Company Directors - Linked Personal And Company Debt Problems

6th October 2014

Introduction from Trust-Deed.co.uk

There have been several threads in our forum recently where company Directors have found their own finances to be in deep trouble following trading problems at the limited companies that they operate.

Often these difficulties relate to personal guarantees given to banks for company debts. Sometimes they can relate to personal debts run-up in order to keep companies trading during difficult conditions.

Directors are in a uniquely difficult situation where they must take into account both their personal financial situation and the needs of the firms that they operate. We asked one of our recommended trust deed experts, Mark McFadyen, (who handles both personal insolvency and corporate insolvency cases) to explain more about the processes and issues involved in such scenarios…

Personal Guarantees and Personal Debts

There have been several posts on the forum relating to limited companies and the overlap of personal debt incurred in the trading of these companies.  This is something which seems to be becoming more frequent, although it is certainly not new.

The origins of a trading as a limited company were as a form of protection for an individual as the “limited” company is viewed as a separate legal entity to the individual who acts as director or shareholder.  However banks and suppliers have become increasingly aware of the exposure this causes to them should the limited company run into financial difficulties.  From this concern, banks and suppliers introduced Directors to “Personal Guarantees” and “Securities”.

In effect, a Personal Guarantee is where a Director guarantees personally a specific debt or debts of the company.  If the company’s financial situation takes a turn for the worse, then the bank or supplier can pursue the individual for payment. 

This debt would be no different in law to a personal credit card debt or personal loan and could be pursued by the same means by a creditor.

In 25 years of handling corporate and personal insolvency cases, I don’t think I have been involved in a company liquidation where the director has not either guaranteed the debts of the company (in some form or other) or taken out personal loans or used existing personal credit facilities to finance the ongoing trading of the company. The underlying reasons are twofold, firstly the belief that business will improve and, secondly, through loyalty to retain staff and to pay their wages.

Processes to Wind-Up or Liquidate an Insolvent Company in Scotland

The normal process where a company is no longer able to trade is for the Director to speak with his accountant, or to speak directly with an Insolvency Practitioner, to establish exactly what options are available.  If the company has sufficient assets to fund a controlled winding up, then this usually takes the form of either a Court Winding up or Section 98 Winding up. Liquidation might also be initiated by a creditor. I’ve summarised these procedures below:

Section 98 – Creditors Voluntary Winding up
A Section 98 Winding up is a non-court based procedure where the shareholders (referred to as the members) pass a shareholders’ resolution (75% majority required) to wind up the company and appoint a liquidator who must be a licensed insolvency practitioner. The creditors then meet and either confirm the liquidator’s appointment (which is the Insolvency Practitioner appointed by the company at the start) or appoint another one of their choosing. Voting for another Insolvency Practitioner by creditors is by a majority (by value of debt) of creditors at the meeting.

Compulsory Liquidation (initiated by own Directors)
The Directors/Shareholders could alternatively petition the court to have an Interim Liquidator (of their choice) appointed if they can demonstrate that the company is insolvent.

Compulsory Liquidation (initiated by a creditor or creditors)
Compulsory liquidation is the only insolvency procedure which any creditor can instigate regardless of the company’s wishes. In all other procedures the company has to participate to some extent in the process. The creditor starts the process by petitioning the court for a winding up order. This will be made as long as the court is satisfied that the creditor is owed over £750 and that the company is insolvent. In most cases, insolvency can be established by the creditor issuing a statutory demand for payment and the company failing, within 21 days, to pay the debt. 

In Scotland the court will appoint a nominated insolvency practitioner as Interim Liquidator after granting the winding‑up order. Before that, where the debtor company is continuing to trade, the court may appoint a provisional liquidator whose function is to preserve the company’s assets (although this is less common that a few years ago). The interim liquidator must call a creditors’ meeting to appoint a liquidator. The appointment of a liquidator will be on the same basis as the CVL (creditors’ voluntary liquidation) where either the original Insolvency Practitioner remains in place or another is appointed by a majority vote from the creditors.

The Company Director’s Personal Finances and Debts

Following the formal winding up of the company, the bank or any supplier may then look at the terms of any personal guarantee or securities provided by Directors. At this point the Directors will normally look to seek advice on their own personal financial position if they’re struggling to manage their debts. 

Irrespective of this being caused by a company debt, personal insolvency (a protected trust deed or sequestration) will typically deal with this in the normal course.  Any unsecured borrowings guaranteed by the Director will form an ordinary claim in any forthcoming bankruptcy or protected trust deed.

It’s important to remember that it’s not possible to continue to be a company director while bankrupt (sequestration). A Scottish trust deed will not normally present the same problem.

Depending upon the level of the Director’s debts, and their future capacity to repay them, such debts might also be dealt with by less formal means such as the Debt Arrangement Scheme or a debt management plan.

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