Always Read the Small Print of Finance Agreements – the Devil’s in the Detail

Over the past year, Yorkshire businessman Keith Elliot has launched a campaign to highlight what he claims are unscrupulous banking practices.

A few years back, Elliot’s car business, Premier Motor Auctions, ran into trouble so he arranged a pre-packaged deal with accountants PwC for his bank, Lloyds TSB, to purchase a 15 per cent stake in the company.

Lloyds described Premier as a ‘great auction business’ so Elliot was shocked when PwC advised the bank to place the company into administration in 2008.

The move caused Elliot, his creditors and taxpayers (through HMRC) to lose money, but earned PwC over £1 million in fees.

Elliot was further disappointed last month to discover that before placing his business into administration, his bank’s venture capital arm, Lloyds Development Capital (LDC), had, for months, been eyeing up his business.

It would be an understatement to say Elliot is fuming that Lloyds took control of his company, even though (or because) LDC’s appraisal valued Premier at £17 million.

But he needs to remember that Lloyds had a charge over the business and if they believed their exposure was at undue risk; they had an overriding responsibility to protect their shareholders’ assets.

The charge is an asset so they would be within their rights to appoint an IP to provide assistance on the exposure.

In such an instance, PwC told the bank there was some risk they may not get their money. Banks often hire third party companies such as PWC to look at a business as a going concern.

Although the procedure may appear shady or inappropriate if that third party happens to be the bank’s venture capital arm, it’s perfectly legal and considered to be a ‘transaction at arm’s length’.

Lloyds are involved in banking not running car showrooms so Elliot needs to realise that when you give a lender security over your assets, effectively you no longer control your business and subsequent destiny.

This happens all the time in business. A business owner needs finance and ends up signing away their business when a lender offers investment in exchange for security.

When you sign a debenture or any loan document such as a mortgage, you give the lender the deeds to the property.

In return, the lender gives you the key to enjoy living in the property. But don’t be mistaken, it’s not your property, because the lender owns the deeds.

It’s the same in business when you go to the bank and get a secured business loan, but instead of losing a property it’s now the lender, not the business owner, who gets to decide when to call time on the business.

The devil is in the detail, and if at any time the lender believes their exposure is under threat or at undue risk, they can recall their loan(s) or call in an administrator to rescue their assets – and without the assets there’s no business.

Usually, there’s only one outcome in these situations because administrators are employed to either realise assets for the benefit of the lender, or sell the business as a going concern.

Sadly, most business owners only comprehend this predicament when they come under pressure from the bank to justify the viability of the business and provide assurances the assets are not exposed to undue risk. And by this time, it’s usually too late.