The High Court recently ruled in Catalyst Business Finance v Very Tangy Television Limited, Richard Tuckwell, Very Tangy Media Limited [2018] EWHC 1669 (QB). The verdict is a useful reminder of the differences between real compensation and a real guarantee. The distinction between guarantee and compensation is more than just semantics. Genuine compensation creates a principal obligation on the part of the guarantor without the creditor having to establish prior responsibility for the principal debt. The obligation of the indemnitors is independent of the obligations of the borrower and does not depend on them. On the other hand, a genuine security is a secondary obligation that allows the guarantor to invoke any objection that would otherwise be available to the debtor (e.g. B that the underlying facility is void or that there is a right to set-off). In that case, the Court examined the wording of a “guarantee and indemnification agreement” in order to determine which obligations actually constituted compensation. For this reason, most modern warranties have been extended to include compensation, creating the most commonly used collateral and compensation today. It should be noted that some lenders may accept a bank guarantee or an associated commercial guarantee as a substitute for a personal guarantee. A potential guarantor may want to discuss these options to reduce their personal exposure.

A lawyer can help you by alerting you to serious pitfalls and helping you negotiate better terms for the warranty, for example. B by limiting the operation of the warranty or the provisions to release it when certain events occur. In the event that a personal guarantee is unavoidable, potential guarantors should carefully read and negotiate the document provided to them in order to limit the scope and wording of the guarantee. There are several ways to limit the scope of a personal guarantee, for example: it is an inevitable feature of modern professional life that you, as an entrepreneur or manager, are obliged to provide personal guarantees on behalf of your company and / or business, especially for suppliers who offer goods on credit and for financiers who advance funds. In cases where we cannot obtain a guarantee – the company is not privately owned, no one owns at least 20%, the company is guaranteed by equity – we receive validity compensation. Also known as a “bad boy guarantee,” a validity indemnity is an agreement to compensate the lender for losses arising from a list of things, all related to fraud or major misrepresentation. Remember that compensation must also take into account what happens in the event of non-performance by your claimants. In such cases, obtain self-help rights and require those entitled to compensation to pay you all amounts due and due under the compensation (including, but not limited to, all amounts due and due in connection with the exercise of your self-help rights).

If these amounts are not paid within a short grace period, these amounts will be calculated at a late payment interest rate (which must not exceed the maximum amount allowed by applicable law) calculated from the date of the claim until the date of receipt of payment. Once you feel comfortable with the person who is entitled to compensation, you need to think about what the compensation should cover. It really depends on the type of transaction and your specific problems. Here are some scenarios. In retrospect, Catalyst`s request was accepted. The judge noted that personal guarantee and compensation were rightly regarded as a “hybrid document in which some of the obligations are primary and others are secondary”. It went on to state: “The distinction between primary and secondary obligations is potentially essential, because if the personal guarantee [and compensation] is a real guarantee, the principle of co-extensivity applies and the guarantor is entitled to all the defences available to the principal debtor”, in which case a right of set-off. What is the difference between a warranty and a compensation? c. providing the guarantee only for the benefit of the beneficiary and may not be transferred to any other party; and b. setting a deadline for the implementation of the guarantee; In a nutshell, Very Tangy Television Limited (Tangy) has entered into a loan agreement (the “Loan Agreement”) with Catalyst Business Finance Limited (the “Catalyst”) to provide a loan (the Loan). A Mr. Tuckwell agreed to provide the loan guarantee as a personal guarantee and compensation (personal guarantee and indemnification).

Two advances were granted under the loan agreement. A few months later, Catalyst requested repayment of the loan. Tangy didn`t pay, so Catalyst sued Mr. Tuckwell as part of the personal guarantee and compensation. Catalyst issued Mr. Tuckwell with various debt certificates certifying the amount to be paid under the loan and the accrued interest. A guarantee itself constitutes an ancillary obligation, the liability of the guarantor depending on the determination of the customer`s liability. If, for any reason, the customer`s liability for the performance of the guaranteed contractual obligations is fulfilled, the guarantor`s obligations are fulfilled. A guarantee is the promise of a party (usually the owner or administrator) (the guarantor) to fulfill the obligations of another party (usually the obligation of a company or corporation to pay money) (the customer) to a third party (usually a supplier or financier) (the third party) in the event that the customer is unable to fulfill its contractual obligations.

However, keep in mind that a compensation agreement is only as strong as the party supporting it. Therefore, it may not carry much weight if the compensation is made by a company, many of which do not have significant assets now or in the future. It can be more reassuring if, in addition to the company involved in the transaction, there is a person behind the clearing. But even with an individual, you must have exercised your due diligence and ensure that the person entitled to compensation currently has and will have enough net assets in the future to cover the risks. Many warranty documents also include compensation. It is a common misconception that guarantees and compensation are one and the same thing. However, compensation differs from guarantees in several respects, and this should be considered by those who are considering the performance of a guarantee that includes indemnification provisions in their terms. Even if your seller is willing to accept these terms, the seller may insist on being released on a subsequent sale of the parent package. If that suits you, this publication should be forward-looking. In other words, your indemnification of the Seller should be limited to the obligations that must be fulfilled by the Seller from time to time after the date of such transfer (not in relation to the obligations to be fulfilled prior to the transfer).

Release must also be conditional on the delivery of an assignment and take-over agreement that was originally properly executed, which confirms that the subsequent owner of the parent package has assumed the obligations under the indemnification agreement in a form acceptable to you. You can also go further and request that the deed transferring the parent package explicitly refers to the indemnification obligations that the subsequent owner of the parent property is required by the deed to abide by the terms of the indemnification agreement. Note, however, that in this scenario, you do not have the right to review the subsequent indemnification exemption or to request a personal compensation recipient. b. A beneficiary may assert its rights against the indemnifying party, even if the underlying agreement with the principal debtor has a default that renders it unenforceable, void or illegal; Since a lender essentially invests money in their client`s business, a guarantee is a good faith sign that the business owner believes in the business just as much as the lender. .