / or invalid.

Liability and Damages

Liability for a breach of warranty can be joint (each warrantor is fully liable for the performance of the relevant obligation), several (each warrantor is liable only for its own specified obligations) or joint and several (giving the claimant the ability to recover the whole liability from any one of the warrantors). A buyer will often insist on joint and several liability in the contract. It is not uncommon for warrantors to have a separate contribution agreement between themselves.

The calculation of damages in a breach of warranty claim can sometimes be complex. The general principle is that the buyer is to be placed in the position it would have been in had the warranties been true. In the case of a share sale, for example, the measure of damages would be the difference between the open market value of shares on a sale if the statement were true and the actual value of the shares because the statement was not true.

An assessment should be undertaken as to what the buyer would have done had they been made aware of the true position through full disclosure. This is typically a matter for witness evidence and cross examination. The seller might argue that the buyer would have proceeded with the sale at the same value regardless of whether the warranty was true or not.

A defendant to a breach of warranty claim may also be able to rely on a contractual cap limiting their liabilities.

The Approach of the Courts

In a recent Court of Appeal case (Drax Smart Generation Holdco Ltd v Scottish Power Retail Holdings Ltd [2024] EWCA Civ 477), the Court held that a buyer’s warranty claim under a share purchase agreement satisfied the contractual requirements in the notice of claim clause. In that case, the notice of claim required the buyer to specify its loss in a particular way. While the notice did not do this, it did identify the alleged loss suffered. The takeaway from that case is that the Court adopted a pragmatic approach and held that the commercial purpose of the notice was for the buyer to give sufficient information to the seller in order for it to investigate the potential liability.

How can Wedlake Bell help?

Careful consideration must be given to contractual clauses concerning warranties, such as the contractual provisions on notification, to avoid a situation where a party is prevented from bringing a claim because it has failed to comply with such provisions and the time for doing so has passed. Our experienced Commercial Disputes team can advise on your rights to enforce a warranty (including assisting you with complying with any contractual notification obligations) or your ability to defend a claim (including by reference to the disclosure exercise and / or cap on liability). We can advise on liability apportionment, agreements for contributions, caps and indemnities.

Professional negligence

What is Professional Negligence?

When clients instruct professional advisors, they expect to receive a competent service which meets their needs and objectives. Unfortunately, this is sometimes not the case and clients can receive a sub-standard service where the professional engaged fails to perform their responsibilities to the required standard, or breaches a duty of care. That can result in a loss with serious financial or other consequences. In such circumstances, the professional may have been negligent in their advice or service. It may be that the advice received failed to produce the desired results, that a professional failed to follow instructions, or a professional omitted to advise on key issues that come to light after the event. Professional negligence claims cover a broad range of professional activities including claims against surveyors, valuers, architects and engineers, accountants and other financial advisors, solicitors and barristers and other professionals owing a duty of care.

As a victim of professional negligence you will no doubt have many questions such as: ‘where does this leave me? Do I have a claim? Can I take steps to recover the loss that I have suffered?‘

Proving Professional Negligence

To succeed with a professional negligence claim, it is necessary to establish the following:

1. The professional owed a duty of care;
2. The professional breached that duty of care by act or omission;
3. The breach caused a loss which was foreseeable; and
4. There is sufficient nexus between the harm suffered and the subject
   matter of the duty of care.

A claim may arise as a result of a contract (the professional having breached their duties in the contract), as a result of a duty of care owed in the tort of negligence (known as a tortious claim), or because a professional has breached a statutory provision. It may be possible to bring a claim based on a combination of contract and tort.

Generally, the standard of care required for a professional negligence claim is that of ‘reasonable skill and care’. However, the scope of the duty assumed by the professional has a bearing on the level of care that can be expected. It is therefore necessary to consider what was agreed between the parties, including whether there was anything which the professional excluded from their service, to determine what was reasonable in the circumstances.

In determining whether the professional caused the loss (or contributed to the loss), it is necessary to review the facts and consider the question ‘but for the professional’s conduct, act or omission, would the claimant have sustained the loss?‘.

A professional’s liability is subject to a test of remoteness. It is necessary to determine whether the damage suffered was reasonably foreseeable so that the professional can be held accountable. If the loss is a natural consequence of the professional’s action or inaction the loss will be generally be recoverable.

