Tax Avoidance by big corporations is in the news a lot, Licensed Insolvency Practitioner Neil Henry discusses Tax and legal...
As experienced Insolvency Practitioners, we often come across situations where people have taken out personal guarantees on directors loans and do not realise that they are personally responsible even if the company is liquidated.
I have just been appointed trustee in bankruptcy of a lady who was made bankrupt by the landlord of premises let to a limited company where she had guaranteed the lease. The company failed and the landlord issued proceedings against her as guarantor. She fought these proceedings on the basis that she had resigned as a director of the limited company which she believed meant that her guarantee lapsed. This is quite a widely held view but unfortunately it is incorrect. Guarantees may be required of directors for all sorts of things with the usual ones being bank loans and overdrafts, finance leases on assets, and leases of premises. These guarantees are given in a personal capacity and not in the capacity as director. This means that if a director resigns the guarantees given still exist.
It is important, therefore, that if you are a director of a limited company and you wish to resign then you should address the issue of any personal guarantees that you may have given. This can be more difficult than it initially seems. The particular creditor may not be willing to release you especially if you are perceived as having the wherewithal to meet any potential claims. Creditors do not like giving up their security. It may be, therefore, that you will need to seek some sort of indemnity from the remaining directors to cover you for any claims that may be made against you. Each case is different and if you find yourself in the position of wanting to resign a directorship then you should seek professional advice.
Check your creditors agreements to see if you have a personal guarantee
Whilst talking about personal guarantees, another common problem is where directors give a personal guarantee without realising that they have done so. What happens is a company approaches a supplier to open a credit account. The application is completed and signed by the director or directors and included in the application is a personal guarantee of the liability of the company by the directors. This guarantee is then called upon if the company fails to make payment because it has gone into liquidation. It is surprising the number of directors who say to me that they did not realise what they were signing; they thought it was just an account opening form; or they did not read what they were signing. None of these are good excuses. In English corporate law it is very difficult to get around a signed contract and do not forget that businesses and their directors cannot rely on legislation that is aimed at consumers. In blunt terms, if you have signed it you are assumed to have read and understood it. It follows, therefore, that you should read all documentation thoroughly before you sign it and sign nothing that you do not understand the consequences of. If you are in any doubt, you should take advice before you sign as afterwards it may be too late.