People in the United Kingdom sign up to be Directors of a limited company without any true understanding of the financial responsibilities of such an action. People are not expected to have any formal trading experience or understanding of signing as a Director.

When matters go wrong with the financial stability of a company, Directors are responsible for certain actions. They think “Limited” stops liability. They think lack of knowledge is a defense.

It is important when a Director signs a personal guarantee they seek guidance as to the result of the guarantee being brought. Directors fail many times to understand the terms of the guarantee and more importantly the effect it may have on them and their family.

When a Director trades with a company that is Insolvent and has financial shortfalls, usually that is when the guarantee is called. If a company has as Debenture over it, often in order to protect the charge holder, an Administrator is appointed to protect and indeed pay back the lender under the Debenture.

Complicated issues such as this are usually beyond many Directors concept; usually by the time Administrators are appointed personal guarantees are at risk. Usually, if it isn’t a Pre-Pack Administration, Liquidation follows and the trading company ceases. A Liquidation though can still follow a Pre-packaged Administration.

So, what is a Director to do? Firstly, they must consider what it is they are doing, and if they have the ability to carry out the duty of a Director. If so, take advice from professionals. Accountants, Solicitors and Bank Managers have been traditional people to seek advice from. However, try speaking to a Licensed Insolvency Practitioner. They may guide you on the pitfalls and if they’re aware of how you should trade, account and manage, then along with those previous you may have a better understanding of Insolvency and avoid issues. Insolvency Practitioners can be found on the internet. 

Finally, before signing a guarantee understand terms such as “Administration”, “Creditors Voluntary Liquidation”. Explore every avenue seeking guidance on short to long term financing, how you secure it and ensure you have a business plan that you can work to. Over inflated plans only fool you and will always haunt you.

So, see an Insolvency Practitioner as someone who can guide you in the beginning and someone who hopefully, you will not require the services of in the future.

A few tips for businesses are:

  1. Never over promise and under deliver.
  2. Manage driving your car. You know where you are going when you turn the key to start the car- the same applies when starting a business.
  3. Act responsibly with those that extend you credit. Do not be the cause of their insolvency or indeed their personal bankruptcy.
  4. Ensure you have advisors you can work with. Do not use them just for preparation of historic information. Do not see their fee as a cost but that it adds value to your business. They can help protect both the solvency of your business and ultimately, you and your family.
  5. Emotion in a business is vital but do not let it allow you to make bad judgement calls.
  6. At all times, understand the value of protecting and meeting the demands and needs of your customers.
  7. Ensure you credit check everyone. Are they trading insolvent and using you to bankroll their business?
  8. Always measure your business against your projections. Act where needed to correct overspending, downturn in turnover or creeping costs.
  9. Always ensure targets are achievable. Failure is difficult to deal with.

The list is a suggestion only on to what to look out for. Your business, it’s solvency and your guarantee are vital for a business to succeed.

Finally, a company may be solvent on the balance sheet but insolvent by lack of cash flow. So, remember if in doubt keep checking, are you able to pay creditors as and when they fall due? If not, seek help independently from a Licensed Insolvency Practitioner. Always tell yourself the truth.

HBG Advisory are Licensed Insolvency Practitioners based in the North West of the UK. Call us on 0330 660 0027 or email us at if you think you need our advice or guidance.

Source: Homelessness due to no understanding of a guarantee