While the legal structure of a company typically limits directors’ personal liability for company debts, there are specific circumstances where it can apply. Personal liability occurs most commonly during insolvency, when directors are found to have acted, or failed to act, in ways that worsen the creditors’ financial position.

I’ll cover the issue of directors’ liability in detail below.

What Are Directors’ Liabilities for Company Debts?

By default, company directors have limited liability for company debt, meaning their personal assets are protected from the company’s obligations by the nature of the limited company structure.

In fact, the principal reason for operating under a limited company structure is to benefit from this limited exposure to corporate debt.

However, there are exceptions to this rule, such as when a director signs a personal guarantee for a company loan or if their actions worsen the creditors’ position.

Here are 10 situations where a director could find themselves personally liable:

Directors Loan Accounts

During insolvency, the liquidator evaluates all amounts owed to the company, including any from a Director’s Loan Account (DLA), as this is viewed as debt owed by the director to the company.

Directors Personal Guarantees

The most common cause of personal liability for company directors is signing a personal guarantee document. This is a legally binding contract in which a director agrees to repay a company’s debt if the company cannot do so. Personal guarantees are very difficult to get out of, even if the director did not sign the guarantee freely or if they were unaware of the full implications.

Wrongful Trading

Section 214 of the Insolvency Act refers to ‘Wrongful Trading’, which is the term used to describe the actions of a company director who, knowing the business was insolvent, failed to put the interests of creditors first. This breach of duty can render the director personally liable for the company’s losses incurred during the period of wrongful trading.

The reason for this is that directors are considered to be trustees of the company’s assets on behalf of the company’s creditors. When a director engages in wrongful trading, they are essentially misusing the company’s assets in a way that benefits themselves or other parties at the expense of the company’s creditors.

Preferential Payments

A preference is a payment made by an insolvent company to one creditor over another in the lead-up to insolvency. This can be done in a number of ways, such as by paying off a particular debt in full, by providing security for a debt, or by selling assets to a particular creditor at a price below market value.

Directors can be held personally liable for preferences if they knew or ought to have known that the company was insolvent at the time that the preference was given. This is because directors owe a fiduciary duty to the company and its creditors to act in their best interests. When a director gives a preference, they are breaching this duty and can be held personally liable for the amount of the preference, plus interest.

Fraudulent Trading

Fraudulent trading is a more serious charge than wrongful trading. It occurs when a company director knowingly and deliberately engages in trading activities with the intention to defraud the company’s creditors. Directors who engage in fraudulent trading can be held personally liable for the company’s losses incurred. This is because fraudulent trading is a tort (civil wrong), and directors owe a duty to the company and its creditors to act honestly and in good faith.

In addition to personal liability, directors who engage in fraudulent trading can also be disqualified from acting as directors for up to 15 years and may also face criminal prosecution.


Misfeasance refers to a breach of a director’s fiduciary duty to the company and its creditors, characterised by improper actions or violation of their duties. This includes issuing dividends when the company is insolvent, paying themselves unauthorised remuneration, using company assets for personal benefit, engaging in self-dealing transactions, and acting in ways prejudicial to the interests of the company or its creditors. These actions represent a departure from the responsibilities and ethical standards expected of company directors.

If the director is found to be liable for misfeasance, they may be ordered to repay the company or its creditors for the losses that they have caused.

Transactions at an Undervalue

transaction at undervalue is a transaction where a company sells an asset for less than its market value. This can happen for a variety of reasons, such as if the company is insolvent and needs to raise cash quickly or if the director is personally benefiting from the transaction.

Directors can be held personally liable for transactions at an undervalue if the company is insolvent and the transaction causes the company to lose assets that could have been used to pay its creditors. This is because directors owe a fiduciary duty to the company and its creditors to act in their best interests. When a director sells a company asset at an undervalue, they are breaching this duty and can be held personally liable for the difference between the market value of the asset and the price that it was sold for.


When a director makes a misrepresentation to a third party, such as a bank or supplier, on behalf of the company, they are breaching their fiduciary duty to the company and its creditors to act honestly and in good faith. If the third party relies on the misrepresentation and suffers a loss as a result, the director may be held personally liable for that loss.

For example, if a director makes a false statement about the company’s financial position in order to secure a loan, the director may be held personally liable for the loan if the company subsequently becomes insolvent and is unable to repay the loan.

Insufficient Record Keeping

Directors have a statutory duty to keep accurate and up-to-date records of the company’s financial position. If a director fails to keep adequate records, it can make it difficult for the company to meet its obligations to its creditors and to the government.

For example, if a director fails to keep adequate records of the company’s sales and purchases, it may be difficult for the company to calculate its tax liability or to identify and address any financial problems early on. This could lead to the company becoming insolvent and the director being held personally liable for the company’s debts.

Unlawful Dividend Payments

Dividends can only be legally distributed from available profits. Paying dividends from an insolvent company, or when it endangers solvency, is unlawful. Liquidators will seek the return of such dividends. Even if the company is not yet insolvent but facing financial challenges, distributing dividends may still breach legal standards

When Can a Director Be Liable for Company Debts?

It is typically the insolvency of a company which begins the process of making directors liable for business debts. For many, there is an unawareness of how legal responsibilities change once the company is officially insolvent, and this ignorance leads to actions and behaviours which worsen the situation for creditors and end up making the director liable.

The Insolvency Act 1986 covers just this eventuality in Section 214 which established the concept of wrongful trading. This clause outlines that failing to put creditor interests first can be considered wrongful trading if the director ‘knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation.’

When the liquidator overseeing the company closure comes to examine the financial affairs of the business in the period preceding insolvency, they are tasked with investigating the directors conduct in this regard to ascertain if they acted lawfully.

Where it can be proved that this wasn’t the case, then directors can be held personally liable for some or all of the debts in question.

>>Read our full article on the directors conduct report

What are the Consequences for a Director if They Become Liable for Company Debts?

The primary consequence for a director held personally liable for company debts is loss of assets if a personal guarantee has been signed, or personal bankruptcy if they cannot pay the money owed. 

They might have to use their personal assets, like savings or property, to pay off the debts. They also risk being disqualified from serving as a director of any UK company for up to 15 years, particularly if they fail to meet their legal duties.

Creditors could take legal action against them to recover debts, which might involve court judgments or asset seizure. This situation can harm their credit rating, making future borrowing or credit access more challenging.

In severe cases, directors may face bankruptcy if they can’t repay the debts.

Can Sole Traders and Partnerships be Held Liable for Company Debts?

Yes, sole traders and partners in partnerships can be held personally liable for business debts.

For sole traders, there is no legal distinction between the individual and the business. Therefore, personal assets can be used to settle business debts.

In partnerships, partners are jointly and individually liable for business debts. This means creditors can pursue any or all partners for the full amount of the debt. However, in a limited liability partnership (LLP), partners’ personal liability is limited to the amount they invested in the business or any personal guarantees they have provided.

Quick Quote for Closing a Company

FAQs on Directors’ Responsibilities for Company Debts

Yes, directors can be held personally liable for certain debts after liquidation if their actions contributed to the company’s insolvency or if they breached legal duties.

Directors who authorise dividends without sufficient profits can be held personally liable to repay those amounts, especially if such payments contribute to the company’s insolvency.

If a director is held personally liable through guarantees or wrongful conduct, their personal assets may be at risk to satisfy company debts.

Directors should seek professional advice, cease trading if insolvency is inevitable, ensure accurate financial reporting, and avoid preferential payments to mitigate personal liability.