Setting up a limited company offers protection from personal liability in most instances, and in the unfortunate event that your business does fail, liability will be limited to the amount of unpaid share capital in the company. Our Insolvency Experts Manchester are here to help should your company go bankrupt. There are circumstances however, where the threat of personal bankruptcy becomes a real possibility, if your company enters insolvency. A process commonly known as ‘lifting the veil of incorporation’ can result in the protection you receive as a company director being removed. If your creditors suffer a material financial loss and you are found to have acted wrongfully as a director, or fraudulent activity is proven, the Court can decide to make you personally liable for some or all of the company’s debts. Ben Cowgill at The Insolvency Experts Manchester explains further.
Don’t ignore the warning signs
Cash flow problems are normally the first sign that your company is struggling, and it is at this early stage that you should seek professional advice. Understandably, Directors often attempt to trade their way out of difficulty, but this often creates more problems. It is a legal obligation to cease trading as soon as you suspect your company is insolvent or close to insolvency. Put simply, your business is insolvent if its liabilities exceed its assets. Failure to cease trading could result in disqualification as a Director, personal liability, and potential bankruptcy.
What are the circumstances in which I could be made bankrupt?
Your failure to put the interests of creditors first could lead to the liquidator pursuing you for any company debt taken on from the date of insolvency and indeed before this date if wrongful/fraudulent activity is discovered. If you are in this situation you must make sure the company takes on no further debt, and does not accept further orders or deposits from customers. You are seriously advised to seek professional assistance immediately. if you haven’t already. Once the liquidator starts investigating, as a Director, you will need to prove that you have done everything in your power to maximise the financial returns for creditors, and that no ‘questionable’ transactions have taken place. Questionable transactions could include: •Preferential payments – repaying one creditor in favour of others •Transactions at an undervalue – selling company assets for less than their full market value •Paying dividends to shareholders, or taking a large salary when the company cannot support this financially
Many lenders insist that directors provide a personal guarantee before lending to a company. Whilst this significantly reduces the lender’s risk, it puts directors in serious danger of bankruptcy should the company fail, as they will become personally liable for repayment of the loan. If you are unable to repay the debt, the lender can force you into bankruptcy, putting at risk your home and other personal assets. Your situation is further compromised because your ability to earn a living is taken away due to the insolvency, unless you have alternative streams of income.
Overdrawn director loan accounts
It is not unusual for directors to withdraw money from their company on a temporary basis when the business is profitable. However, if your company enters insolvency and your loan account is overdrawn, the liquidator will pursue you for repayment in order to increase returns for creditors. This can result in an awkward financial situation if you do not have the funds to repay. Like with personal guarantees, it leaves you exposed to the threat of bankruptcy as you are obligated to repay the funds you have taken from the company.
Risk of bankruptcy for sole traders
If you are a sole trader you are at greater overall risk of bankruptcy if your business fails, because unlike a limited company, it is not a separate entity in law. Creditors can pursue you through the courts for money on a personal level, putting your home and other assets at great risk. As a result you may be forced into bankruptcy, or have to declare yourself bankrupt as protection against other creditors. Although this process does allow you to start afresh once the bankruptcy period is over your access to finance in the future will be severely limited. Although being Director of a limited company reduces the risk of personal bankruptcy as opposed to sole traders, it is clear that the threat can emerge very quickly once any business starts to fail. Insolvency Experts Manchester can assist whether you are a company director or sole trader worried about personal bankruptcy. There are alternative options, such as an Individual Voluntary Arrangement (IVA), and we may be able to negotiate an affordable agreement with your creditors. We understand that we are the last people you want to speak to but be assured that our ultimate goal here at The Insolvency Experts is to find a means to assist your company survive financial distress. If your company is unable to keep up with financial obligations and you’re concerned about your company, contact The Insolvency Experts, Manchester now on 0300 303 8284 or via our contact us page.