If you’re considering closing your company, you are probably worried about whether you could be held personally liable for your company’s debt. One of our team at 1st Business Rescue can help you understand the situation you’re facing and let you know what you may or may not be responsible for.

In this article, we’ll explore in what circumstances you may be held personally liable for your company’s debts and the rules and regulations currently in force regarding directorial liability.

What is a liability?

Firstly, let’s look at what a liability actually is. A liability is a debt that your company is responsible for. These can include bank loans, outstanding invoices, finance arrangements, tax payments and rent costs. More recently, you may find yourself facing personal liability for bounce-back loans.

When will you be held personally liable for your company’s debt?

Thanks to the limited liability structure, a limited company is classed as a separate legal entity to its company directors and shareholders. This means that a director cannot be held personally liable for company debts in most circumstances. When a limited company has debts, it’s the company that owes the money and not the director of the company.

However, there are some situations in which a director can be held personally liable, thereby leaving the responsibility to cover the company debt to the director and NOT the limited company.

will I be held liable for company debt

Situations where personal liability may occur are as follows:

If a director has signed a personal guarantee (this is the most common situation)

If you have signed a personal guarantee and you place the limited company into liquidation, you will be issued with a demand to repay the personally guaranteed amount. Most company directors are unable to repay the money straight away and will renegotiate with the lender, who, in most cases, will restructure the loan.

Remember, the lender just wants their money back, it should be easy enough for you to get the lender to arrange new terms on the personally guaranteed debt. As long as you keep up the payment terms on your new agreement, this should not have any detriment to your personal credit score either.

Our extended team has decades of experience in supporting and advising directors around personal guarantees. In most circumstances, you should be able to come to some type of company debt settlement arrangement with the lender. Don’t bury your head in the sand when it comes to personal guarantees and business debts. As soon as you believe the business has the potential to fail, speak to someone quickly to understand your options.

If a director has inflated their company’s turnover to gain a larger bounce-back loan

You were allowed to apply for 25% of your business’s turnover in the calendar year 2019, capped at £50,000. You could estimate your turnover if your business was incorporated after 1st January 2019.

These applications were self-certified and open to abuse. Many directors inflated their business turnover on the application to receive a larger loan. This is being classed as bounce-back loan fraud and could lead to you being made personally liable by the insolvency practitioner or the insolvency service.

If a director used the bounce-back loan personally instead of for the benefit of the company

Anyone who used their bounce-back loan on house extensions, new cars, watches, or boats will have a shock when it gets uncovered. The spotlight is on bounce-back loans right now and, more importantly, what the loans were actually spent on. If you are worried about this and the possible ramifications, it is critical you speak with someone today.

If you are a one-man/woman band (personal service company) and you used the bounce-back loan for your salary, then you should be fine as long as your drawings were in line with previous years. Be careful, though, as you may have built up an overdrawn director’s loan if you continued to take money from the company while experiencing financial difficulty and making little or no profit.

If a director has failed in their duties as a director

Failing in your duties as a director may include prioritising your financial needs over your company’s creditors, such as allowing the limited company to trade whilst insolvent or favouring some creditors over others.

Emptying the business bank account of every penny by paying your wages before you seek insolvency advice is a sure sign that you have placed your needs over the needs of the company’s creditors. This will be uncovered by the insolvency practitioner during the director’s investigation, and you may become personally liable.

when will I be held liable for debt

If you have an overdrawn director’s loan account

This situation arises when a director has borrowed money from a limited company that has not been repaid. If this happens, the liquidator may be able to pursue you to recover the amount owed.

Don’t leave this point to chance, you should be able to see your last published director’s loan position on the company’s last set of full accounts. You will see that your director’s loan is either in credit or overdrawn. That’s not all though, you should also review all transactions made from the limited company to you personally since your last set of accounts were published.

Any payments above and beyond your salary could also be allocated to your overdrawn directors’ loan account by an insolvency practitioner. If you have an overdrawn director’s loan account, it is the duty of every insolvency practitioner to recover that money and distribute it to the company’s creditors.

When dealing with any overdrawn directors’ loan account, the insolvency practitioner will need to take into consideration your ability to repay the loan and the likelihood of recovery. If you are in rented accommodation, with no assets and no disposable income, it’s unlikely the insolvency practitioner will be able to recover any money. In this circumstance, the entire director’s loan may be written off.

If you have a family home with equity, investments, savings, and an ability to pay, the insolvency practitioner will pursue you much harder. No matter what your personal situation is, if you have an overdrawn director’s loan and your business is failing, then you should seek professional advice about your options as a matter of urgency.

If you’ve disposed of the company’s assets, either for free or below their market value

The process of a newco purchasing the assets from an insolvent business is called a pre-pack liquidation. If you are considering this as a viable option, you must be careful to do things in the correct manner and under the supervision of an insolvency professional.

Any assets that are to be purchased from an insolvent company must be purchased for a fair market value, you will need to have the assets valued independently by an experienced valuer, and you must have the relevant sale agreement paperwork.

You could also be held personally liable for your company’s debts…

  • If you lied or misrepresented any facts when making an application for a credit or business loan agreement on your company’s behalf.
  • If you failed to keep a formal separation between your business and personal finances.
  • If you failed to keep accurate company accounts.
  • If you continued to trade with no intention of repaying your company’s debts, or you repaid the business debts through fraudulent means.

What are the sanctions if I’m found to be personally liable for my company’s debts?

If you’re found to be personally liable for your company’s debts, then just like personal debts, you’ll be responsible for repaying them.

