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Insolvent Company & Personal Guarantees – which should a director deal with first?

Sep 18, 2018 | Written by Cliff Sanderson

At Dissolve we normally deal with companies at the smaller end of the size scale.  Typically, a director who calls will have a company that is trading, but needs to stop because it is unviable, or it has already ceased to trade.  Also, a little less typically, that director will have signed a bundle of personal guarantees to the Bank, trade suppliers, the landlord and possibly be facing personal liability for some tax debt as a result of a Director Penalty Notice.  As a result, the director will be reconciled to the fact that they will be losing the company and will also have to declare themselves bankrupt as well.  So the question will be…. how to cause all that to happen and in which order should the problems be dealt with?  There are a few simple guidelines that can make the process, well, maybe not pleasant, but at least less stressful.

So there are a number of considerations.

Director Penalty Notices

If you have received a Director Penalty Notice, and in particular a 21-day DPN, then take careful note of the date on that DPN and calculate the 21 days (not business days) from the date of that Notice  then subtract one day to be sure.  That will be the last day that you should either place the company into Creditors Voluntary Liquidation (“CVL”) or Voluntary Administration (“VA”).  That is the backstop date for dealing with the company.  Don’t miss the 21 days because, if you do, then you will be personally liable for the debt shown on the DPN.  If you place the company into liquidation prior to the 21 days expiring, then at least you will not be personally liable for that debt – the debt will stay with the company.  Having said that, don’t leave it to Day 20 to call us – we can do same-day appointments but no sense pushing that envelope if it can be avoided.

Insolvent Trading Laws

If the company is still trading, be sure not to incur any further new debts.  There are Insolvent Trading laws that simply state, if a director allows their company to incur a new debt after the company is insolvent, then that director can be personally liable for that debt.  So the takeaways from that are:

  • If the business is trading at a loss, the sooner it is shut down the better.  To not shut it down risks personal liability and also increases the deficiency in the company.
  • If it is possible that a director has traded while insolvent in the past, then there is the possibility that, after the company enters liquidation, the directors will face extra claims for Insolvent Trading.  Hence, it is prudent to get the company into liquidation to “crystallise” any possible personal liability, before the director declares themselves bankrupt.

A Bankrupt can not be a director

The law states that a Bankrupt can not be a director.  Therefore, once a director declares themselves Bankrupt, they can no longer make decisions on behalf of the company.  So, if a director wants to place a company into CVL or VA then they need to do so prior to declaring Bankruptcy.

So what does all that mean?

So those are the issues.  Pulling them together, for a director who is facing the demise of their company and is also facing personal bankruptcy, the following is the order of dealing with things:

  1. Don’t incur any new debts;
  2. Stop trading the company;
  3. Appoint a liquidator or put the company into Voluntary Administration;
  4. declare yourself Bankrupt
Cliff Sanderson

Cliff Sanderson