Can I make directors personally liable for limited company debts?

How to insert wording into your terms of business to get directors of a limited company to personal guarantee payment of fees?

Here is a typical business problem sent to me by a firm of accountants:

“A client owes us a significant amount of fees but his company has no assets. I understand that we cannot take action against the directors personally to recover the debt. However, we would like to put a paragraph in our engagement letter in future that would make a director liable for the unpaid fees of his company.”

[In other words, we’ve been left high and dry and we don’t want it to happen again.]

To recap, generally the directors of a company are not personally liable for the debts that their limited company racks up.

However, there’s a big ‘but’ looming. If a director has given a personal guarantee in respect of those debts then he IS personally liable, and you can write a clause stating as much into your terms of business.

This can save your company from the injustice of seeing the director roll up to meetings in a Bentley while another of his risky ventures crashes and burns, leaving creditors (like your company) suing an empty or worthless shell.

A personal guarantee (just in case you missed that class), is a promise by a director that his company will fulfil its payments or obligations – and that if the company fails to do so, or goes bust trying, then the director will personally make good.

Banks ask for personal guarantees. Landlords take personal guarantees. Why shouldn’t you? There is no law against you asking for a personal guarantee from directors of your limited company clients. Although it might feel awkward to do so, it makes good sense; you are merely securing your income against unscrupulous behaviour, and if you’re dealing with someone who is confident in the stability of their company, they are unlikely to mind making the commitment.

That said, even the most honest client can watch their company go pop through no fault of their own – perhaps suffering a large bad debt or the failure of a sub-contractor. Including a personal guarantee provision in your terms of business to clients helps to ensure that you never find yourself in that position. It is a further protection against a common business risk.

The wording for the Canopy Law terms of business looks like this. You have my permission to recycle/re-purpose/regurgitate this as you wish:

“In consideration of Canopy Law providing legal services to the Company {insert your client name here}, the director signing these terms of business on behalf of the Company hereby personally guarantees to pay any Fees that are not paid by the Company as and when they become due.

This guarantee is a continuing guarantee and shall cover the ultimate balance from time to time owed to Canopy Law by the Company.

Canopy Law shall not be obliged to take any legal action against the Company, or to obtain any court judgment before taking steps to enforce its rights under this personal guarantee which shall remain in full force and effect notwithstanding the insolvency of the Company, or any part payment of the Fees.”

In short, the person who signed the contract is agreeing that if the company can’t pay us, they will personally take responsibility for the debt, and we won’t need do anything before we start court proceedings to enforce this.

One of the key parts to note here is that the contract is only binding for the director who signs the terms of business. So, if there are multiple directors you can insist that each of them signs a copy of the terms of business so that you can take action against the one with the deepest pockets – they may also prefer this as it spreads the risks and the potential costs.

In the event that you need to enforce the personal guarantee, the next step can vary depending on who you are suing and the amount being called on. The usual routes are:

1. You will issue a Statutory Demand against the individual who has given the guarantee. This will give them 21 days to either settle the debt or reach an agreement to pay. If this is not possible, then you can start bankruptcy proceedings providing that the debt is over £750.

2. You can apply for a County Court/High Court Judgement. The usual results will be that you can then either obtain a Warrant of Execution – not as scary as it sounds! – and get the bailiffs in (rather than the headsman that the title implies), or go for a Charging Order to secure the debt against the home of the individual who gave you the guarantee.

Business brings a huge number of extraneous variables; a personal liability clause is just one way to help you to stay in control.