You might find yourself wanting to move on from a company for many reasons, such as for finances or simply because you’re starting something new. In this blog, we’re answering the question, how long is a director liable after resignation?
Resigning as a director simply means you are no longer part of a company. Usually, you’ll be leaving another director in charge; otherwise, the business would need to close.
Deciding to resign can be challenging, as you’re often walking away from a company that has meant a lot to you and you’ve worked hard for. Sometimes it might feel like the right thing to do or be your only option.
It’s crucial to remember that resigning as a company director doesn’t mean you can walk away from financial burdens. Therefore, it could be a better idea to enter a formal liquidation procedure. Liquidation is likely not your only option, and our experts can assess your circumstances to offer you various options.
If your business is struggling financially, you must seek advice from a professional. Continuing to trade while insolvent could land you in trouble if you do have to close your company.
What is director liability?
A liability is essentially something that you’re responsible for. However, if you’re running a limited company, you also receive limited liability. You’re probably thinking, ‘what is limited liability?’ Limited liability means that your company is responsible for the debts and not you. Limited companies benefit from this, whereas sole traders do not – they are responsible on a personal level.
When is a company director personally liable?
There are some instances where you, as a director, will be held responsible for company debts. For example, if you have signed a personal guarantee. A personal guarantee means that you’ve taken the responsibility from your company and given it to yourself. If you enter a liquidation procedure, these personal guarantees will be called in by your company’s creditors.
Another reason you may be held personally responsible is due to wrongful trading. This can include things like making preference payments, continuing to trade while insolvent and much more. Continuing to trade means building up company debt without the intention of paying it back.
Bounce back loans are another reason why many directors are finding themselves in hot water. When applying for the bounce-back loan, company directors were informed that the money should only be spent for the economic benefit of the business. Some directors have been found to have spent the money on a home extension or a new car. This was not permitted and has led to some directors facing allegations of bounce-back loan fraud.
How long is a director liable after resignation?
How long a company director is liable for post-resignation depends on what is being investigated. For example, it’s unlikely that you could avoid liability associated with any personal guarantees you’ve signed.
Personal guarantees are always attached to the director themselves, so leaving the company will not affect them. When your creditor wants to, they can call in the personal guarantee, and you’ll be expected to pay back the money even if you’ve already resigned. This company loan will not fall to your fellow directors, and you will remain liable as you signed the personal guarantee.
It might come as a surprise, but even if you left the company when it was in a good financial state, you could still face liability. This is because the director’s conduct will be investigated for the three years leading up to the insolvency. This is where an insolvency practitioner will assess the company’s financial situation and look for evidence of wrongful trading.
Following your director’s duties
The insolvency practitioner will also be interested in assessing how well you adhered to your director’s duties. These include acting in the company’s best interests, such as seeking professional advice early if you suspect insolvency. Seeking specialist advice early can help to limit damage to your creditors and employees. Find out more about director liabilities.
If you’re found to have committed wrongful trading, you and any other company directors will face the consequences. These will vary depending on the issue in question but can include director disqualification or personal liability for company debts. Your details will be passed on to the Insolvency Service and Companies House.
If the company enters liquidation at least three years after you have resigned, you shouldn’t be included in the report unless you have contributed to the insolvency. In which case, you’ll be held liable, along with any other directors who have too. This highlights how important it is to seek advice early regarding financial struggles.
What to do next if you’re worried about director liability
If you’re considering resigning as a director, you should seek advice from a professional before making any decisions.
We hope this article has helped you to understand the liability times for a resigning director in a limited company. It’s always best to seek advice early in these situations.
If you find that your business is struggling financially, we can assess your situation and suggest the best course of action. We’re here for you as a director, so get in touch if you need support.
Justin Barker
I’m Justin Barker, the Managing Director at 1st Business Rescue. I have over 25 years of experience providing insolvency advice to business owners.
I understand how challenging it can be when dealing with financial difficulties within your business. It’s easy to ignore the problem and hope that it disappears, but this is often the worst thing you can do. Our dedicated team is here to provide honest, valuable advice to help UK directors deal with their personal situations in the most appropriate way.
No case or circumstance is the same, but I can guarantee that I am there to give you the best advice.
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