Options for Directors in debt after Liquidation

After liquidation the general rule is that directors are not liable for company debts. However they may still be liable for considerable debts which they personally have to repay. There are various options for managing these.

  • Are Directors liable for debt after Liquidation?
  • How to resolve debts after Liquidation

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Which debts are Directors liable for after Liquidation?

After Liquidation Directors will be liable for any debt that is left in their own name. These debts can come in various forms.

Personal debt taken to support the company
Perhaps the most common form of debt a director will be liable for after Liquidation is personal debt. A director may have tried to support company cash flow by borrowing in their own name. This could be in the form of personal loans or credit cards.

Guaranteed company debts
In small and medium sized companies directors are often required to personally guarantee company debt. This is common if the company has borrowed from their bank or taken out a property or vehicle lease.

Once a company is liquidated creditors will call in any personal guarantees. The associated director is then personally liable for these debts.

Director’s Loan Account
A debt which is often overlooked is a Director’s Loan. This is money that a director owes to the company after Liquidation.  It normally exists because a director has taken dividends when there were no profits to pay these. The Liquidator will demand the director repays this debt. They can use legal action to enforce payment if necessary.

How to resolve Director’s Debts after Liquidation

If a director is left with debt after Liquidation the most obvious solution is to pay it. However what happens if they have no funds to do this. They may have used used any savings they had to try and support the company. In addition any income they were drawing has now stopped. The answer is therefore to implement a personal debt solution.

Liquidation normally leaves directors with little or no means to repay their personal debts. As such closing a company will often go arm in arm with implementing a personal debt solution.

Debt Management Plan
If a director has given a personal guarantee the bank will often be prepared to agree a sensible repayment plan with them. This is commonly known as a Debt Management Plan (DMP). Other unsecured debts owed by the director could also be included. However if the amount they can afford to pay each month is low it will take a long time to pay the debt using this method.

Individual Voluntary Arrangement
An Individual Voluntary Arrangement (IVA) allows outstanding personal debt to be settled over a fixed period of time. It can result in much of the debt being written off. It is potentially an ideal solution because you can still act as a director while the Arrangement is in place. However as with a DMP it will only be possible if the necessary monthly payments can be funded or if a lump sum is available.

Bankruptcy
An alternative option a Director may not have previously considered after Liquidation is Bankruptcy. An considerable advantage of Bankruptcy is no debt payments are required unless there is available income. Given a director may have no available income it could therefore be an ideal solution. However it is only an option if the individual no longer intends to be a director. They are legally barred from doing so for the period they are bankrupt.

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