When Are Company Directors Liable For Business Debts?

When a business becomes a private limited company, directors and shareholders are protected from any debts that the organisation in question accrues. Shareholders are able to invest in companies safely, knowing that if something does happen all they’ll lose is their initial investment and no more, with assets and personal finances completely protected.
 

But there are some instances where directors may find themselves personally liable for the company’s debts. This will often be because they have given a personal guarantee.
 

When trying to secure finance for a company, suppliers and banks may well ask the directors to provide a guarantee which means that if the company suddenly can’t afford to make repayments for whatever reason, the directors will be personally responsible for paying the debt instead.
 

It’s possible that banks and other lenders may also ask you to use personal assets such as property as security for the company debt. If the business then defaults, these personal assets can be repossessed.
 

You may also find yourself responsible for paying company debts if the directors are deemed liable by the courts in circumstances such as insolvency. Liquidators will investigate to see if the actions taken by the directors had a hand in the reasons behind the insolvency in the first place – and if so, they can ask that the courts make the directors personally liable.
 

If you’re worried about insolvency or some other kind of business trouble and what could potentially happen with regards to your personal guarantee, it would be wise to seek professional advice to help you navigate your negotiations with your loan provider.
 

You need to know just how circumstances are going to unfold so you know you’re making the best decisions moving forward. If you’ve received a demand for payment regarding a personal guarantee, you need to know the difference between a formal demand and statutory demand.
 

A statutory demand is a formal legal document that will result in bankruptcy proceedings if not dealt with accordingly, while a formal demand is simply a letter from the bank calling in the guarantee.
 

You’ll find that some banks and other lenders are more aggressive than others when sending out demands for payment and their methods for debt collection will determine how the process can be accelerated. If you’ve received a demand for payment, you do need to act immediately – burying your head in the sand will only exacerbate the situation.
 

Bear in mind that it can be quite tricky to exit a guarantee. Even if you resign as a director of a company, you can still be held personally responsible as a guarantor for the debt of that business. Resigning is not enough for you to extricate yourself from the guarantee.
 

If you’d like to find out more about guarantees and how we can help you manage the debt associated with this, get in touch with us today.
 

03 May By Mel Loades

 

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