Safeguarding the personal assets of directors
How many company directors do you know who have invested personal assets in their business to help with the company’s cash flow, expansion, research and development or simply to prop up the business when it faces difficult times?
With more and more businesses facing financial difficulty in the current economic climate, there will be an increasing number of directors who are potentially risking losing everything if their company does fail. This presents a double blow at a time when directors are reeling from the shock of business failure and on top of that are facing losing their home and any other capital investments they’ve made in the business.
What many directors are not aware of is that they can potentially safeguard their personal assets through a director’s debenture, which gives them priority over other creditors if the business fails.
Setting up a director’s debenture is a straightforward process and we would be happy to advise clients on the most effective way to do this.
Case Study – If only he had known!
In a case that we are dealing with a director operated a very successful engineering business supplying parts to the automotive industry. In order to finance an ever increasing order book he remortgaged his house and invested the money in new equipment and increased working capital. He did not take out a director’s debenture.
Despite the additional capital, by 2009 he was already overtrading and was at the limit of his facilities with the bank and had no headroom in his invoice discounting facility when the recession hit. Fixed overheads were high and he could not afford to make redundancies as his employees were all long serving. With creditor pressure mounting and no prospect of things improving he had no alternative but to appoint Administrators.
The business and assets have been sold and the invoice discounting company and the Bank have made a full recovery. It is expected that there will be a dividend paid to creditors in the near future.
Because the director did not take out a director’s debenture, he will be sharing in the dividend to unsecured creditors in due course. However, had a director’s debenture been in place, he would have ranked behind the bank as a floating charge creditor and would have recovered all of the money he invested in his company. He would not now have to be selling his home.
To find out more about setting up a director’s debenture contact Tony Mitchell
