It’s a common concern amongst both husbands and wives that a failing business could impact them personally.
In many cases, small business owners will have given personal guarantees to support business borrowings. Any guarantee given becomes problematic if the business fails and cannot pay its debts. This is the most common way in which a spouse of a business owner gets impacted although it doesn’t generally mean a spouse is directly personally liable unless she or he has also given guarantees.
What can happen is that there will be an impact on assets, typically the family home, where the personal guarantee will then result in a claim against part or all of the equity in the property. In a worst case scenario, this can mean the property must be sold.
If you are concerned about your business, your personal liability or how business problems might impact your spouse or family, we can help. Please do get in contact.
Liability for Your Wife Or Husband’s Business Debts in the UK
The first point is that the limited company structure is designed to limit personal liability. So even the directors of limited companies shouldn’t be liable personally, unless they’ve engaged in wrongful or fraudulent trading, or some other form of misfeasance.
In the case of a spouse, you are even more removed from the situation so there’s nothing in company law to put you at risk.
There are some exceptions, however, as we’ll cover below:
You Set up a Partnership
One obvious exception to this is if you’re in a business partnership with your spouse and the debt is incurred to the partnership itself. In that instance, even if you had no part in the running of the business, you are what is called ‘joint and severally liable’ due to the partnership agreement.
If either partner obtained a business loan via the partnership, for example, then a creditor could take either or both members of the partnership to court.
Partners are ‘personally liable’ for business debts incurred by the partnership so, in this scenario, you could lose your assets, such as a house, if you can’t clear the debt.
Your Business Structure Does Not Offer Limited Liability
If your partner is a sole trader then he/she is not operating within a limited liability structure anyway, and there is hence no separation between personal and corporate assets.
In this scenario a creditor, and potentially bailiffs on their behalf, can take possessions jointly belonging to a spouse, as long as the debtor is at least a part owner.
What About Co Signed Personal Guarantees?
It is a common enough scenario for one partner, needing business finance for a limited company, to use a jointly signed personal guarantee as loan collateral. Usually, this means the family house is the security and, in the event of default, this guarantee can be called in.
Joint and Several Liability for Debt
Neither person in a marriage is liable for their partner’s debt by default. If you sign a finance agreement together, however, this makes you jointly and severally liable which means you will be held liable.
Joint Bank Accounts or Mortgages
Another thing to note is that if you set up a joint bank account or have a joint mortgage which falls into arrears, then future credit checks will show this for both borrowers.
As a point of caution, it is wise to keep your accounts separate should either party have experienced credit issues before.