In the summer of 2013, men’s fashion brand Urbohemia Limited (Urbo) caught the eye of fashion distributor Four Marketing Limited (FML) as an investment opportunity.
Urbo was struggling to pay its suppliers. In order to protect its reputation, FML began financing Urbo’s cash-flow with a view to eventually taking equity. By January 2014, with its exposure at around £23,000, FML indicated that it was prepared to advance further sums only if it were secured. In February 2014, its founder David Bradshaw (DB) therefore entered into a personal guarantee in favour of FML (the Guarantee).
In April 2014, when FML had lent circa £150,000, FML, DB and Spring Studios Limited (SSL), a creative agency which was also interested in Urbo, began to discuss a potential investment structure. A term sheet was agreed and signed in June containing the following principal terms:
- FML, SSL and DB would each be issued shares in Urbo so that each had a 30% stake (with the other 10% to be held by a director of SSL and Chris Bailey, co-founder of Urbo (CB))
- The documentation would include: a) a subscription agreement; b) a shareholders’ agreement; and c) shareholder loans between Urbo and each of DB, FML and SSL (the Documents)
- Any monies advanced by any of the parties from 25 April 2014 onwards would be treated as part/full satisfaction of the monies required from such party under the Documents
- All existing loans, advances and debts would be capitalised in exchange for the shares referred to above
- The Guarantee would be extinguished.
The term sheet included an express provision that it was not intended to be binding on the parties.
By early August, before the Documents had been agreed, CB withdrew from the venture and FML swiftly followed. In its notice of withdrawal, FML referred to the (now £296,000) debt outstanding as supported by the Guarantee and tried to broker a repayment plan. No agreement was ever reached, and in July 2015 FML issued proceedings to enforce the Guarantee.
The issues before the court were:
- Whether the Guarantee remained enforceable
- Whether a valid demand for repayment was required for FML to enforce the Guarantee, and, if so, whether such demand had been made.
What sums were covered by the Guarantee?
DB argued that the Guarantee did not cover sums advanced by FML before 5 February 2014 (the effective date of the Guarantee), nor those advanced after 25 April 2014 (when the parties met to discuss the structure of the investment).
The definition of “Guaranteed Obligations” referred to “all present and future obligations and liabilities of the Borrower due, owing or incurred under the On-demand Loan Facility”. The definition of the “On-demand Loan Facility” secured by the Guarantee referred to all amounts made available to Urbo by FML from time to time repayable on demand.
As all sums lent by FML were advanced without stipulating the time for repayment, the court held they were repayable on demand and so within the scope of this definition, regardless of when they were lent.
The natural and ordinary meaning of this phrase, particularly inclusion of the word “present”, left no doubt that the Guarantee was intended to cover liabilities which existed prior to 5 February and after 5 April 2014.
Was the Guarantee enforceable?
DB argued that the parties had agreed either orally or by conduct that the Guarantee was extinguished in June 2014 when shares were issued to capitalise the loans. FML countered that the Guarantee was to be extinguished on completion of the Documents.
The court found the emphasis in the term sheet on completion of the Documents highly persuasive. It was clearly not enough that shares were issued to do away with this requirement and thereby extinguish the Guarantee. The term sheet was also unequivocal that it was “not intended to be binding”.
DB argued that the conduct of the parties following execution of the term sheet suggested they were giving effect to its terms, despite the absent Documents: the CEO of FML was to be appointed as a director of Urbo; the parties began to invest; and shares were issued. This did not sway the court: the parties had been giving effect to the term sheet before it was even agreed, and this was not sufficient to outweigh the clear importance of the Documents demonstrated in the term sheet.
The court considered whether the Guarantee had been waived. The terms of the Guarantee itself stipulated that it could only be waived in writing. Recent case law (MWB v Rock) has established that such a provision would not preclude an oral waiver provided there is unequivocal agreement to that effect, but the court found no evidence of any common intention that the Guarantee be discharged, let alone an agreement to that effect.
Defence counsel suggested that the parties’ intentions changed following execution of the term sheet and the Documents were no longer required, but the court found instead a significant body of evidence to the contrary, with FML in particular pushing to get the Documents agreed.
DB’s final argument was that an estoppel had arisen: he acted to his detriment in putting funds into Urbo and would not have done so if he thought the Guarantee remained in place. The court held for an estoppel there must have been conduct on the part of FML suggesting the requirement for the Documents would not be insisted upon and the Guarantee was discharged; there was no evidence of this.
Therefore the Guarantee was not discharged by agreement or waiver, either on or after signing of the term sheet and FML was not estopped from relying on it.
Was a valid demand for repayment made, or indeed required?
The court affirmed that a debt repayable on demand is not due until a demand is made, but the bar for a valid demand is very low: all that is required is clear intimation that payment is required.
In FML’s withdrawal, it referred to the “considerable debt outstanding” and the importance of this being repaid, proposing to “discuss a payment solution which works for all parties”. DB contended that this was a statement that money was owed, not a demand. The court disagreed: it was a clear intimation that the sum was to be repaid, albeit in conciliatory language. Because the repayment was not forthcoming, DB’s obligations under the Guarantee had been triggered.
The court therefore found in favour of the Claimant.
Although judgment was in favour of FML and whether by accident or design, the drafting of the Guarantee was watertight from its perspective, this case illustrates several potential pitfalls for lenders. Where advances pre-date security, care should be taken to ensure this is covered by the drafting. If sums are advanced to a bridge a financing gap while a long-term investment is negotiated, lenders should be careful not to discharge or waive security for the bridged funds, or to rely on the terms of an agreement contemplated but not yet documented.
Individual guarantors should always seek independent legal advice (Mr Bradshaw did not) and keep an eye on the scope of the obligations they are guaranteeing. A deal is not done until documents are signed: relying on the goodwill of other parties and non-binding heads of terms can be an expensive gamble.