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KNOWLEDGE HUB

When doing the right thing as a company director can impact your personal financial position

Running a company comes with various responsibilities and legal obligations for directors to ensure the proper functioning of the business and the protection of interests, including creditors. While prioritising ethical and lawful behaviour is crucial, it’s important to recognise that some decisions made in the best interest of the company might have financial implications for the directors themselves. Here are some scenarios where doing the right thing as a company director can impact your personal financial position:

Financial Sacrifices for Company Solvency:

Directors may need to make tough decisions that involve personal financial sacrifices to ensure the solvency of the company. This could include forgoing salaries, bonuses, or dividends during challenging financial periods to meet creditor obligations.

Avoiding Preference Payments:

When company directors make preference payments, they engage in the practice of prioritising certain creditors over others, typically just before the company faces financial distress or insolvency.

Repaying close creditors: These payments are often made to repay debts to select creditors, such as friends, family, or business associates, ahead of other creditors. While it may seem like a well-intentioned effort to fulfil obligations, making preference payments can raise ethical and legal concerns.

Repaying creditors who have personal guarantees: Another common occurrence is directors prioritising payments to creditors who have a personal guarantee to prevent triggering that guarantee and thus being personally liable.

During insolvency, preference payments will come to light, they may be seen as an attempt to favour specific creditors to the detriment of the overall creditor body. Such actions can be considered unfair and may be subject to legal challenges in the context of insolvency proceedings. Directors need to exercise caution and adhere to legal guidelines to avoid potential legal consequences associated with preference payments, ensuring fair treatment of all creditors in times of financial hardship.

Delaying Liquidation:

A company director may be hesitant to put a company into liquidation for various reasons, especially when considering the potential impact on personal finances. Some of the key reasons include:

Personal Liability: Directors may be concerned about personal liability for the company’s debts. In certain circumstances, directors can be held personally responsible for the company’s financial obligations, especially if there is evidence of wrongful or negligent conduct.

Loss of Investment: Directors often have a financial stake in the company, including personal investments and shares. Liquidating the company may lead to a loss of these investments, affecting the director’s personal wealth.

Reputational Damage: Liquidation can be perceived negatively, potentially harming the professional reputation of the director. This may impact future business opportunities, partnerships, or employment prospects.

Personal Guarantees: Directors may have provided personal guarantees for the company’s loans or contracts. In the event of liquidation, these guarantees may be called upon, meaning the director’s personal assets could be used to cover the company’s liabilities.

Legal Costs: Initiating the liquidation process involves legal procedures and costs. Directors may be concerned about the financial burden of fees associated with winding up the company.

Emotional Attachment: Directors may have a strong emotional attachment to the company, especially if they have been involved in its growth and development. The decision to liquidate can be emotionally challenging and may not align with the director’s long-term vision for the business and their own financial position.

In summary, a company director is entrusted with a dual responsibility – one to effectively manage the company’s affairs and prioritise its interests, and the other to avoid favouring personal financial gains over the well-being of creditors. Striking this balance is crucial, as any attempt to prioritise personal interests during insolvency may lead to the removal of the limited liability protection, exposing the director to personal responsibility for all company debts. The director must consistently wear the hat of a company steward to uphold ethical and legal standards, safeguarding the company’s integrity and protecting interested parties.

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