The benefits of being a director of a limited company are many. Not necessarily because of the tax benefits but, rather, the personal protection given to directors by the corporate veil surrounding limited companies.
That corporate veil means that directors’ liabilities for the debts of the company are limited to the extent of their shareholding (maybe £1) in the UK this concept (outside insolvency) is sacrosanct and protected by the Courts.
However, if the company has or is going into liquidation or administration, that concept can disappear and directors can find themselves personally liable for the various company debts and financial consequences of their actions. Actions which, outside insolvency, could be seen as relatively innocuous in the rough and tumble of commerce.
So, when financial issues arise for a company caused by the loss of a major client or unusually bad trading conditions, every director should stop and carefully consider their position by carrying out the three C’s:
Failure to follow these 3 C’s could mean heavy financial penalties for the directors as well as picking up the professional fees for the Insolvency Practitioners and their lawyers.
If a director realises that the company is failing and will go into liquidation. Stop and consider, otherwise you may be responsible for the company’s debts for wrongful trading (that is trading your company on when you should have known that it would go into liquidation); check whether or not the dividends you have been taking have been out of profits. If not, you may have to pay them back. Take care if you start a new company, transferring assets and contracts to your new company from the old one could lead you into a big bill for misfeasance (for breaching those special “fiduciary” duties you owe your company) - also watch out when using a former company name; extra care should be taken not to prefer yourself over other unsecured creditors when you are repaying your company expenses.
These claims emphasise that you and your company are regarded as completely separate entities by the law - the issues can be resolved – however you do not want to risk losing that corporate veil and with it substantial sums of money.
Our insolvency and legal system is largely geared to protection of creditors – your actions will be seen against a backdrop of how you protected your company’s creditors – this duty is enshrined in the Companies Act.
How can your personal position be protected?
How can you protect your personal money you ploughed into the company to try and keep it afloat? You don’t want to lose that money through want of some security!
An embarrassing conversation with your wife/husband /partner will be the least of your problems compared with having to downsize your house, your car and taking the kids out of private school!
The call to arms is to act fast when you anticipate a problem and get in contact with an expert restructuring and insolvency lawyer.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.