Posted on: Saturday 11th May, 2019
If your business is struggling and can’t pay its creditors, you may be concerned that your personal finances are also in danger. If you’re a sole trader, essentially you are the business, and creditors chasing debt can pursue you through the courts as an individual.
Also, the likelihood of being made bankrupt for business debts is higher for sole traders than for company directors because a limited company is a separate entity in law. There are instances, however, where directors can be made personally liable for the company’s debts; this is known as lifting the ‘veil of incorporation.’
When you run a sole trader business you’re at greater risk of a creditor making you bankrupt, simply due to the business structure. Unlike a limited company, there’s no separation between the business and its owner.
Being a sole trader does offer many benefits, such as reduced administration, but the lack of separation between yourself and your business leaves personal assets exposed if the business declines and creditors take enforcement action.
Under normal circumstances, running a limited company offers protection from creditors as debts typically belong to the business. This can change very quickly, however, and it’s important not to rely wholly on the fact that the company is a separate legal entity.
As a director you may be held personally liable for some or all of your company’s debts under certain conditions, placing you at risk of personal bankruptcy alongside the insolvency of your business.
You’re obliged to cease trading when your company enters insolvency, or you believe insolvency is inevitable, as this limits creditor losses and allows you to meet your legal obligations as a director.
Taking on more debt, accepting customer deposits, or paying one supplier in favour of others when knowingly insolvent, can all lead to the liquidator holding you personally liable for the company’s debts, leaving you open to the potential threat of bankruptcy.
Providing a personal guarantee is a common requirement for business borrowing, and if the company fails or is otherwise unable to continue to pay the loan, the lender will initiate the guarantee in an attempt to recover their money. This means that you will become responsible for paying this debt from your own personal funds. If you can’t afford to pay, your creditor may decide to take legal action which could ultimately lead to bankruptcy.
If there’s no hope of business rescue or recovery, voluntary liquidation can help you avoid personal bankruptcy and at the same time may allow you to claim director redundancy. Creditors’ Voluntary Liquidation (CVL) does involve the business closing down, but also offers you more control over proceedings as a director. It allows you to meet your legal obligations to creditors, as by entering liquidation voluntarily you’re placing their interests first.
To find out more about avoiding bankruptcy for business debts, and whether you can claim statutory redundancy pay as a director, call one of our expert team at Redundancy Claims UK. We offer same-day consultations, and can quickly assess your situation to minimise your exposure to personal liability. RCUK are Authorised and Regulated by the Financial Conduct Authority. Authorisation No 830522. You can check our registration here.