17 February 10
LTD - Leave The Debt?

Many businesses operate as a limited company, and as the clue in the title suggests, enjoy the comfort that comes with limited liability.  If things go wrong, then this structure ensures that the personal assets of the directors are protected. Of course, as any company director will tell you, this is as long as the directors have not breached any of their duties under the Companies Act, or insolvency legislation.

If you are operating as a limited company however, or intend to do so in the future, bear in mind that in many cases lenders will request a personal guarantee from the directors.  They may additionally require security on personally owned assets. This may be a risk that as a director you are happy to take in order to get the finance the business requires.  As long as you are fully aware of the extent of the guarantees or security that you are offering then you will be fully armed to ensure that you are able to manage your own affairs accordingly.

We have highlighted the above sentence deliberately as we regularly have to advise directors who are unaware of the extent of their personal financial exposure. The “small print” of company loan documents may be dull and boring – but it is absolutely essential that you read it and take advice from your solicitor before signing any type of credit agreement.

We are also seeing in increasing number of cases where directors have obtained personal loans, or used personal credit cards in order to buy stock or assets for the company.  For accounting purposes, these liabilities incurred are introduced into the company by way of a director’s loan account.  Beware however – that if you do this then you become the creditor of the company, and the liabilities remain personally yours.   In the event of the company’s insolvency, these debts do not remain with the company and the credit card companies will still look to you for repayment despite the company’s demise.   You must also ensure that you do not use company funds in this situation to repay any of the balance due to yourself in preference to other creditors, or you will be held to account for these funds under insolvency legislation.

Our advice is to keep the company debt in the company wherever possible, and your personal liabilities as personal.  Be very careful, and beware of the consequences that if you blur the line between company and personal liabilities, your actions may come back to bite you.