Are directors benefitting from limited liability?
2 August 2022: Often, one of the main benefits to directors in incorporating a company (or in some cases, a limited liability partnership) is limited liability in the event of a formal insolvency process. This contrasts sharply with a sole trader where liability is unlimited which effectively means that personal assets may be called upon to pay creditors. In a partnership, each partner is jointly and severally liable.
However, for owner managed businesses in the SME marketplace, directors may not always benefit from limited liability if they have provided a personal guarantee to a creditor. Typically, these were commonly provided where a company had taken out an unsecured loan or purchased assets on either hire purchase or some other form of finance agreement.
We are now seeing that personal guarantees have extended to other suppliers, including trade creditors. Where a trade creditor supplies stock to a business, a personal guarantee may be included in the supplier’s standard terms and conditions that form part of a credit application. Another common example is the inclusion of a personal guarantee in an engagement letter.
The provision of a personal guarantee may have a significant impact on a director’s personal financial situation and could also have major implications for their family.
BRI fully appreciates and understands that, in the SME marketplace, the company’s and the director’s financial position are often entwined. BRI is committed to explaining the different options available to the directors and members of an insolvent company. Furthermore, BRI will also set out how each of these options might impact the director/owner and their family.
In the event that our insolvency practitioner is conflicted from providing such advice to an individual, BRI will recommend professional advisors who will be able to give support and assistance to directors/members who find themselves in such a challenging and stressful financial predicament.