Amending secured facilities – what does this mean for existing guarantors?

Whilst the difficulties faced by many businesses during the Covid-19 pandemic are starting to ease, the financial pressures placed on businesses worldwide are continuing. It should therefore come as no surprise that many businesses will be/ are seeking to amend their existing credit facilities to allow greater financial flexibility and sustainability. Whilst taking new security need not be complicated, there are many considerations that that need to be addressed not only by the lender, but also the borrower and guarantor.

During the lifetime of a facility agreement, it is not uncommon for a borrower’s circumstances to change. For example, a borrower may need more time to repay its debt, it may wish to increase the amounts available under the facility or it may wish to alter the financial or commercial covenants that govern the contractual relationship. Often this requires the facility to be formally amended to reflect any substantial changes, typically through an amendment letter or even issuance of a new replacement facility. Such variations can be substantial in nature and significantly change the risk exposure for the parties and the guarantor beyond what it had originally envisaged, however, sometimes changes could be within what is known as the ‘purview’ of the guarantee.

But what does this mean for a guarantor who guaranteed the original obligations of a borrower and further, what does it mean for a lender?

Where such a contract, or similar situations, are secured by a guarantee, a variation of the underlying contract may give rise to legal defences to a claim. The lender will want to ensure that it continues to benefit from the guarantee even if the terms of the underlying contract change. The guarantor will want to ensure that it is not unfairly prejudiced by any variation.

English law provides guarantors with a variety of protections, which can be summarised in the following three legal principles:

• The general principle that clear and unambiguous words must be used to exclude or limit rights.
• Equitable protections given to the guarantor, in particular the rule in Holme v Brunskill, ensuring that any material variation of the underlying transaction which has the potential to prejudice the guarantor will discharge the guarantor from liability, unless consent is obtained. There are also variations which are automatically assumed to prejudice the guarantor.
• Doctrine of purview, pursuant to which, even if consent is obtained, a variation to the underlying contract will discharge the guarantee unless the amendments to the transaction are within the ‘purview’ of the underlying agreement as originally drafted.

Where the terms of an underlying facility are substantially altered, there is a risk that they cannot be viewed as an amendment to the existing facility, but are instead completely outside the scope (the purview) of the guaranteed obligations. In such circumstances, lenders are at risk of losing their security in the event of default. Understanding this risk and taking steps to avoid or minimise it, is critical for both the lender and the borrower.

The case law surrounding the rule in Holme v Brunskill and the doctrine of purview does not provide clear guidance as to what types of amendments would fall outside of the ‘purview’  and it is difficult to predict how the court will view substantial amendments in any individual case.

Particular care therefore needs to be taken when drafting waiver of defence clauses and we recommend the following considerations are taken into account:

1. Ensure that variations of any terms, which may be anticipated, are considered when drafting the underlying contract.
2. Ensure a consent is given by the guarantor in an appropriate format.
3. If the underlying contract is being renewed, ascertain whether a new guarantee should be obtained.

If you are a lender looking to enforce a guarantee/ or a guarantor looking to dispute the validity of a guarantee and the guarantee is governed by English Law, please get in touch with our Dispute Resolution team who specialize in advising lenders, borrowers, and guarantors in relation to banking and commercial disputes.