Time limits

Anyone considering bringing a professional negligence claim should have in mind that there are time limits for doing so. Time limits differ depending on whether a claim is brought in contract or in tort. Calculating the date for limitation for professional negligence claims is rarely straightforward and it is sometimes necessary to issue protective proceedings if limitation is soon to expire so as to protect a claiming party’s position. There are three professional negligence limitation periods: primary limitation, secondary limitation and the ‘longstop’ limitation period. The primary limitation period is 6 years. The secondary limitation period runs from the date that you become aware of the negligence and may be used in circumstances where you did not have knowledge of certain key facts at the time of the act or omission. Save in cases of deliberate concealment of certain facts or fraud by the negligent party, the ‘longstop date’ is an overriding time limit of 15 years from the date of the act or omission.

It is possible to reach an agreement to suspend the running of time and this is often done in circumstances where limitation is approaching to allow a party to investigate and formulate its claim and to allow the professional to respond to the allegations made against them.

A party bringing a professional negligence claim is expected to comply with the Pre-Action Protocol for Professional Negligence (“the Protocol”) which sets out a code of good practice and the steps that parties should take. The Protocol provides that a party should act promptly after deciding there is a reasonable chance that they will bring a claim against a professional by notifying the professional in writing.

How can Wedlake Bell assist?

Wedlake Bell is able to provide expert assistance, provide in depth knowledge, guidance and advice in respect of professional negligence claims. Our team works with companies and individuals in an efficient, strategic, flexible and collaborative manner to achieve a client’s commercial and strategic objectives. We have wide experience in professional negligence claims including against:

1. Accountants;
2. Solicitors;
3. Financial advisors; and
4. Property (such as surveying) or construction professionals.

We can provide you with strategic advice throughout the life of the claim to enable you to make informed decisions. Due to the existence of professional indemnity insurance taken out by the professionals, there may also be further funding options for a claim such as risk sharing or “no win no fee” arrangements – easing the pressure on client cash flow.

LPA and fixed charge receiverships

What is the purpose of LPA and Fixed Charge Receiverships?

LPA and Fixed Charge Receiverships are a means of enforcing security, allowing a secured creditor (usually a lender) (“Secured Creditor“) to appoint a receiver to take control of, protect and realise its interest in a specific secured asset (or assets) of a debtor (usually a borrower or giver of security) (“Debtor“). Typically the appointments relate to property but receivers can be appointed in respect of charges over other assets, such as shares.

Terminology – what is the distinction?

The Law of Property Act 1925 (“LPA“) implies a right to appoint an “LPA Receiver” into any mortgage or charge executed as a deed; however, usually, a Secured Creditor will enforce its contractual right to appoint a “Fixed Charge Receiver” contained in the security document creating the fixed charge. The charge document usually confers wider powers on the receiver than the statutory powers granted under the LPA, such as the power to manage (e.g. insure or repair) and sell the asset. Often the terms are used interchangeably but in most cases it is a Fixed Charge Receiver that is appointed, with all the powers conferred on them by the charge document and the LPA.

When can a receiver be appointed?

This is fact specific, but a receiver can usually be appointed once the Debtor has defaulted on and/or otherwise breached certain terms of the loan between the Debtor and the Secured Creditor. Wedlake Bell can assist in advising Secured Creditors on the validity of their security and whether the right to appoint a receiver has arisen and is exercisable (or if there are any prior steps which need to be taken), together with the appointment process itself.

Who does a receiver owe duties to?

Unless the charge document states otherwise, a receiver acts as agent of the Debtor (albeit where a winding up or bankruptcy order is made, the receiver will no longer be deemed agent of the Debtor and will likely exercise his/her powers as principal). However, whilst the receiver owes a duty to the Debtor to act in good faith, he/she will primarily owe a duty to act in the best interests of the appointing Secured Creditor in protecting and realising the assets (usually property) over which he/she is appointed in order to repay the debt secured by the charge. This includes a duty to obtain the best price reasonably achievable in all the circumstances, usually necessitating a proper marketing process for
the asset.

Enforcement options – receiver or administrator?

Often a Secured Creditor will hold a security package (often called a Debenture), containing both a qualifying floating charge and a fixed charge over specific assets. This enables the Secured Creditor, upon default, to appoint either an administrator to take control of the whole of the company or a fixed charge receiver to secure and realise specific assets. Which of these options is the most favourable will be determined on a case by case basis and needs careful consideration. Receivership is generally cheaper and quicker (and a receiver’s duty is owed to the Secured Creditor, rather than all creditors); however, in circumstances where a greater degree of control over the company’s assets (rather than single asset enforcement) is required, wider investigatory and other powers are needed and/or where the event of default under the fixed charge is not clear cut, administration may be more appropriate.

