If you’re a limited company director whose business is in financial difficulty, you might be concerned that you could be made personally liable for your business debts .
One of the main reasons people form a private limited company or an LLP is to limit liability for business debt.
However, there are some circumstances in which you can be held personally liable, meaning the responsibility for covering the debt falls to you.
UK director personal liability risks include not just being held financially responsible for corporate debt, but in some cases criminally responsible, if your actions are deemed fraudulent or dishonest.
If you are worried about your potential personal liability for company debts, we can help. We specialise in advising directors in your situation. In many cases we can help you fully understand your position, possibly negotiate on any director liabilities you may have and help you avoid making your situation worse. Please do get in contact.
|When Can a Company Director Be Held Personally Liable for Corporate Debts?|
|If you’ve signed a personal guarantee|
|If, knowing the company is insolvent, you’ve continued to prioritise shareholders over creditors|
|If you’ve disposed of company assets below their market value or for free|
|If you’ve overpaid yourself from the company account, creating an overdrawn director’s loan|
Directors Personal Liabilities for Limited Company Debts
The issue of personal liability generally arises for directors at the point of insolvency. As the company enters insolvent liquidation, directors wonder if they will be held accountable for any of the losses.
The key piece of legislation outlining potential liabilities is the Insolvency Act 1986.
Here are the key sections within that:
Section 214 of the Insolvency Act GOV:UK, Insolvency Act Section 214 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.
Wrongful trading is not something conducted out of connivance or wilful desire to defraud. Rather it is about ignorance of due procedure, and a failure to understand the rules.
For example, a director who understands that the company is insolvent might pay himself out of the last money in the account simply because he needs to pay his mortgage on time. That action qualifies as wrongful trading because it’s putting his own interests before those of company creditors.
Section 213 of the Insolvency Act GOV:UK “Insolvency Act Section 213” refers to the more serious charge of ‘Fraudulent Trading’, which means that any actions taken by the director were done ‘knowingly.’
Defrauding creditors or any other member of the business may be held personally liable to contribute to the assets of the business.
Section 212 of the Insolvency Act GOV: UK “Insolvency Act Section 212” covers ‘misfeasance’ which is the term used to describe ‘misfeasance’ (improper activity) or a breach of fiduciary duty. Essentially this covers activities surrounding use of money such as when dividends are issued inappropriately, or unauthorised remuneration to directors.
Transactions at an Undervalue
Section 238 of the Insolvency Act GOV: UK “Insolvency Act Section 238” covers the situation where an officer of the company sells an asset at less than market value in a way that results in less return for creditors.
For example, if a company is insolvent and a director sells a company property to a family member for a less-than-market rate, it could result in personal liability for the amount missing.
Section 239 of the Insolvency Act  refers to the situation of one creditor receiving preferential treatment over others.
For example, if a director pays one supplier and not others, on the basis of a long and trusted relationship, after becoming aware of the company’s insolvency, he/she could find themselves personally liable as, overall, the creditors find themselves worse off.
For example, should the director pay one supplier – on the basis of long and trusted relationship – post become aware of the company’s insolvency, he/she could find themselves personally liable as, overall, the creditors find themselves worse off.
Directors personal guarantee
Banks, suppliers and landlords understand that the directors or private limited companies and limited liability partnerships do not have personal liability for the company’s debts, many will refuse to extend credit or loan money to small businesses without the owner’s personal guarantee.
If you have signed a director’s personal guarantee on any loan, lease or contract, you will be personally liable for the debt if the company does not pay. Typically, personal guarantees are required on loans for business vehicles or equipment, a credit line from a bank, or a commercial lease.
Circumstances alter slightly for a personal guarantee in liquidation. But the debt remains unsecured unless you have specifically offered assets as security.
Using your Property as Loan Security
In some circumstances, banks and building societies will require the owners of private limited companies and limited liability partnerships to use their home or other personally held assets as security on loan. If your business defaults on the loan, the lender can repossess the asset and use the proceeds from its sale to repay the company’s debt.
Funding the Business with Credit Cards or Personal Loans
If you use personal credit cards or home equity loans to increase the capital in your business, you will always be personally liable for those debts. In fact, you will almost always be personally liable for making payments on a business credit card under the terms of the credit card application you signed.
Fraud, Misrepresentations and Insufficient Record Keeping
If you lied or misrepresented any of the facts while applying for a credit or loan agreement on behalf of your business, you could be held personally liable for the debt.
Similarly, if you failed to maintain a formal separation between your personal and business finances, creditors could also pursue you personally for business debts. You are also obliged to preserve and maintain accurate company accounts. If you fail to do so, you could be made personally liable for some of the company’s debts.
Reducing risk of personal liability if your company may be insolvent
When a company becomes officially insolvent, any insolvency practitioner will look at the directors conduct in the period leading up to insolvency.
If you suspect your company is insolvent, or close to it, our suggestion is that you behave with the utmost diligence, and make contact with us as soon as possible for advice. It’s also worth checking to see whether there is an overdrawn directors’ loan account within the company as this can be quite serious as the business becomes insolvent. HMRC will want to see evidence that you:
- Always placed creditors interests first once you understood the company’s financial position
- Kept clear lines of communication with both creditors and shareholders
- Did everything you could to find new business and manage your debts responsibly
- Took Professional Advice
You can read a full article here on Wrongful Trading.
Get Free Advice Now on the Extent of Your Personal Liability?
If you’re worried about being made personally liable for your business’ debts, contact us today. We can help you meet your obligations as a company director and avoid any personal liability for your debts while undergoing a company insolvency, company liquidation or company rescue procedure.
All Company Debt insolvency content is written by our licensed insolvency practitioners.
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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