Small Companies Go Broke
I am finding that small traders are not being careful enough about who their customers are.
If the debtor pays there is no problem. If he does not, few realise that directors are just NOT responsible for the debts of their company. That means that the only asset left available to an unsatisfied creditor if he sues is the company seal!
Let me spell it out. Mr Brown suggests what work he wants. The price is agreed. He then asks that the invoice be made out to his company. If he does that after the work, Mr Brown himself is liable. If he asks before the work is done then the company was introduced into the contract and the company is liable.
A company in financial difficulties just does not pay. What money it has is removed by the directors, fees salary, other debts etc and all that is left in the company is the company seal. Suing the company is not an option. The director is not liable. Unless he has behaved delinquently he is legally sheltering behind the advantage of limited liability. The company may have cost only £100 to set up and the delinquent director is free to set up his next one.
Remedy: amongst your terms of trade should be a term (together with reservation of title etc) along these lines:The person signing on behalf of the company by signing accepts personal liability in the event the company fails to pay according to the terms.
And to be safe there should be a separate form of guarantee, dated and signed by the person guaranteeing (note: he signs as an individual not as a director) and witnessed.
L M Wise FCA
Barrister-at-Law
Leslie Wise has regularly written articles for the Solicitors' Journal, Solicitors' Gazette and Accountancy. His wide practical experience informs Debt Collecting London’s total approach to your debts and helps ensure a quick result.