If a Debtor goes into administration after the appointment of a receiver, an administrator may require the receiver to vacate office. If the Debtor is already in administration, the Secured Creditor would be prevented (by the moratorium) from appointing a receiver without the administrator’s consent or court approval.

How can Wedlake Bell help?

Wedlake Bell can assist Secured Creditors on all receivership matters, from start (determining an appropriate strategy, carrying out a security review and appointing receivers) to finish (taking possession and disposing of the asset).

Contractual disputes

How is a contract formed?

A contract is a legally binding agreement between two or more parties, which can be made in writing, verbally or even through conduct – however, there are some situations where a written contract is required by law. A contract must comprise of each of the following key elements:

• Offer: a clear proposal made by one party.
• Acceptance: final and unqualified agreement to the terms of the offer.
• Consideration: some form of value must be exchanged between the parties, whether money, services or goods.
• Intention to create legal relations: both parties must intend for the contract to be legally binding.

A contract must also have certainty of terms – the terms must not be vague or ambiguous.

Contractual disputes

A contractual dispute is a disagreement between the parties to a contract. A contractual dispute does not necessarily involve a breach of contract and can also arise from disagreements over: validity (including, existence and interpretation), the terms (such as performance obligations), or the implementation of the contract. Contractual disputes range from minor breaches of contract to significant allegations and disputes.

Contractual disputes can arise in all types of contracts including:

• Joint ventures;
• Shareholder;
• Distribution and supply;
• Share purchase;
• Asset purchase; and
• Franchises.

Is the contract valid?

In some circumstances, a party may challenge the validity of the contract – if successful the contract may be void or voidable (depending on the grounds for challenge).

A void contract is ineffective from the moment it is created, it does not create any rights or obligations and has no legal effect.

A voidable contract is effective and binding unless it is rescinded by the wronged party (set aside). If a contract is voidable, the wronged party may rescind the contract by telling the other party the contract is rescinded and refusing further performance under the contract (or it may ask the Court to order a recission). We set out in the table below the circumstances when a contract may be void or voidable.

Void	Voidable
It lacks one of the key elements.	It was entered into under duress.
One or all parties lacked capacity.	There was undue influence on one of the parties.
The terms of the contract were too vague or ambiguous.	There was misrepresentation or fraud.

What is a breach of contract?

A breach of contract occurs when one party fails to fulfil their obligations as agreed by the parties under the terms of the contract. Contractual breaches come in different forms: some are significantly serious to give the wronged party the right to terminate the contract, whilst others are less significant and more easily remediable. Examples of contractual breaches include:

• Non-payment for goods or services.
• Failure to deliver goods or perform services as agreed.
• Delivering goods or services that fail to meet contractual specifications.

When a party commits a breach of contract, the options available to the wronged party depend on the severity of the breach and the terms of the contract.

When a contract is governed by the laws of England and Wales, as a general rule, a claim for breach of contract must be brought within 6 years of the breach.

Remedies for breach of contract

If a breach of contract occurs, several remedies may be available to the wronged party. If the breach is serious enough the contract can be repudiated (treated as if it had never been entered into) or terminated.

The most common remedy in a contractual dispute is payment of damages. The wronged party is compensated financially for the loss incurred that was caused by the breach. The purpose of damages is to compensate the wronged party for their loss and the general rule is that damages should place the wronged party in the same position as if the contract had been properly performed and the breach had not occurred. In some cases, the court may order the breaching party to carry out their obligations as per the contract – known as specific performance.

Resolving contractual disputes

Litigation via the courts is one way to resolve a contractual dispute, however depending on the nature of the dispute and the desired outcomes of the parties involved, there are other methods available, such as different forms of Alternative Dispute Resolution (ADR) – which can be quicker and cheaper. ADR is more flexible than resolving the dispute through the courts and allows a much higher level of control and privacy to the parties involved. There are various forms of ADR including:

• Negotiation: the parties attempt to resolve the dispute through discussions, often leading to a compromise.
• Without prejudice meetings: the parties and often their solicitors will attend a meeting in an attempt to reach a resolution.
• Mediation: a neutral third party will help facilitate an agreement between the parties by encouraging discussion and facilitating commercial solutions.

