When a company fails, its directors don’t usually face the same financial burden as sole traders who have to pay the debts of the business from their personal funds. But there are exceptions to this which we’ll look at here.
Who controls the finances?
If a company becomes insolvent, a liquidator or administrator is appointed to take control and ensure that creditors are paid back. Directors have to provide all the information required but have to cease direct control. If they owe money to the business, this will have to be paid to the company and not used to pay creditors.
The Government says that in the case of insolvency, a company director must shift their focus from the shareholders to creditors. If they are not sure of the actions they need to take, they should seek professional advice.
In a limited company structure, directors are protected because the business is separate from its owners in legal terms. However, if a director has previously signed a director guarantee in order to get a loan, it means they are liable for any of its debts when the business goes into liquidation and cannot repay them. The lender will require payment of any outstanding loan by the guarantor as the company is no longer able to afford it.
If the director cannot repay the loan, they will face legal action and potential bankruptcy where they are stripped of their assets. Therefore it is essential to get legal advice from experts such as https://www.parachutelaw.co.uk/director-guarantee if you are thinking of providing a director guarantee.
An Insolvency Practitioner will establish what has caused the company’s decline by looking at the actions of its directors. They can face fines if any misconduct or wrongful trading is discovered.