In light of the ongoing threats to business posed by the COVID-19 crisis, we’ve prepared the following guidance to assist sole traders and limited companies.
For more information on what measures are available to you now and in the future to protect you and your business, please follow one of the following two links that’s most relevant to you:
Sole traders – How to manage money risks when you’re a sole trader
Ltd companies – Managing and taking money out of your limited company
As well as updating our guidance, we’re also keeping up to date with the latest announcements over on our blog:
A quick note before you start using this guide: If you’re based in England or Wales, this is the guide you should use. But if you’re based in Scotland, you should use the debt collection rules for small businesses (Scotland) version.
As careful as you may be with your trading terms and when giving out credit, sometimes a customer just doesn't pay on time. As a small business, cash flow is of essential importance… one unpaid invoice from a customer can mean your suppliers don't get paid either.
We've put together this handy guide to highlight the options you have when someone owes your business money so you can act now to resolve the situation before it becomes a big problem.
First things first: Who owes you the money?
It may sound obvious but it's important to be really clear about this, because your options to recover the money owed to you (and the rules connected with these options) depend on the business model of your debtor.
Is your money owed by a...
If so, the sole trader is personally liable for the debt and so it is the sole trader to whom you must address all correspondence.
If so, the partners are both responsible for the debt, individually and jointly. Addressing your correspondence to the partnership will be sufficient. Additionally, you can of course still openly copy correspondence to your usual contact and mark it for their attention, if you like - especially if you want to keep good working relations going and you are at a very initial stage in chasing for payment.
If so, the LLP entity is liable for the debt owed to you, (although an partnership (LLP) individual member of that LLP can also be held liable (to the maximum amount of their invested capital sum) for any negligence that has caused the debt owed to you).
If so, the limited company is itself liable for the debt owed to you. There are, however, a number of circumstances where individual directors of that company might be liable for repayment to you. (See the section immediately below)
When are directors personally liable for the debts of a business?
Individual directors won't be personally liable for the company's debt unless one of the following scenarios apply:
1. One or more director(s) defrauded creditors by intentionally not paying the company's debts on time.
2. The director(s) traded 'wrongfully'; meaning that they continued to do business while insolvent and without striving to limit the potential damage to the company, so causing it to go into liquidation. (Note that in this scenario, the director is liable to contribute to the assets of the company in liquidation, rather than pay a creditor directly.)
3. One or more directors signed a personal guarantee, which is a legal agreement declaring that the director(s) is liable for repayment of the debt if the company cannot do so.
4. Legal action has been taken by the company against one or more of its directors. This typically happens where those directors have breached their legal duty to act in the best interests of the company.
(Note that where this happens, even if the company is no longer trading, directors will be liable to pay up)
Although less common, a company director may also be liable for debts owed by the company if they've done any of the following and this impacts the debt:
- Signed a contract on behalf of the company before its incorporation
- Undervalued company assets that they've disposed of
- Illegally paid dividends to shareholders
- Continued acting as a director after disqualification by the court
- Failed to make it clear that they were contracting as the company's agent when entering into contracts personally
- Caused damages to the company due to negligence
What about shareholders?
Unless they are also a director, it's very unlikely that a shareholder would be liable for the debt, since shareholders are not typically involved in the running of the company.
On the odd occasion that shareholders are found liable (and they have not given a personal guarantee, which is pretty rare), they can only be liable for amounts up to the value of their shares - and once they have paid the company for their shares, their liability is fully satisfied.
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