GUEST BLOG: Closing a company with debts

By John Baird, personal finance and insolvency expert at ScotlandDebt.co.uk

The process of having to close down a company is never one that anyone who starts or runs a business would ever relish, and in most instances it will be a last resort option.

However, it is unfortunately a situation that very commonly arises and one that ought to be approached carefully by anyone involved.

The good news is that there are plenty of scenarios in which a company with debts can effectively cease trading and be closed down without this having any direct or devastating impact on the individual directors involved.

It’s important to realise that insolvency and administration proceedings aren’t designed to punish or penalise the individuals who find themselves in charge of failing businesses. Nor indeed are the processes of receivership or liquidation, which can become relevant as a company reaches the end of the road.

Where these processes can come to impact the personal finances of company directors though is when personal guarantees have been given in association with specific loans or lines of credit.

Where these guarantees have been given there is scope for creditors to pursue individuals for debts owed if a company defaults and heads out of business.

DIRECTOR RESPONSIBILITIES

Administration and insolvency proceedings more generally are in part designed to provide legal protections to companies that are unable to pay back the money they owe to creditors.

Insolvency practitioners will be appointed to manage the affairs of companies in these situations and they have a legal obligation to represent the interests of creditors but they have no interest in punishing or making life more difficult for the directors involved.

Dividends and salaries are considered separately and directors can, of course, put more money into a business than they take out and leave their loan account in credit

However, there are very clear legal responsibilities upon directors in the period prior to and as a company enters administration or is being wound up. If, for example, directors know their business is insolvent but they fail to declare as much then there is scope for legal action against them on the basis of improper conduct.

Any improper actions in these contexts can result in a company’s debts becoming personal concerns for individual directors.

DIRECTOR LOAN ACCOUNTS

John Baird, ScotlandDebt.co.uk

While there is not necessarily any crossover from the financial affairs of a company becoming insolvent and a director of that company’s personal finances, there are ways in which the waters might be muddied. Director loan accounts are among the more common reasons for complications in these areas.

A director’s loan account is a means through which a company director can withdraw money from the company they run. Dividends and salaries are considered separately and directors can, of course, put more money into a business than they take out and leave their loan account in credit.

However, when a director’s loan account is overdrawn and a company then ceases to trade, there may be questions to answer and business to be settled.

In short, liquidators appointed to extract what value they can from an insolvent business will view an overdrawn director’s loan account as an asset to pursue and this may ultimately have a considerable impact on the finances of the directors involved.

GETTING GOOD ADVICE

It is always the case when a company is facing the prospect of being closed down that its directors can potentially benefit from expert advice on the relevant issues and the particular dynamics involved in a particular instance.

Even if only for the sake of peace of mind, getting clear guidance on these matters can be very valuable and eminently worthwhile.

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