Another method to resolve disputes outside of court is arbitration. Unlike other forms of ADR, the decision of the arbitration panel is final and binding on the parties. Parties tend to use arbitration in circumstances where there is an arbitration clause within their contract, however there is nothing preventing parties from agreeing to refer a dispute to arbitration. In comparison to court proceedings, arbitration is usually quicker, more flexible, and held in private and therefore confidential.

How can Wedlake Bell help?

The Commercial Disputes team at Wedlake Bell, have extensive experience dealing with contractual disputes and can advise at any stage of a dispute on strategy and the most suitable and cost-effective route for a party to a take. The team have extensive experience advising on contractual disputes in various different sectors including: aviation, automotive, hospitality and maritime.

Funding UK litigation & arbitration

Introduction

The UK Courts are widely recognised as some of the most sophisticated, efficient and well respected in the world. Together with agreements to allow recognition of judgments across the globe, the UK is a very attractive forum for disputes. For this reason many contracts are governed by English law and provide that any disputes must be resolved in the UK court or arbitration system. Even without a contract, there is often a way to engineer an angle to allow a claim to be brought in the UK.

However, litigation can be an expensive process if not managed carefully. Real care and engagement is therefore needed when considering how to fund and progress any litigation. Routes to try to shortcut the claim or resolution process could include applying for summary judgment or strike out of a claim or defence, as well as early encouragement of alternative dispute resolution methods such as mediation (formal or informal). But even though the winning party can often recover some of its legal costs from the losing party, it is important to plan the funding at the start and agree on the most appropriate funding option. This note sets out at a high level the options for conducting litigation and the wider options of risk sharing the costs with solicitors, barristers and funders. This ensures that a litigant goes into the process with eyes wide open but also explores ways to ensure everyone is engaged in what can be an involved and long process.

Options to Fund Litigation

Fee Paying

Even where the litigant agrees to pay all of the costs of their legal team (often hourly rates), there are a range of options that can be explored for the benefit of the litigant. There is no doubt that it is very hard to model costs in litigation to provide accurate forecasts, but the court system has built this budgeting exercise into the litigation timetable and so it is now a vital and important part of the process.

Even within the term Fee Paying, there are a range of options:

Hourly Rates	Charging time incurred by the hour
Blended Rates	Agreeing one rate that applies to all of the legal team irrespective of experience.
Fixed Fees	Agreeing a fixed amount for the litigation (which is unusual) or, more usually, certain stages of the litigation. This gives the litigant certainty and an ability to model cash flow.
Risk Sharing	There are also a range of options to explore which share the risk of the litigation between the lawyers and the litigant.
Discounted Rates	Discounts can be applied at any stage of litigation or applied if the costs reach a certain level (to incentivise adhering to budgets etc).

Risk Sharing/Contingency Type Arrangements

Conditional Fee Agreements (“No Win No Fee”)

A conditional fee agreement (CFA) (often called a “no win no fee”) is an agreement with a legal team which provides for their fees and expenses (or part of them), to be payable only in specified outcomes. Generally, if the litigant loses the case, it will not be liable to pay for the legal fees that are subject to the CFA (because payment is conditional on a “win”). If the litigant wins the case, it will be liable to pay all fees and expenses, including the conditional fees, together with a “success fee”, that is outlined in the CFA (and this is the quid pro quo for the legal team taking the risk of not getting paid at all).

A success fee is an additional amount payable for the legal services, over and above the amount that would normally be payable if there was no CFA. It is expressed as a percentage uplift (up to a maximum of 100%) – and this can also be staged throughout the litigation (e.g. lower if there is early settlement).

This success fee cannot be recovered from the losing side and it must generally be paid by the client (i.e. it comes out of the litigant’s winnings). The rest of the costs (or some of them) can, in theory, be recovered from the losing party.

Partial Conditional Fee Agreements

A variant of a CFA is a Partial CFA where the legal team receive a percentage of the fees on a fee paying basis but the remainder is “on risk” and the legal team will only be entitled to be paid the balance, plus a success fee uplift, if the litigant is successful. This reduces costs for the litigant and shares the risk of the case with the legal team.

