One of the main benefits of running a business through a limited company is limited liability. A company is a separate legal entity, which means it is responsible for its own debts, not its directors or shareholders. However, this protection has limits. In some situations, directors can be held personally responsible for company debts. This article outlines the circumstances in which company directors can be held personally liable for company debts, despite protection by limited liability.<\/p>\n\n\n\n
In most cases, if your company cannot pay its debts, creditors can only claim against the company. Your personal assets, such as your home, savings and other property, are usually protected. This is one of the main benefits of running a business through a limited company<\/a> instead of as a sole trader.<\/p>\n\n\n\n A company is responsible for its own debts. If it cannot pay what it owes, it may become insolvent and be wound up. In most cases, shareholders only risk losing any unpaid amount on their shares. Directors are separate from the company and are usually not personally responsible for a company’s debts.<\/p>\n\n\n\n Despite general protection by a limited liability company, there are specific situations where the corporate veil can be pierced, leaving directors personally exposed.<\/p>\n\n\n\n The most common way directors become personally liable is through personal guarantees<\/a>. When a company borrows money or enters into certain contracts, lenders and landlords often require directors to sign personal guarantees. This is a contractual agreement where you promise to repay the debt if the company cannot.<\/p>\n\n\n\n If you have signed a personal guarantee and the company defaults, creditors can pursue you personally for the full amount, regardless of the company’s separate legal status.<\/p>\n<\/div>\n\n\n\n Under the Insolvency Act 1986<\/em>, directors can be held personally liable if they continue trading after they knew, or should have known, that the company had no realistic chance of avoiding insolvent liquidation.<\/p>\n\n\n\n The objective test is whether a reasonable director in your position would have realised the company was unlikely to avoid insolvency. If the answer is yes and you continue trading, you may have to pay money towards the company’s debts.<\/p>\n<\/div>\n\n\n\n To avoid wrongful trading liability, you should take every step to minimise potential loss to creditors once insolvency becomes inevitable. This might include: <\/p>\n\n\n\n The Insolvency Act 1986<\/em> also deals with fraudulent trading, which is more serious than wrongful trading. Fraudulent trading happens when a company continues to operate with the intention of deceiving creditors or for another dishonest or fraudulent purpose.<\/p>\n\n\n\n Fraudulent trading is harder to prove than wrongful trading because it requires evidence that the directors acted dishonestly. However, the penalties are much more serious. A director found guilty can be ordered to make an unlimited contribution to the company’s assets and may also face criminal charges, including a prison sentence.<\/p>\n\n\n\n Directors owe various duties to their company under the Companies Act 2006<\/em>, including: <\/p>\n\n\n\n If you breach these duties and cause loss to the company, you can be held personally liable.<\/p>\n\n\n\n For example, if you misappropriate company funds or make decisions that benefit you at the company’s expense, you may be required to compensate the company.<\/p>\n<\/div>\n\n\n\n When a company enters insolvency<\/a>, liquidators often investigate directors’ conduct and may bring misfeasance claims to recover losses for creditors.<\/p>\n\n\n\n Directors who authorise dividend payments when the company lacks sufficient distributable profits can be required to repay those dividends. This is particularly relevant when a company later becomes insolvent, as such payments may have depleted assets that should have been available to creditors.<\/p>\n\n\n\n If you act as a director while subject to a disqualification order, you become personally liable for the company’s debts incurred during that period. Director disqualification can arise from various forms of misconduct, and the consequences of breaching a disqualification order are severe.<\/p>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\nWhen Personal Liability Arises<\/h2>\n\n\n\n
1. Personal Guarantees<\/h3>\n\n\n\n
2. Wrongful Trading<\/h3>\n\n\n\n
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3. Fraudulent Trading<\/h3>\n\n\n\n
4. Misfeasance and Breach of Duty<\/h3>\n\n\n\n
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5. Unlawful Dividends<\/h3>\n\n\n\n
6. Trading While Disqualified<\/h3>\n\n\n\n