Even if a business becomes insolvent, there remain multiple tools for sureties to mitigate their exposure and reduce both the risk of call and the scale of any calls.
Issues to consider where the bonded group or companies within it enter an insolvency process are:
- Status of bonded projects: where the bonded group is, for example, a construction business, it is possible that the state of the project is such that a bond should not be called or that with minimal additional work a call could be avoided or reduced. While there is a duty to mitigate, this would not be binding on an administrator or liquidator. In these circumstances it is advisable to engage with the insolvency practitioner to see if a mutually beneficial outcome can be achieved.
- Recourse against other group companies: where the indemnity net includes other group companies this can give opportunities to increase realisations. Where a company is not in insolvency this should allow full recourse if that company has assets. Action against that company might precipitate an insolvency but could also create leverage for a settlement to avert or delay an insolvency. Even if another indemnitor is insolvent there are other issues to consider including the operation and terms of non-competition clauses to identify whether it will be beneficial to enforce or waive rights.
- Your voting position: unsecured creditors can have the ability to influence the conduct of an administration or liquidation or the structure and effects of a CVA. We have seen insolvency practitioners seek to minimise the influence of surety claims as contingent liabilities. We regularly advise sureties upon how to value their voting position upon any insolvency to maximise their influence in the outcome of processes.
- Entity priority modelling: the terms of your indemnity can affect the way recoveries flow in a group-wide insolvency. We can guide you through various legal aspects of this as the assumptions made upon inputting into the model can significantly impact your outcome and the strategy to pursue.
- Challenges: unsecured creditors may be able to improve recoveries through investigative actions in an insolvency. We advise upon any challenges to pre-pack arrangements and directors’ conduct.