Damages-Based Agreements

A damages-based agreement (DBA) is a type of contingency fee agreement where the litigant will only make a payment to the legal team if the litigant obtains (usually) damages paid by the losing side. The fee will be expressed as a percentage of the compensation received from the losing party. If the case is unsuccessful, the legal team will not usually be paid.

Legal Expenses Insurance

After the event (ATE) insurance is a form of legal expenses insurance policy taken out after a legal dispute has arisen. ATE insurance usually covers liability in the event of losing the case, in respect of the litigant’s own disbursements and the opponent’s costs and disbursements (because usually the losing party has to pay at least some of the winning party’s costs). ATE is therefore often acquired with another form of funding to cover the litigant’s own legal costs, such as a CFA or third party funding. This way, a litigant may not have to pay legal fees as they have an agreed CFA, but also takes out insurance to cover the possibility of losing the claim and being liable to pay the other party’s costs. This materially reduces risk.

A litigant may also have before the event (BTE) insurance – which is often included as part of a household or business insurance policy. BTE insurance usually covers legal fees and disbursements up to a specified limit. However, each policy should be checked carefully to ensure that it provides adequate cover for the relevant dispute.

There are also variants where insurance can be taken out to cover the litigant’s own legal fees (which won’t need to be paid by the litigant if the claim is not successful, and the policy provides cover). Again, this materially reduces risk and exposure.

Third party and Litigation Funding

Third party funding is usually either a known third party agreeing to fund a claim or defence (e.g. friend / family, supporter, associated company, another victim etc) or involves a commercial litigation funder (or exceptionally a crowd funding platform) agreeing to pay some or all of the litigant’s legal fees and expenses in return for a fee – which is payable out of the “winnings” recovered from the claim (whether the “win” is a court judgment or a settlement). If the claim is unsuccessful, the funder does not receive any payment.

Conclusion

There are a range of options to reduce costs and risk for the litigant in what is a very specialist area. These options can give certainty and assist with issues such as cash flow forecasting. The existence of a risk sharing model can also be strategically useful as it shows belief in the underlying case, as all parties are so confident in the case, that they are prepared to take a risk. This might aid leverage and, ultimately, a speedy resolution.

Wedlake Bell would be happy to talk you through these options and introduce expert third parties such as ATE insurers and litigation funders.

Shareholder disputes

How shareholder disputes may arise

Disputes between shareholders of a private company are not unusual and can arise over a wide range of issues, including disagreement as to the approach or management of the business, the conduct of shareholders and/or directors, company incentives and overall direction. Often, the minority shareholders feel that their rights are not being observed or are being diluted, that there is a lack of consultation / provision of information, that company assets are being misappropriated, or that directors are taking large sums out of the company in circumstances where dividends are not being paid to shareholders – these types of disputes can give rise to claims of unfair prejudice.

Real care is needed to navigate a path through the issues but with minimum disruption to the business (current and future). Our multidisciplinary team of litigation, corporate and employment specialists can guide clients to achieve this.

Is litigation avoidable?

Yes, in most cases – but pragmatic and early intervention is crucial to understand what the stakeholders want to achieve, and to prevent positions from entrenching to the detriment of the business and shareholder value. These are often emotional situations (especially where the business has been grown by a limited number of shareholders), so there needs to be an element of objective detachment in the decision making where possible and to focus as much as possible on what is in the best interests of the business. Often, the best starting objective is to steer the situation away from a formal dispute through guidance, negotiation, use of company law rights and resolution mechanisms such as mediation.

What are the potential outcomes of shareholder disputes?

Shareholder dispute scenarios are intertwined with a matrix of complex issues, including shareholders’/JV agreements; employment rights; whistleblowing; directors’ duties; directors’ rights and removal; investigations into conduct; corporate governance; duties arising from the financial difficulty or insolvency of one or more entities; reputational concerns; commercial sensitivities; minority shareholder rights and/or regulatory obligations. Despite this, the potential outcomes of shareholder disputes are usually more limited;

• broad agreement is reached and (sometimes an uncomfortable) cohabitation / status quo persists (or is ordered by the court);
• one shareholder or shareholder group buys the other(s) out;
• the business fails and value is lost (or the deadlock is so severe that the court winds up the company as there is no other viable path); or
• one shareholder seeks to utilise insolvency and company law procedures to build a new business entity without the constraints, history or debts of the existing vehicle.

