When a small or medium sized company gets into difficulties the Directors may also be left with debts. Generally Bankruptcy is not an ideal solution to deal with this issue. However there may be times when it could be a sensible option.
- When does a Director need a personal debt solution?
- Disadvantages of Bankruptcy for Directors
- Is Bankruptcy ever suitable for a Director?
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When does a Director need a personal debt solution?
If a company rescue solution is implemented the directors may also be left in financial difficulty. They may have taken debt in their own name to support the business. They may also have given personal guarantees which are now called in.
The directors may not have sufficient resources to repay these debts. They will then need to use a personal debt solution. Under normal circumstances Bankruptcy might be a useful option to consider. However for a Director it throws up some unique problems.
Disadvantages of Bankruptcy for a Director
Once bankrupt you have to give up any directorships you hold. In addition you can no longer be involved in the management of the company. These are legal requirements. The restrictions last for the period of the bankruptcy which will normally be 12 months.
You can be an employee when you are bankrupt. As such you can continue to work for the company you used to manage. However someone else must be appointed as the director and manage the business.
If you own shares in your company these are classed as one of your assets. As such the ownership of these will transfer to the Official Receiver. You might be able to buy them back. However the funds required to do this must come from a third party.
Additional disadvantages of Bankruptcy are that the individual’s credit rating will be negatively affected. In addition the fact that they are bankrupt is a matter of public record. Their name and address will entered into the insolvency Register which is publicly accessible via the internet
Is Bankruptcy ever suitable for a Director?
Despite the downsides there are some situations where Bankruptcy might be suitable for you if you are a director. The first is when you no longer need to continue in the role. There may be other directors who can run the business without you. They may be happy for you to remain as an employee.
As long as you co-operate with the Official Receiver you are likely to be discharged from bankruptcy after 12 months. You can then become a director of a company again if you wish.
If your company has been closed you may have no income with which to maintain personal debt payments. As such you cannot afford a solution such as an IVA. Given you no longer need to be a director bankruptcy offers a significant advantage. That is you are not required to make any payments towards your debts unless you can afford to do so.