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Directors often take on substantial personal debt to support their business. If the company fails, directors are then left with responsibility for these debts which they are unable to repay. An Individual Voluntary Arrangement (IVA) could be the answer. For business' that are failing there are a number of possible solutions to try and turn it around. Possible solutions include a company voluntary arrangement where debts are rescheduled and some written off, and pre-pack liquidation where the old business is liquidated and a new one started without the burden of historic debt. However for Directors these very good business turnaround solutions do nothing to resolve any debts taken on by them personally. It is common for the directors of a company will borrow money in their own name which is then used to support their company. Directors may take a personal loan and transfer the money to the company account. Alternatively and perhaps more commonly, a director will pay company bills and invoices with a personal credit card. Because these debts are in the director's name and not that of the company, the director remains personally liable for them even if the company is closed. When their company goes wrong often directors are struggling with debt due to this personal liability. The director will then have to find a solution for their debt problem. One answer which should be considered is an IVA (individual voluntary arrangement). What is an IVA? A formal legal agreement with creditors. It allows a director (or indeed any individual) in debt to offer a settlement payable over a fixed period of time. Creditors agree to accept reduced payments and freeze further interest and charges. At the end of the agreement (normally 5 years) outstanding debt is written off and the individual is debt free. The IVA works very well for company directors because there are no restrictions on them regarding their ability to continue to act as directors for other companies. However, an IVA should not be undertaken lightly. If the director is a home owner, then equity in the property may have to be released to put towards the debt. You should note that if the terms of the IVA are not met then the director is at risk of being made bankrupt. The availability of personal debt solutions such as IVA mean that after the failure of a company, directors who have taken on personal debt to help support the business can also be helped. In these circumstances, an individual voluntary arrangement could be an excellent solution depending on the specific personal situation. However, if you are considering undertaking an IVA, you need to understand exactly what this will mean and the implications. As such, you are always advised to speak to a specialist personal debt advisor who will be able to analyse your circumstances and talk through the various different options available.
Derek Cooper is Managing Director of Cooper Matthews Limited. His experience of both corporate insolvency and business management puts him in a position to be able to understand the challenges facing directors in today's economic climate.
If you are in personal financial trouble find out more about this and other solutions at coopermatthews.com/directors-advice.html.
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