In some cases, you may be found criminally liable if your actions are deemed fraudulent or dishonest. You could also be disqualified and barred from being a director for up to fifteen years and, in some circumstances, could face criminal prosecution.

company debt liability

What if I have personal liability and can’t repay the business debts?

If you are made liable for some or all of the company debts, then many directors will struggle to repay them straight away.

If you are worried about the prospect of being made personally liable for some or all of your company’s debts, then you should take advice as a matter of urgency to understand what options you have available.

Depending on the reason why you are being made personally liable for company debts, you should be able to negotiate with the insolvency practitioner and repay a smaller amount over a period. It will all come down to your personal financial position, your ability to repay business debts and the insolvency practitioners’ ability to recover the money.

An insolvency practitioner can and will make a director personally bankrupt if no acceptable settlement is made or if it is deemed in the creditor’s interests.

For instance, let’s say there is a director who has an overdrawn director’s loan account of £100,000, and they lied about their company’s turnover to get a larger bounce-back loan than they were entitled to.

The company director in question has no realisable assets, no money in the bank and is now unemployed. Even though there is very little hope of the insolvency practitioner recovering any money, they will have a duty to investigate where the money has gone and what the director has spent it on. In this case, it’s highly likely that the insolvency practitioner will force the director into personal bankruptcy so an in-depth investigation can be carried out into what happened to the company money and the bounce-back loan.

What are the current rules and regulations regarding personal liability?

The primary legislation relating to liability can be found in the Insolvency Act 1986. Here’s a review of the key sections regarding personal liability:

Wrongful trading

Wrongful trading is covered under Section 214 of the Insolvency Act. We know what you’re thinking, what is wrongful trading? It’s the term used to describe the actions of a company director who failed to put the interests of creditors first, despite knowing that the business was insolvent.

At various points, companies may go through cash flow challenges, so there’s a risk you may accidentally end up trading whilst insolvent. However, it will only become known as wrongful trading when the business continues to operate once it has passed the point of no return. A time at which insolvency is fundamental and permanent. Another reminder to make sure you take advice as soon as you can see the business is starting to struggle.

Fraudulent trading

More severe than wrongful trading, fraudulent trading is covered by Section 213 of the Insolvency Act. It’s also a criminal offence rather than a civil one.

For trading to be classified as fraudulent, it must be obvious there has been an intent to trade that would be detrimental to the creditors. For example, continuing to take deposits from customers without any intention or possibility of delivering the goods and services the deposit was intended to secure.

director liability for company debt

Preference payments

Covered by Section 239 of the Insolvency Act, preference payments refer to the situation where one creditor receives preference over another. For example, repaying director’s loans or making payments to connected parties, such as family members or specific creditors or suppliers.

When a business becomes insolvent, you should be careful of paying anyone, as these payments will be looked at very closely by the insolvency practitioner once they become appointed.

Payments made under contractual obligation, such as employee salaries or those made under the evidence of duress, would not be considered a preference payment.

Transactions at undervalue

Section 238 of the Insolvency Act covers transactions at an undervalue. This situation arises when an officer of the company sells an asset at less than market value to result in a reduced return for creditors. For example, directors selling company assets before liquidation or attempting to secure equipment at a discounted price.

If you are considering purchasing some or all of the assets of the insolvent business, you must seek professional advice and ensure that you have a valuation carried out by a suitable valuer.


Section 212 of the Insolvency Act covers ‘misfeasance’ or improper activity. This relates to financial activities, such as when dividends are issued inappropriately or unauthorised remuneration to the company’s directors.

Insolvency practitioners are going to be looking in great detail at transactions made from the businesses’ bank accounts on the run-up to the company liquidation. Any large withdrawals by the company director could lead to misfeasance claims down the line.

worried about personal liability

Is it possible for shareholders to be held personally liable for company debts?

As with a company’s directors, shareholders also have limited liability status, meaning they’re mostly protected from incurring responsibility for a company’s debts. However, there are certain exceptions to this, including:

  • Where a shareholder or a group of shareholders have personally guaranteed a business debt.
  • Where shareholders have acted improperly or fraudulently. For example, using company money for personal use.

I’m worried – will I be held personally liable for my company’s debt? What should I do?

Do not delay, if any information on this page regarding personal liability concerns you, then you should take advice today. All our enquiries are treated in the strictest of confidence, and we will offer you free and independent advice. We will suggest the most appropriate formal insolvency process for your business.

At 1st Business Rescue, we’re experts in every element of the closure of limited companies, so we can guide you through what can be a stressful situation for both you and your business. If you’re wondering ‘will I be held personally liable for my company’s debt?’ – seek advice!

If you suspect your company is facing insolvency, contact us as soon as possible for advice. If you would like some independent and free advice, book a call with our experts.

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I'm Chris Worden, Managing Director at 1st Business Rescue. With over 7 years of experience, I help UK directors navigate the complex world of UK corporate insolvency. We offer free and independent advice to UK directors and advise them about what options may be available to them if their limited company starts to struggle. I am passionate about helping other directors overcome their business challenges and get back on their feet, as I was once in the same position as them. I had a business that became insolvent, and the advice out there was confusing and overwhelming. I am here to provide honest and valuable advice to UK directors.  I am proud to say that we are one of the only 5-star corporate insolvency companies on Trustpilot with hundreds of 5-star reviews, and we publish videos weekly on our YouTube channel. Our channel is designed to educate UK directors about insolvency and debt advice. Check it out here:

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