If you own your own business then insolvency is likely to affect you personally. Not just in terms of your physical wellbeing but going through business insolvency can also affect your emotional wellbeing. It is not uncommon for business Directors to experience a high level of stress during insolvency which can have negative affects on your health and relationships.
As a Director you can be held personally liable for your actions and the actions of the business as a whole, some types of misconduct can result in prison sentences.
This is why it is important to protect yourself in the event of insolvency.
How to protect yourself against personal liability
To protect yourself against personally liability, you first need to understand what responsibilities your role as a Director involves. You need to fully understand what actions you can and can not legally take when you are insolvent.
When a business goes into administration or liquidation, a director’s conduct may be investigated and you could be held personally liable for:
- Wrongful trading – this is if you continue to trade and create debts that you know you will be unable to pay
- Fraudulent trading – for example giving incorrect information in order to obtain orders or credit and taking orders that you know you will be unable to fulfill
- Misfeasance- if you use company money to pay for non business related items
- Personal guarantees- if you have given a personal guarantee for a loan, the creditors can request you to repay it if the business cant.
- Preferences – if your business is insolvent and you pay one creditor in preference to another you could be held personally liable as you are under a duty to treat all creditors equally.
- Transactions at an undervalue – if the business transfers assets for a lot less than their market value
How to protect yourself
- Keep accurate records and up to date financial records
- Don’t keep trading if you have become insolvent unless it is possible to turnaround the business
- Do not write cheques if you think they will bounce
- Don’t take orders if you know your business cannot fulfill them
- Don’t pursue other forms of credit if you know you wont be able to prepay it
- Treat all creditors equally
- At meetings, ensure minutes are kept, particularly if your views differ from other directors
Get professional advice
If you are worried about insolvency it is a good idea to get some advice from a qualified insolvency practitioner. They have a vast amount of experience and they will be able to help you make the right choices for you and your business.
To understand the whole range of options and to get help choosing the right one for your business contact us on 0800 597 4757 or enquire online using the form opposite.
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