How a VA can be used to deal with personal debt.
The voluntary administration (VA) process is used to restructure company debts. But what about a director's personal guarantee debts?
On The Pulse readers will be familiar with the VA concept, which was designed to increase the chances of a company's survival where it cannot pay its debts as and when they fall due, or if it is not possible, results in a better return to the creditors and members when compared to an immediate wind up of the company. This however does not cover all the benefits a VA can provide.
This article discusses how the VA process can minimise a director's exposure to a personal guarantee debt.
Recently, Christopher Darin was appointed as voluntary administrator of a franchisee business that was hit hard by the COVID-19 pandemic and despite the landlord providing free rent and rent deferrals, the business still fell a few months behind in rent. Apart from the landlord, the company did not have other outstanding creditors of significant value.
The director was ready to shut down the business but knew that the personal guarantee on the lease would expose him for rent for up to two years until the lease ends (unless a new tenant could be found). To make matters worse, the two shops next to the business had been vacant for the past six months. So the director engaged a business broker to sell the business.
Initially the landlord was supportive but as more rent became overdue, the landlord lost patience and gave notice to repossess the premises and change the locks in three days. At that time, the business broker was dealing with several interested parties and a sale could be on the way anytime. It was therefore critical to continue trading to keep the sale process alive.
The director approached Worrells and we discussed the various benefits of the VA process, including:
- Unsecured creditors cannot enforce their claims or apply to wind up the company.
- Secured creditors (with perfected security interest over company's property) have 13 business days to exercise their security, or otherwise be bound by the moratorium.
- Landlords cannot repossess the premises (unless they do so prior to the VA appointment).
- Creditors holding personal guarantees from directors and other parties cannot enforce their guarantees.
Following the VA appointment, we continued the sale process with the landlord's support and successfully found a purchaser within three weeks. This means that the director's only personal exposure was to the current outstanding rent and luckily, the majority of it was covered by the bond (the director subsequently settled the debt with the landlord). If the director had chosen an alternate action, the landlord would have repossessed the premises and the business would not have been sold, potentially leaving him exposed for rent until the landlord could locate a new tenant.
PS-you should always take care to engage with your key suppliers, banks, and landlords no matter how difficult the situation can be. This outcome may have been very different. Read Chris Cook's article: Business survival impossible without the support of critical stakeholders.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.