Personal Guarantees

Directors beware… limited liability does not protect you from everything

Personal guarantees

Signing a directors’ guarantee is a pledge to repay the debt if the company is unable to do so.

Generally, such undertakings are given for loans or lines of credit with suppliers and effectively pierce the veil of incorporation should the company fail to honour its obligation.

Guarantees are often given quite freely and with little thought to the repercussions, but the consequences can be significant when there are personal assets at risk. Losing a business and livelihood is bad enough, but losing your home is something else.

Bounce Back Loans CBILS & RLS

Billions of £'s was given to millions of businesses by way of covid support and for the most part company directors have not had to provide a personal guarantee. Instead, directors were simply asked to give some assurances about the company's trading status & solvency, however, it has since been widely recognised that not all the loan applications were with the best of intentions or indeed truthful.

As some of these loans started to fall due, we noted further questions and undertakings being asked of directors particularly if forbearance was being asked for.

Compensation orders

Compensation Orders have been around since 2015 and can be used to make directors financially responsible for the consequences of unfit conduct.

Where a company enters into insolvency proceedings and a director is subject to a disqualification order or undertaking, the Insolvency Service can apply to the court for a Compensation Order if the director’s conduct has caused a quantifiable loss to the creditors of the insolvent business.

Compensation orders have rarely been used, but we suspect they will become more widespread as the Government seeks to challenge those individuals who have abused the Covid support schemes.

The first reported case for a Compensation Order was in the matter of Secretary of State for Business, Energy & Industrial Strategy v Eagling [2019] EWHC 2806 (Ch) (1 November 2019).

The court was asked to make a compensation order against the director who had been disqualified for 15 years. The company entered into liquidation with deficiency of c£1.7m.

The court found that the director had misappropriated funds of £559,484 paying it into another company of which he was sole shareholder, prior to the company entering into a creditors’ voluntary liquidation. The company had no means to pay its creditors and the court ordered the director to personally repay this money.

New powers to investigate â€˜dissolved companiesâ€™

The Insolvency Service will be given powers to investigate directors of companies that have been dissolved. The aim is to close the loophole and act as a deterrent to those who use the dissolution process to avoid repayment of Government backed loans given to businesses to support them during the Coronavirus pandemic

The extension of the power to investigate also includes the relevant sanctions such as disqualification from acting as a company director for up to 15 years. Any director disqualified under such circumstances should be mindful that Compensation Orders can be used as a means of recovering the money from them personally.

These measures will be retrospective and will enable the Insolvency Service to also tackle directors who have inappropriately closed companies that have benefited from Bounce Back Loans.

The measure will also help to prevent directors of dissolved companies from setting up a near identical business after the dissolution, often leaving customers and other creditors, such as suppliers or HMRC, unpaid.

Conclusions

These new powers are likely to be exercised to ensure that any directors who “abused” Covid Support Schemes will be brought to task.

You need to ensure that you acted compliantly, or you run a personal financial risk, should you require further advice regarding this matter please contact us.

Covid business loans
& personal guarantees

Directors beware… limited liability does not protect you from everything