Financial Times Contribution

I was recently asked by the Financial Times to respond to a reader’s question, so I have decided to relate the question and my response to readers of this blog. The full article can be found here http://www.ft.com/cms/s/0/15607a86-4b56-11e1-a325-00144feabdc0.html#axzz1tc3QTCRR , although you may need to log in to read it. (All rights reserved to the FT):

Can my brother be saved from debt trap?

The Question:

My brother, 63, a serial entrepreneur, formed a company about three years ago with two co-directors to lease pubs from a brewery.

About 12 months ago, due to stress and disagreement with his co-directors, he left the company but remained guarantor for the payments to the brewery, which has a lien on his heavily mortgaged family home. One of his sons is a guarantor of the mortgage. My brother rents out this property and lives with his 69-year-old wife in a small rented bungalow. The difference between the two rents is about £300 a month and they make ends meet from commission on sales for a number of companies and his wife’s occasional part-time work.

It is likely that the debt to the brewery can be paid off in about two years, but the thought that it might not be is putting my brother and his wife under increasing financial and mental stress. His ex-partners have recently missed a couple of payments to the brewery.

Bankruptcy would take what little equity is left in the former family home, along with other minimal assets, and be a black mark against my brother’s name. Additionally, any small financial assistance the family might provide could be ensnared in any bankruptcy. What can be done to get my brother out of this mess?

My Response:

The first question I would ask is why, having left the company, has your brother remained a guarantor for the company’s obligations? Also, what is his current role? Does he retain equity ownership, with shareholder rights, and what are the terms of the lien?

Depending on the answers to the above, he should have a discussion with the remaining directors and shareholders, and the bank, about removing the guarantee altogether or transferring it to the remaining stakeholders.

If he remains a shareholder, it may be worth considering trading shares in exchange for removal of the guarantee. Alternatively, a repayment plan could be worked out where the company agrees to pay down the brewery debt and to indemnify the client personally for any default.

If the aim is to alleviate his brother’s stress and misery, another possible solution may be to sell the house, pay off the outstanding mortgage and remove the lien, although your brother may not want to go down this route and ultimately there may be little equity in the property.

As your brother’s wife is 69, she should be claiming a pension. If he and his wife have no additional income, she will be able to claim the “couple” rate of pension credit of £217.90 per week, although this is income-related and any income including pension and commissions will be deducted. They would also be able to retain savings of up to £10,000. There may also be an argument for the couple to receive housing benefit.

About the Author:

Jonathan Abrams is a Senior Associate Solicitor, with experience in advising both public and private companies, particularly start-ups, SMEs and investors. Jonathan’s practice focuses on corporate and business transactions, with a particular focus on the Media and Energy sectors. Jonathan is a qualified US attorney-at-law and continues to counsel clients in both the UK and the US.  

If you require assistance or have any questions about Starting a business or investing in early stage businesses or SMEs, please don’t hesitate to contact our Corporate Team on 020 7979 2066 or email the author, Jonathan Abrams ([email protected]), Senior Associate Solicitor.