If your limited company is in trouble, you may be wondering what are the risks to you personally, and in particular surrounding your family house.
In most cases the answer is your house or other assets will not be at risk. A limited company and its debts are separate legally from its directors and shareholders. However, there are personal liability risks which, if they exist or are created by directors by their conduct in the lead up to insolvency, might ultimately mean a property you own could be at risk. The main risks are :
- You have given a personal guarantee for the company’s debts.
- You owe the company money via a directors loan.
- You continue trading when the company is insolvent or otherwise act in an unfair and unlawful way towards creditors once you knew as a director or ought to have realised the business was insolvent.
Even if 1 or more of the above apply it does not automatically mean that your home or any other property you own is immediately at risk. It simply means that you may be personally liable financially and recovery action may ultimately follow against your assets at some point in the future.
It is also important to note that if you co-own your property this will make it more difficult for any creditor to ultimately obtain an order for it’s sale.
If you’re unsure whether your business is insolvent you can use our insolvency test tool here.
This article aims to give you practical advice about your situation.
Could I Be Made Personally Liable for Corporate Debt?
The good news is that, if you’re working under the limited company structure you most likely will not suffer any consequences to your personal finances.
Limited companies are designed to offer precisely what they say on the tin, i.e. ‘limited liability’.
This won’t be the case, however, if you’re working as a sole trader, even if you’re using a separate bank account. From HMRC’s perspective, there is no difference between the personal and business finances of a sole trader and, as such, you could lose your house if you’re in debt.
Under What Circumstances Could I Lose My House From Going Bust?
There are several key exceptions whereby limited companies directors may be held personally liable for some or all of corporate debt, which can include losing a house.
(1) If you’ve signed a personal guarantee document – These documents are specifically designed to pierce the corporate veil and place personal assets as collateral for business debt. If you’ve listed your house as the collateral for the guarantee, it is likely to be called in by creditors in case of default.
(2) If you’re found guilty of wrongful or fraudulent trading – Placing interests other than creditors at priority is a serious offence and any insolvency practitioner is required to investigate directorial conduct as part of a liquidation.
If you are found ‘knowingly or wilfully’ guilty of corporate misfeasance such as this you can be fined, or rendered personally liable for some or all of the corporate debt. This could of course propel you into personal bankruptcy if you don’t have the funds to pay, meaning your house is at risk.