If you are a director and you find that the business of which you are a director is struggling, it can be easy to assume it is just a bad patch that will pass; however, it is crucial to get a detailed understanding as to why the business is struggling. This will help to identify whether it is a short-term problem or there are major underlying issues. It is also important to look at alternative ways of generating funds/boosting cash flow in the short-term rather than directors putting in their own money.
Extra protection when trading with limited companies
If you are about to start trading with small/new limited companies, you could look at including a director guarantee as part of your contract terms and conditions. A director guarantee is a personal guarantee that means the director in question accepts liability for debt(s) incurred by the company and means the debts will be regarded as personal rather than being attached to the limited company.
Liability
If the business is a limited company, directors will not usually be personally liable if things go badly wrong. This is because the directors and the business are regarded as separate legal entities. However, if there is a strong case for so-called wrongful trading, directors can be held personally liable for the debts the company incurred.
If the debts are regarded as belonging solely to the limited company, directors may find themselves grouped with other creditors who may or may not be paid what they are owed, depending on the assets owned by the company.
A director guarantee is often required by mortgage lenders if buying property through a limited company; however, investing personal wealth in a struggling company should always be a last resort.