Directors’ Liabilities within Insolvency
What is a Personal Guarantee?
A Personal Guarantee acts as security for company borrowing. Many lenders require a Personal Guarantee to be signed as it is an assurance to a supplier or lender that if the company is unable to pay the liability then the guarantor(s) will pay the amount which the company cannot.
The most common creditors to request a Personal Guarantee include:
- Business bank loans
- Property leases
- Large asset leases
- Building trade suppliers
Should you sign a Personal Guarantee?
By agreeing to sign a Personal Guarantee it offers greater routes for potential financing for a limited company. If however for some reason your company enters insolvency and the company is unable to repay the loan the lender can proceed with legal action against the individual for the un-paid funds.
Before you sign any Personal Guarantees we suggest that you seek legal advice as the terms can vary depending on who is issuing the guarantee.
Also, make sure you always check the small print on invoices because the invoice may imply personal terms that they do not mention up-front.
Directors Loan Accounts
A Directors’ Loan Account is a record of transactions between the company and a Director that isn’t salary or dividends.
A Director can either put their own personal funds into a company or alternatively a Director can take funds from the company for their own personal benefit. These transactions are recorded and shown in the accounts of a company as a Directors Loan Account.
If the company enters Liquidation and the position of the Directors Loan Account is overdrawn i.e. the Director is a debtor of the company and owes the company money that he has taken out, these funds will be considered a company asset and any appointed Liquidator will require these funds to be paid back into the Liquidation estate in the best interests of the company’s creditors.
Alternatively, if the Director has loaned the company money and this position remains upon Liquidation, then the Director will be listed as a creditor of the company and entitled to receive any distribution payable from the Liquidation estate along with other creditors of the company.
What makes a dividend illegal?
Taking dividends from a company is a legal way for Directors to take a salary and is usually the preferred route to take a salary due to the tax benefits.
A dividend can only be taken however from profits of a company, and therefore if a company is struggling with insolvency, dividends cannot be taken legally as there are no profits to take them from.
Within a Liquidation process if illegal dividends are found to have been taken it is the job of the Liquidator to retrieve these funds from the Directors and enter these funds back into the company. This is to ensure damage to creditors is minimised as much as possible.
Illegal dividends will start from the first signs of insolvency and not from the date of entering a Liquidation process. This could therefore mean dividends have been being taken for a number of months before the company entered Liquidation and that the Director will need to pay back quite a large sum of money.