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Debt Advice Handbook Scotland 1st ed - with new material

Director of a limited company

• Giving advice to a director of a limited company
• If a client is still trading
• If a client has ceased trading

Giving advice to a director of a limited company

A limited company is a separate legal entity and must be registered with Companies House. A limited company’s name must usually end in either ‘limited’ or ‘Ltd’.

A limited company can be set up as a private company (in which shares are owned by and transferred between a limited number of people) or as a public company (in which shares can be bought and sold on the stock market). The most common type of limited company business debt advisers deal with is a private company.

A limited company is owned by its shareholders and run by its directors. Many small companies are run by just one person, who is both the director and shareholder.

Since a limited company is a separate legal entity, it can own assets and is liable for its own debts. A limited company will need to comply with company law, as well as important documents lodged with Companies House (the memorandum of association and articles of association and accounts). Dealing with limited companies can be complex. Advisers should signpost clients to specialist advice if there is an issue with the limited company. (An insolvency practitioner might be useful in this situation.)

A director of a limited company has duties and responsibilities to the limited company. A director is not usually liable for the limited company’s debts unless:

•the director gave a personal guarantee; or
•the company was dissolved (struck off) or liquidated, and, following an investigation, it was decided that the director had acted inappropriately in their role.

A director could have acted inappropriately in their role for many reasons. Here are a few examples:

•acting fraudulently towards the company’s creditors;
•taking money from the company for their own use at the expense of the company’s creditors;
•increasing a company’s debt by continuing to trade a company while it was insolvent when there was no reasonable chance it could trade out of its difficulties.

The recently published case of Antuzis v DJ Houghton Catching Services Ltd1[2021] EWHC 971 (QB), 23 April 2021 confirmed the principle that directors entering into contracts in bad faith can be held personally liable.

If a director disputes liability for a limited company debt or liability is unclear, signpost the client to specialist advice.

A director will be an employee of the business and will normally receive a wage or ‘dividends’, or a mixture of both. It is important to clarify how they are paid.

 

1     [2021] EWHC 971 (QB), 23 April 2021 »

If a client is still trading

The status of a limited company as a separate entity should usually allow you to give advice to directors on their personal debts. However, because personal and business finances often become merged for these clients, there are some common issues that you need to consider.

Personal debt issues for a director of a limited company often indicate problems with the limited company. For example, it may indicate that the client is using personal credit to prop up the business. Explore the reasons for the client’s personal indebtedness. If the client’s debts are caused by the limited company’s performance, signpost the client to a specialist adviser.

Ensure the client has checked whether they have given any personal guarantees for the limited company. If they have, they need to consider how certain strategies may affect the limited company. This can be particularly important if a guarantee exists but has not been called in. Signpost the client to specialist business advice if that is the case.

Suggest to the client that they also get specialist business debt advice before deciding how to proceed with their personal debts. The client must consider whether any action they take to deal with their personal debts could affect their ability to continue acting as a director.

Insolvency practitioners are usually a good source for help. Get to know a few of them and ask them for advice.

If a client has ceased trading

Check whether the client has closed the business or resigned as a director. Signpost to a specialist business adviser for advice on leaving or closing the business if that is needed. Has the client submitted an application for ‘striking off’ to Companies House – to apply to strike off a limited company, the client must send Companies House form DS01. The form must be signed by a majority of the company’s directors.

They should deal with any of the assets of the company before applying. For example, close any bank accounts and transfer any domain names. Applications for ‘striking off’ can be refused and this is invariably due to debts due to outstanding creditors – eg, HMRC who can object to the application. Alternatively, the other way to close is through a formal liquidation process. This, however, can be expensive and cost up to £5,000 (with VAT) for a straightforward liquidation.

For insolvent companies, this is known as a creditors voluntary liquidation (CVL). The process can only be entered into under the guidance of a licensed insolvency practitioner. The client should always be referred to an insolvency practitioner in these cases, for further advice and guidance.

Ensure the client has checked whether they have given any personal guarantees for the limited company debts. If a personal guarantee relates to a complex business debt, such as an ongoing business lease, the client needs specialist advice.

Providing the client does not have any complex business debts that require specialist help, you can give the client full advice on their personal debts. Advisers could also seek the advice of an insolvency practitioner or the client’s accountant.