Getting caught between a rock and a hard place

Lets face facts. Things are getting pretty tough out there and being a director of any company operating in the construction sector at present is not for the faint hearted. Rising costs and too many companies chasing too few orders leads to one thing only reduced margins and losses!
 

Directors beware - “Getting caught between a rock and a hard place”

 

Let’s face facts.  Things are getting pretty tough out there and being a director of any company operating in the construction sector at present is not for the faint hearted.  Rising costs and too many companies chasing too few orders leads to one thing only – reduced margins and losses!

 
Now we all know that any company with “wool on its back” can survive a short downturn in the market but, contrary to Mr Darling’s predictions, there are increasing signs that the construction sector is in for a very tough time over the next two years.  What are the implications for directors?  Well there are clearly lots but this article is interested only in two areas of potential personal liability.
 
If you are a company director you may be one of an increasing number that are being forced by our beloved banking institutions to offer personal guarantees in exchange for continued funding.  So, if I have this right in my head, the same banks that created the recession by irresponsible lending now want you to put up a personal guarantee to secure their position in exchange for not pulling the plug on you.  Great!  My advice is simple.  Think very carefully before you agree to give a personal guarantee and please, please, please take advice before entering into such an arrangement.
 
I see a lot of directors that are concerned about calls under personal guarantees.  Invariably the same simple plan to avoid the liability is re-told to me over and over.  It goes like this.  If the director concerned believes his or her business is in trouble, all he/she has to do is make sure that the bank is re-paid before it falls over and, “hey presto”, no liability!  If only life were that simple.  It is not.
 
Planning to re-pay your bank ahead of your other creditors could well amount to a preference under section 239 of The Insolvency Act 1986. What does this mean?  Well, in short, the court can order a bank to repay monies back to the company where it is satisfied that a company has given a preference to one of the company’s creditors. Clearly, if this happens and the bank does not get re-paid in any ensuing insolvency arrangement, you can expect a demand under your personal guarantee.
 
I am afraid that the story can get even worse.  If a director knows or ought to know that his company is trading whilst insolvent then section 214 of The Insolvency Act 1986 will apply and the director concerned could well end up being held personally responsible and liable to pay the company’s creditors from the point in time when he or she ought to have known that the company was insolvent!
 
So, the moral of this story is in two parts:
 
Firstly, you should not even dream about entering into a personal guarantee without first taking advice and only then as an absolute last resort.
 
Secondly, failing to recognise trading problems within your business and taking appropriate action at the right time can have some extremely unpleasant and personal consequences down the line.
 
If you have a personal guarantee and/or suspect that your company is about to enter a difficult trading period you must not hesitate to take appropriate advice if you are to avoid the very real possibility of having to write some very large personal cheques or, and in the worst of cases, the very real prospect of bankruptcy.
 
Peter Vinden is the Managing Director of Vinden.  His company offers a range of options to help sick businesses operating in the UK construction sector.  He can be contacted by email at pvinden@vinden.co.uk
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