Small company debt problems often go hand in hand with Directors personal debt. A Director may have given personal guarantees or borrowed in their own name. If the company fails this leaves them struggling.
- How are Company and Directors personal Debt linked?
- Should Directors consider Debt Management or an IVA?
- Can a Director go Bankrupt?
- Government Advice about dealing with Personal Debts
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The link between Company and Directors Personal Debt
A fundamental principle of a limited company is that the Directors are not responsible for its debts. However in small to medium sized companies it does not always work out that way.
Directors of smaller companies often give personal financial support to the business. This may be in the form of guarantees for a company overdraft or bank loan. They may also borrow in their own name and use the money to pay company bills. They are personally liable for these debts.
If a company is trading successfully this personal liability is not an issue. However if the company starts to struggle the Director is unlikely to be paid and may struggle to pay their own debts. In these circumstances they can use one of a number of personal debt solution options.
The Link between company and directors personal debt is the reason why company and personal debt solutions are often implemented together.
Debt Management Plan
A Debt Management Plan (DMP) is commonly used to manage directors personal debt. The Plan reduces the amount that is paid towards the debts to an affordable level. If a director has given a personal guarantee the bank will often agree to this type of repayment plan. It gives a more sensible time to pay.
However a DMP can be a poor solution for a Director. The Plan requires the director to be able to fund monthly payments until their debts are paid in full. This can take considerable time if the director can only draw a small salary from the company.
Another issues is that HMRC debt cannot generally be included. If personal tax arrears are outstanding this solution is therefore not usually appropriate.
Individual Voluntary Arrangement
An Individual Voluntary Arrangement (IVA) is a formal personal debt solution. Outstanding debts are settled either with reduced monthly payments or a lump sum. Once the agreement is in place no further legal action can be taken against the director.
This solution is often used by company directors. The individual is allowed to continue to act as a director while the Arrangement is in place. In addition HMRC debt can be included.
An IVA is often used to deal with personal debts after the implementation of a CVA or Pre Pack Liquidation. Using this solution they are allowed to remain in their role. They can also remain directors of other companies.
Bankruptcy is usually considered as a last resort for dealing with a director personal debt. The main problem is that an individual is not allowed to act as a director while they are bankrupt. Bankruptcy will normally last for 12 months so this can cause significant issues.
Once bankrupt the individual also has to hand over any shares they own in a limited company. These can be bought back from the Official Receiver. However funds will have to be found to do this which can be a problem depending on their value. In addition if there is equity in any property owned this will be put at risk.
There are some circumstances when bankruptcy might be sensible for a director. This could be where the individual no longer wants to act in the role. In addition they may not be a homeowner or have little or no equity in their property.
Government Advice about Dealing with Personal Debt
As well as the information found on this website the Government’s Insolvency Service has produced a useful guide to personal debt solutions which you might also find useful: “In Debt – Dealing with your creditors”.
The Money Advice Service (MAS) are an independent service set up by the Government to provide people with free advice about all aspects of personal finances. For help from MAS if you are struggling with debt please follow this link: MAS – Help if you are struggling with debt.
It is also recommended that you read this one page document produced by MAS entitled “Dealing with debt – 5 things you should know”.