By Gordon Goodfellow
The matter of directors' insolvency can emerge if, upon entering an insolvency procedure, it is discovered that one or more of the directors have given personal guarantees in relation to debt which has been raised by the company.
The Insolvency Act 1986 was created partially with an eye for this problem. This Act saw the creation of the Individual Voluntary Arrangement (IVA) as a more humane, but no less robust, alternative to bankruptcy, and which also allow proportional repayments of the debt to creditors over five years. The IVA was designed to be fair to both the creditor and the debtor and was seen to be generally popular and workable.
It is often the case that company directors use the limited company shield as a valid device for protecting their own personal liability and assets. Lenders sometimes - more frequently so - require directors to make personal guarantees before lending to the company is considered. This may even include a second charge on their personal property such as their home.
In good times this is fine, and nobody worries about it. If all goes to plan then the directors' personal guarantees would not be called upon, nor would they expect to be called upon. But when times are difficult things may change dramatically very quickly as balance sheets begin to tell their own story.
Most personal guarantees are limited to a specific value; at least the director will know the extent of his or her liability. When a business becomes insolvent, any assets securing the debt are utilised to pay off the loan. The problem then arises that any amount not so discharged falls upon the directors under their personal guarantee to clear. Hence the prospect of a directors' insolvency comes into play.
You may want to seek professional help if this has happened to you or if you think there is a danger that this may happen to you or your company. Professional help will protect you against the bankruptcy that may otherwise follow on the heels of such a breached guarantee. For example, any debt may be carried through to a new venture.
It is important for a director to avoid bankruptcy if the intention is to carry on business, as a bankrupt will not be able to hold the office of director.
If you're facing problems with your business don't face them alone. We are specialist insolvency solicitors and can help you with directors insolvency. See our site for details about making an appointment for an informal chat. We will solve your problems while safeguarding your personal assets.
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