The link between personal and corporate debt
We are frequently asked to provide advice to Directors and partnerships in relation to their business/limited company. This can be at a point when the business has no prospect of continuing and will involve a complete wind down, sale of any assets and the redundancy of any employees. However, it can also be at a stage where the business has encountered a much smaller problem that is likely to be rectified.
When we are asked to provide advice the Director or business owner has often not made any link between the position of the business and that of their own situation.
When a business is encountering difficulties it impacts on the individual. Detailed below are some case studies that we have encountered:
Case Study 1 The company was unable to meet its ongoing debts, in terms of payment of employee wages and also payment to suppliers. This was because the company had not been paid for debts owed. The Directors believed this to be a temporary issue so they used their personal credit cards to pay company debts and took out a personal loan to pay the employees their wages, with the view that they’d be getting the money back once the debt had been repaid to the company.
Unfortunately, the position was not as temporary as first thought and the creditor failed to pay. The company was unable to meet the obligations of the Director in respect of the credit cards and the personal loan, meaning the Director was forced to make the on-going monthly payments personally. While it had been possible to meet the initial payments, the Director did not see that this could continue and there was no ability to take the monthly payments from the company.
In this case we gave the Director personal advice regarding the loan and the credit cards and ultimately put an IVA (voluntary arrangement) in place, which allowed him to meet the on-going personal debts over a longer period of time. It also meant that he was not required to pay the debts in full and also stopped interest being charged on the debts.
Case Study 2 In order to trade, the company required funding from the bank. The bank had taken security over the company assets, but had also requested a personal guarantee from the Director. Upon the company having financial problems, the bank called in their security. As they were insufficient to discharge the bank debt, the personal guarantee was called in.
Personal advice was provided to the Director and, after discussions with the bank, they agreed to a compromise amount in full and final settlement of the debt.
Case Study 3 As a result of the failure of the business the company had gone into liquidation and therefore ceased to trade. All staff members were dismissed. The Directors no longer had paid employment or any draw funds from the company, and were therefore unable to meet their on-going personal expenditure i.e. mortgage and rent payments, personal loans, credit card payments or their normal household bills. Both Directors involved sought personal debt advice. One Director had no assets and was living in rented accommodation. Due to the level of his unsecured debts, he was advised it would be best to declare himself bankrupt, subject to him not wishing to be a Director of any other company. His debts were written off, allowing him to make a fresh start.
The other Director owned his own home jointly with his partner but anticipated the equity to be minimal after repayment of the mortgage. He was advised to obtain up-to-date valuations and redemption statements, with the view that his partner could buy out his share of the equity and thereby saving the property from being involved in any insolvency procedure. He was also advised to consider bankruptcy subject to his confirmation that he was looking for employment rather than considering being a Company Director again.
While advice was provided to the Directors of the company, this service was also offered to their employees as they were also affected by the company having ceased to trade.
When advice is sought in respect of a company, partnership or sole trader, it is imperative to consider the overall personal position of any Director or business owner. An Insolvency Practitioner should provide advice on both the Corporate and Personal options available prior to any decision being made.
Failure to account for the personal implications within a corporate insolvency procedure can be disastrous for a Director and the effects need to be fully explained.
Should you require any further advice regarding corporate insolvency, please contact us on 0191 285 0321.