Incorporation generally provides protection from personal liability for product guarantees and warranties. Setting up a business using this legal structure makes the company a separate entity, with director/shareholder liability being limited.
On liquidation, any customer wishing to use a current guarantee or warranty for one of your products effectively becomes an unsecured creditor, taking their place in the creditor hierarchy.
Because unsecured creditors are placed at the bottom of the list for repayment during a liquidation process, it is unlikely that monies will be available to repay them. This does not affect your liability as a director, however, even if the product you sold became damaged or developed a fault.
People with reason to seek recompense for a faulty or damaged purchase need to produce a valid product guarantee or warranty. The liquidator will then register them as a creditor, and the amount they are owed is verified.
Unsecured creditors can keep in touch with the liquidator in case surplus monies do become available, but in most cases it is the secured and preferential creditors who receive the highest returns in liquidation cases.
There may be other ways in which your creditor could recover their money, one of which is to make a claim via their credit card provider if this was the original method of payment. Alternatively, there may be a manufacturer’s guarantee in place which could also solve the problem.
Although not generally a significant proportion of a company’s overall debt, the value of product guarantees and warranties can represent a costly outlay for the purchaser. When a company is liquidated, an investigation takes place into director conduct in the time leading up to insolvency.
If wrongful or unlawful trading has occurred, directors may become personally liable for company debt. Whether or not this would include the value of product guarantees and warranties depends on individual cases, but it is likely that more significant debt would be addressed first.
Begbies Traynor can provide further guidance on your liability as a director during liquidation. We provide independent, unbiased advice, and with 37 offices around the country, can offer a same day meeting in complete confidence.