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Company Law

Q: Protecting your home against company bankruptcy

I am a company director of my theatre group. How do I make sure I do not lose my home in the event of a financial disaster?

A: First and foremost never give a personal guarantee of your company's obligations however tempted you might be to do so, unless the amount of that guarantee is expressly so limited in amount as to ensure that your home and other assets which you cannot afford to lose will not be put in jeopardy. By the same token do not finance your company's business with personal borrowings of your own which you cannot afford to repay from your personal resources without putting your home in jeopardy.

Most theatre business, particularly stage production, is so volatile, high risk and difficult to adequately finance that, from time to time, producers may be tempted to provide personal financial support rather than close or abort the production concerned.

That may be possibly be excusable in some cases but never where personal financial survival is at stake, unless the individual is prepared to gamble on his financial survival and is willing to take the consequences, which, if his family is involved, it is unwise to do without first discussing it with at least the adult members of the family.

The second golden rule is that you should never allow any company of which you are a director to carry on trading after you first become aware that it is or may be insolvent in the sense of being unable to pay its debts as and when they fall due, unless you are prepared to accept personal liability for the company's deficit as a possible consequence of so doing. If you cannot prevent it happening then resignation from office or an officially recorded protest may be the most prudent course.

If it is just your home that you are concerned about in the event of personal bankruptcy then you should take steps to ensure that it is acquired in or subsequently transferred to the name of your spouse or domestic partner. However, such a step could rebound adversely upon you in other ways, for example if you and your spouse/domestic partner were to separate, or if your spouse/domestic partner were to predecease you without leaving you the home (which even then could have adverse tax consequences).

Another possibility is for you to put the home into what is called a "protective trust" so that it would be held by trustees for your benefit during your lifetime but would pass to your designated beneficiaries if you were to attempt to dispose of your interest ion the trust or go bankrupt. Provision could be made within the trust for the trustees to allow you to continue living in the home and for them to sell it at your request and replace it with another during the life of the trust if that were to be a particular concern.

However, if it could be shown that you took any such protective step at a time (no matter how long before a subsequent bankruptcy) when you were insolvent or with the deliberate intention of putting the asset beyond the reach of your creditors in the event of insolvency, the gift of the home (if that is what it was) to your spouse/partner would be unlawful and could be set aside. Likewise, if it were to be transferred in such circumstances at an undervalue. Furthermore, depending on whether a bankrupt person is solvent or insolvent at the time of such a transaction, it will be set aside if effected within two or five years respectively of the transferor's bankruptcy and influenced by a desire to mitigate the effect of bankruptcy, which will be presumed if the recipient is an "associate" (defined so as to include spouse or other relative). A protective trust is not a course which is commonly adopted since most people are reluctant to restrict their freedom of control over their own home in this way.

This brings me back to where I came in, namely advising you never to risk personally more than you can afford to lose, particularly if you have a family to support. On the other hand, if you have a family to support. On the other hand, if you have no dependents and, like the man in Rudyard Kipling's famous poem, you are willing to risk everything, and are prepared to have to pick yourself up, dust yourself off and start all over again, then so be it, but I suspect if you feel that way you would not be asking the question.

First published January 2000