Limited Liability – Trapped Directors

April 27, 2022

27 April 2022:  A limited company gives owner managers/ directors protection from the business liabilities of a company. Sole traders/ partners would otherwise be personally liable for all the business debts. If the company goes bust, the directors’ finances including any personal assets are separate from that of the company. They are protected from the creditors of the limited company.

But beware of the traps …

There are limitations to this principle and below are a few examples.

Secured lending
A director seeking a fixed and floating charge loan from a bank may be asked to give additional security on top of securing the assets of the company. This additional security may be over the director’s residential home or other assets. If the company is liquidated, the lender can first pursue the company and the business assets and can then pursue the director’s’ personal assets for any shortfalls.

Overdrafts and unsecured loans
In many cases, directors that are given unsecured lending by a bank/financial institute will be asked to sign personal guarantees. Always read the small print before signing any documentation.

Financed assets
Directors that purchase assets for the limited company on finance also need to be aware of the small print. They may be purchasing plant and machinery as part of an asset finance agreement for the company but need to look out for the personal guarantees. Specifically financed vehicles in most cases will have the name of the director on the paperwork and the director in many cases will unknowingly sign up to personally guaranteeing the finance agreement should the company defaults on payments or if the vehicle is returned before the agreed terms are completed.

Directors will also be trapped in by the exorbitant fees and penalty charges. If you feel you may need to speak to one of BRI’s experienced management team for advice in respect of potential issues you are facing in your business, please do not hesitate to get in touch.