As a director, will I be held personally liable for my company’s debt?
Where to begin
Understanding your liabilities as a director can be hard work and often confusing. A liability is a debt that your company is responsible for, such as bank loans, outstanding invoices, finance arrangements, tax payments and rent costs. By way of the limited company directors liability structure, a limited company is classed as a separate entity to its directors and shareholders. Therefore, in most circumstances, a director cannot be held personally liable for company debts. However, as a director, you can be held liable if you have signed a personal guarantee or operated outside of the limited liability protection, for example, by way of a traditional partnership.
Are directors personally liable for company debts?
Yes, there are certain situations when a director can be held liable for the debts of the company, with the most common being when they have signed a personal guarantee. Other circumstances when a director may lose the protection afforded by limited liability, is if they failed in their duties as a director or allowed their company to trade when it was insolvent. Also, if you have an overdrawn director’s loan account (where you have borrowed money from the company which has not been repaid), then a liquidator may be able to pursue you to recover the amount that is owed. If you have acted responsibly as a director and not completed any wrongful trading, preference payments or other wrongdoings then you may not be liable for company debts. An insolvency practitioner should assess your business’ position and be able to advise you based on your personal circumstances.
If a limited company goes bust, who is liable?
If you’re already worrying about business closure then you’re probably thinking all kinds of things, such as ‘are directors liable for debt in a limited company?’ The answer to this question completely depends on the type of business debt that you have, the guarantees in place and if you have acted responsibly as a director. However, a limited company generally has more protection from debts than a sole trader does.
If I am found liable for my company debts, what will happen?
If you are found to be liable for the debts of your company, then just like personal debts, you will be responsible for repaying them. If you are unable to repay, then you may have to consider selling or refinancing some assets. Failing which, the company’s creditors may force you into bankruptcy, or you may wish to consider declaring yourself bankrupt. In some situations, if you are found to be liable as a consequence of not fulfilling your duties as a director, you can be disqualified and barred from being a director for up to fifteen years.
What are my other available options to deal with the debts?
As well as refinancing and bankruptcy, there are other options available, but this all depends on the level of the debt and your own personal financial situation. For small amounts of debt, a Debt Management Plan can be an option, or a more formal insolvency procedure, such as an Individual Voluntary Arrangement (IVA). Some directors may also be entitled to redundancy pay from the liquidated company, which could be used to pay off some of the personal debt. However, this will only be available if the company has been incorporated for at least two years, and the director has been receiving a regular salary through the PAYE system.
Can company debts be written off?
Should you decide to enter a Creditors’ Voluntary Liquidation (CVL), any funds that are left over once the liquidation process has been paid for will be distributed evenly between the company’s creditors. Any remaining unsecured company debt will then be written off. Find out more about Creditors’ Voluntary Liquidation.
Next steps
If you’re considering closing your company and are worried about whether you are liable for your company’s debts, we can help you understand the situation better and let you know what you may or may not be liable for. At 1st Business Rescue, we have a wealth of experience in every element of the closure of limited companies. We will be able to guide you through what can be a difficult situation for both you and your business.
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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