Whether or not agreement can be reached so that the status quo can persist will depend largely on the extent of the damage already done; whether value remains; whether the stakeholders are on board and it is a viable long term strategy. Status quo agreements are unlikely to have a long shelf life where the dispute has had a lasting impact on the morale of stakeholders as this usually affects the long-term success of the underlying business.

What if the dispute cannot be resolved amicably?

In these situations, formal proceedings are often the next step and Wedlake Bell is hugely experienced in advising shareholders and directors through the necessary dispute process either as an end in itself or on the path to helping to reach a negotiated agreement. This may also include a confidential arbitration process, unfair prejudice proceedings brought under s994 of the Companies Act 2006 or proceedings to wind up a company on just and equitable grounds. There are a range of funding options available for clients, which can be considered on a case by case basis.

Directors’ duties for companies in distress

What are directors’ duties?

Company directors are “fiduciaries” for the companies they manage – i.e. they occupy a position as trustee with the company as beneficiary. As such, they owe the company certain duties, for which they can suffer personal liability in the event of a breach.

Ss 171 – 177 of the Companies Act 2006 (“CA06“) codified these directors’ duties as follows:

171. Duty to act within powers
172. Duty to promote the success of the company
173. Duty to exercise independent judgment
174. Duty to exercise reasonable care, skill and diligence
175. Duty to avoid conflicts of interest
176. Duty not to accept benefits from third parties
177. Duty to declare interest in a proposed transaction or arrangement

When a company enters an insolvency process, the office-holder (usually a liquidator or administrator) will investigate the directors’ conduct and, if it appears that any of the above duties were breached, may seek to bring a claim on behalf of the company for loss caused by that breach. Directors therefore need to consider their actions and the decisions they make very carefully when a company appears to be in financial distress.

S172: the Duty to Promote the Success of the Company

Of particular concern to directors of companies in financial distress will be s 172 CA06, which places a duty on company directors to promote the success of the company and act within its interests at all times. When a company is solvent and trading comfortably, acting “within its interests” is generally considered to mean acting within the interests of the company’s shareholders (which will in most cases include the directors, at least in some form).

However, case law has determined that when a company is insolvent or close to insolvency, the duty to act in its interests and “promote its success” will extend to considering the interests of a company’s creditors. If a company’s directors continue to trade a company past the point where it has no hope of returning to solvency, and thereby increasing the deficit to creditors in the process, an office-holder may hold the directors responsible for that loss. As such, when a company is in financial distress, directors must consider the interests of creditors in all decisions they take.

When does the “duty to creditors” bite?

Much ink has been spilt over precisely when a director’s duty to consider creditors’ interests crystallises, and every case will turn on its own facts. Various authorities have spoken of the duty biting when a company is “close to” or “on the verge of” insolvency, with the most recent major authority – BTI v Sequana SA and others [UKSC 2019/0046] – asserting that directors should consider a company’s creditors when there is a “real risk of insolvency”, rather than when insolvency is “probable, imminent, or a reality”. As such, when the interests of shareholders and creditors conflict, the creditors should be prioritised in circumstances where liquidation is likely.

How will the directors’ liability be quantified?

To the extent possible, insolvency practitioners will attempt to quantify the damage caused by reference to specific transactions – for example, if directors continue to pay themselves remuneration at the expense of the Company’s creditors, or pay a creditor they are personally connected to in preference to the Company’s general body of creditors.

However, if the company continued trading for long enough and caused a big enough deficit, it may be possible for office holders to claim general trading losses on behalf of the Company: in the recent BHS Group Limited v Chappell, Hennington & Chandler, it was held that the directors’ liability could be quantified by reference to the increase in the deficit between assets and liabilities caused by the misfeasant transactions, rather than the value of the transactions themselves. That has the potential for directors to expose themselves to very significant liabilities for breaches.

What defences are available and how can directors protect themselves?

S 172 provides a defence to breach of directors duties in that if the directors took their decisions in good faith acting reasonably, they will be absolved of liability for breach of this section. As such, directors of distressed companies would do well to consider taking some or all of the following actions:

1. Ensure all financial records and book-keeping is up-to-date, with detailed cash flow forecasts running across the following three months.
2. Avoid paying any creditor connected to the Company.
3. Hold regular board meetings for each affected company with accurate minutes recording the proceedings, at which all financial projections and costs base are reviewed in detail (with a view to keeping such projections realistic).
4. Keep banks and institutional lenders informed of all relevant matters and progress throughout.
5. Develop a policy for paying creditors and ensure equal treatment where possible; including engaging with creditors that threaten legal action to avoid winding up petitions being issued.
6. Seek advice from insolvency practitioners of insolvency lawyers as early as possible and give an open account of the company’s finances and records of decisions.

