Partner Article

Company debt help and tips

When a sole trader incurs a debt there is no difference between his personal and business assets but when a company is formed and it incurs debts the director has more protection in theory at least. As long as no personal guarantees have been signed a limited company debt belongs to the company not the director. The whole point of having the limited liability status shown at the end of your company name is to let everyone know they can only call on company assets if the company fails.

Of course in practical terms most banks, finance house, suppliers and every cat and dog asks for a personal guarantee from a director. Personal guarantees are the biggest personal debt risk to directors when a company fails.

The simplest way to stop potential company debts from being transferred to you as a director is to refuse to sign a personal guarantee. Or, ask to have a limit placed on the amount guaranteed or a time limit placed on an overdraft. Another useful tip often overlooked is to have the amount of an overdraft reduced over a 12 month period say, so at the end it flattens out a far reduced but essential level.

As far as every day creditors as a director you have a responsibility to keep creditors informed and this is often ignored for fear of causing worse problems. In my experience this is rarely the case. Most debts turn into legal action due to lack of communication between director and creditor.

For debts with a major creditor and only if you are desperate why not ask if they are willing to accept a debt for shares stake. In other words will they take a stake in your company instead of the debt. Failing that keep creditors updated with what is going on and do not overegg the pudding by exaggerating matters. Understate and over deliver and make sure you leave yourself reactive time in order to respond appropriately and in a considered fashion. For example if you know money is due in on the 3rd of December then allow for late payment based on experience.

Another very good tip though it may not seem like it initially is to make sure you always, always initial every single page of any agreement you are being asked to sign. This prevents overstated claims later on when a page goes missing or even added in as, has happened with a variety of institutions.

It is worth understanding what options a creditor has and has not too. In a large number of cases the use or, I should say misuse of winding up petitions cannot be overstated. Sadly a lot of lawyers know the impact of a winding up petition and often ignore ‘due process’ when pursuing a debt. I will clarify what I mean by due process in a moment in the context of pursuing a company debt, but in the first instance it is important to understand a winding up petition is not a means of debt collection. A winding up petition is a means of closing an insolvent company by way of a court hearing.

So, why do you lawyers use winding up so commonly nowadays? Well quite simply the fear factor and the process favours’ the creditor. You cannot simply settle a debt once a creditor has issued a winding up petition a hearing will be held. After seven days of the petition being served the petition can be advertised in the government’s insolvency register which is monitored by banks and possibly other creditors. This advertisement in itself can deliver a fatal blow to your company. So the debtor tends to pay even if the debt is disputed.

Due processprovides the right for the debt to be contested and this is often the reason due process is not followed. Typical due process for a company debt would involve a proven law suit, county court judgement or a statutory demand. All of these routes would have given time for the debt to be disputed legally.

This was posted in Bdaily's Members' News section by Mike Smith .