The limited company is a separate legal entity in its own right, just like a person; as such the Company entity can incur debts and be held liable for them up to the value of the company.

The Directors of a Limited Company are employees of the company but can commit the company to various contracts and agreements. With a limited company the shareholders (usually the directors) own the business although you can be a director in name only and not own shares.

Suppliers and lenders are aware that if the company fails they may have no recourse to recover their money and so they sometimes insist on a company director signing one of the most dangerous documents in the business world – The Personal Guarantee (or PG for short)! The other most dangerous document on earth is the Bond and Floating Charge (B&FC), much loved by banks and other financial institutions.

The PG: By signing a PG you effectively LOSE the protection of limited liability and become PERSONALLY LIABLE for the Company debt.

This is (very / obviously) bad news as not only do you lose your job if the company fails you then have to try and repay all the debts that you signed a PG for. Avoid PG’s like the plague. It may not be easy at first but as you establish a track record make sure that you renegotiate ANY contract where you signed a PG (otherwise what was the point of setting up a Limited Company?)

The B&FC: Sometimes a lender needs or wants security from you and wants to take a charge over your business assets when it gives you say a business loan. If they used a “standard security”, then you could not buy and sell assets, stock etc as it would be secured to the lender and not yours to sell until the security was removed, hardly practical on a day to day basis. A B&FC allows you to buy and sell in the normal course of business but when the B&FC is called up by the lender it then takes effect ( crystallizes ). At that point whatever assets are on the premises or specified in the agreement are secured by the lender. B&FC’s sometimes extend to your HOME so be careful.

Unlike personal debts, action against businesses can happen much quicker as the pursuer or creditor will probably know you by name not a number! For that reason it is important to have a strategy in place either before you set up in business or as soon as you realize that a problem is coming your way.

It is important to remember that if you continue to trade, KNOWING that the Company is insolvent you could find yourself PERSONALLY LIABLE for the debts!

All is not lost however and you do have certain rights and courses of action that could be undertaken to ensure that you have a viable way of dealing with your business debts.