Investment fraud

What is investment fraud?

Investment fraud is a type of financial deception where an individual or entity induces people to invest money based on false, misleading, or deceptive information. The intent is to trick the victim into parting with their money under the guise of a legitimate investment opportunity, but the funds are typically misused or stolen by the fraudster.

Common types of investment fraud

There are several types of investment fraud, but perhaps the most common and well-known type are Ponzi schemes. This a fraudulent investment operation where returns to earlier investors are paid from the capital of new investors rather than from profit earned. These schemes rely on a continuous influx of new investors to survive and inevitably collapse when recruitment into the scheme slows or stops. Other types of investment fraud can include pump and dump schemes, boiler room scams, romance scams, fractional ownership schemes, wine investment schemes, and advance fee fraud, amongst many others.

Warning signs of investment fraud

Some of the most common warning signs of investment fraud include:

• Unrealistic returns: Promises of high or guaranteed returns with little to no risk.
• Pressure to act quickly: If someone is urging you to make an immediate decision, it could be a tactic to prevent you from conducting proper due diligence.
• Unregistered investments: Fraudsters often opt for investments and schemes that lack regulatory oversight, such as crypto-assets, making it easier for them to operate and harder for investors to recover losses.
• Complex strategies: Fraudsters often use complicated terminology or strategies to confuse investors and hide the lack of legitimacy behind the investment.
• Unsolicited offers: Receiving an investment opportunity out of the blue, especially from someone you don’t know, is often a sign of a scam.

What immediate steps should you take if you suspect you have been the victim of investment fraud?

While the exact steps that should be taken will depend on the facts of the particular case, in most instances you should take the following, immediate steps:-

• Do not invest any more money into the scheme;
• Preserve all documents, communication, and records related to your investment;
• Consult a solicitor with experience in financial fraud disputes and investigations; and
• Consider reporting the matter to the relevant authorities.

Challenges in recovering losses

There are several challenges involved with recovering losses associated with investment fraud. These often include:

• Asset dissipation: Fraudsters often try to hide or remove assets from the jurisdiction, making recovery more difficult.
• Jurisdictional issues: If the scheme operated across borders, different legal systems and regulations can pose challenges.
• Tracing and identifying assets: A victim’s funds often move through multiple accounts and entities, sometimes across jurisdictions, making it difficult to trace and identify where the money has gone.
• Multiple victims: Fraudsters typically mix the funds of various investors, complicating the process of tracing individual assets and determining who has a claim to what asset or sum.
• Anonymous perpetrators: Fraudsters often operate under pseudonyms so identifying the perpetrator can also present challenges. This is especially so in crypto asset-based fraud, where transactions are conducted through blockchain technology. While all transactions are recorded on the blockchain, identifying the real person behind a wallet address can be difficult without additional information.

What can be done to recover losses and how can Wedlake Bell help?

Despite some of the common difficulties explained above, there are many steps that can be taken to help recover losses. As above, the precise steps that are taken will depend on the facts of each case.

However, disclosure orders are a common and often very helpful tool in identifying the perpetrator of the fraud and gathering evidence to support a fraud claim. These orders can compel banks, financial institutions, or other entities to reveal the flow of funds, helping victims trace where their money has gone. This is crucial in identifying both the assets and the individuals behind the scheme.

In addition, a victim can consider apply for a freezing injunction, which is a court order that restrains a defendant from disposing of, transferring, or dealing with their assets. This order can apply to assets within the UK or, in some cases, internationally. By freezing the perpetrator’s assets, the injunction increases the likelihood that funds will be available to satisfy a court judgment if the victim wins the court case.

A victim can also consider using insolvency proceedings. This includes placing a company suspected of fraud into administration or liquidation – at which point, an administrator or liquidator of that company can, using their statutory investigation powers, assess, gather and preserve assets.

We have considerable experience dealing with these types of claims, including having successfully applied for and obtained disclosure orders, freezing injunctions and other types of “interim” orders.

If you suspect that you may be the victim of investment fraud, then please do not hesitate to contact a member of the team and we would be happy to assist.