One of the most pressing questions we hear from directors is whether they can be held personally responsible for business debts[1]Trusted Source – GOV.UK – Director information hub: Debts and insolvent companies.

Are Directors Personally Liable for Company Debts?

By default, directors have limited liability for company debt, due to the clear legal separation between personal and corporate finances inherent in the limited company structure.

In fact, one of the main reasons for operating as a limited company is to benefit from this limited exposure to business debt.

However, there are exceptions to this rule, particularly when directors have behaved improperly or fraudulently. I’ll cover the actions and behaviours that can lead to personal liability below.

10 Circumstances When a Director May be Held Liable

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.

Continuing to Trade While Insolvent (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.

This is because 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 to benefit themselves or other parties at the expense of the company’s creditors.

Making Preferential Payments to Certain Creditors

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.

Engaging in Fraud

Fraudulent trading, defined under Section 213 of the Insolvency Act 1986, 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, disqualified from acting as directors for up to 15 years and may also face criminal prosecution.

Breaching Fiduciary Duties (Misfeasance)

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.

Selling Company Assets Below Market Value

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

When a director sells a company asset at an undervalue, they are breaching their statutory 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.

Making False Statements or Misrepresentations

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.

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.

Failing to Maintain Accurate Financial Records

The Companies Act 2006 mandates that company directors maintain precise and thorough financial records. Simply delegating this duty is not enough to avoid liability.

In cases of insolvent liquidation or administration, the lack of proper records can be viewed as mismanagement or misconduct by directors, raising the risk of personal liability claims.

Distributing Unlawful Dividends

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 is facing financial challenges, distributing dividends may still breach legal standards.

Overdrawn Directors Loan Accounts

During insolvency, the liquidator considers everything owed to the company, including debts from a Director’s Loan Account (DLA). According to the Insolvency Act 1986, directors’ loans are treated as recoverable assets; hence, the directors are required to repay these amounts back to the company as part of the insolvency resolution process.

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

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

Directors 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 sue 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.

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What Should a Director Do If They Are Facing Personal Liability for Company Debts?

If you find yourself facing personal liability, it’s time to take professional advice immediately from either a lawyer or an insolvency practitioner such as ourselves if your company has debts.

Gather all relevant financial documents prior to this meeting to make the discovery process easier. I recommend you also document every action you take if you think your company could be insolvent and ensure you understand the responsibility to maximise creditor returns.

Here at Company Debt, we specialise in offering practical, no-jargon advice via same-day meetings, phone calls, or live chat during working hours.

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.

References

The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.

You can learn more about our standards for producing accurate, unbiased content in our editorial policy here.

  1. Trusted Source – GOV.UK – Director information hub: Debts and insolvent companies