Personal liability for business debts when resigning as director

Updated: 22nd November 2021

If I resign as a director of a ltd company, am I still liable for business debts?

There are many reasons a director may want to resign from their post and move on from their company. This could be due to retirement, relocation, or simply a desire to move on to a new venture. Resigning is a surprisingly easy, and often very quick process, however, it goes without saying that you should give this decision careful thought and consideration before going ahead.

How do you resign as a director of a limited company?

Your first step is to put your intention to resign in writing and give a copy of this to the remaining directors. You do not have to give a reason for your resignation, however, you must make it clear that you are leaving the company along with the date this is to take effect from. Although not mandatory, you may also want to notify customers and/or suppliers of your decision and let them know their point of contact following your departure. Once your resignation has been accepted by your fellow directors, a TM01 form should be completed and sent to Companies House who will remove your name from the records they hold on the company.

At this point your liabilities are over as far as the company is concerned. You can only be held responsible for things that happened (or did not happen) during the time of your directorship. As long as you did not act outside of the law whilst in your post as director, you are free to walk away from the company for good.

Resigning as a Director and Liability for Business Debts

Understanding limited liability

But what happens if the company is in debt at the point of your resignation, or if it falls into debt after you resign? In the majority of cases, the simple answer is: nothing! This is because of something which is known as ‘limited liability’, a feature which is often seen as one of the main benefits of operating under the structure of a limited company. Limited liability essentially means that the debts of the company belong to the company and not the directors personally. If the company is unable to meet its liabilities, it can enter into an insolvency procedure such as a Creditors’ Voluntary Liquidation (CVL) as a way of closing the company and clearing any outstanding debts. It should be noted that only current directors of the company are able to begin such a process; once you resign you will have no control over how the company is run and you will be unable to prevent, or initiate, a liquidation procedure.

Are you eligible to claim director redundancy?

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Personal guarantees

While limited liability does offer a level of protection for the directors of limited companies, there are some exceptions to this. The main one is if you have signed a personal guarantee for a company loan, credit card, overdraft, or any other finance agreement. By signing a personal guarantee you are removing the protection limited liability offers. Any personally guaranteed debt is the responsibility of the individual who acted as guarantor until the money is paid back in full. This means that if the company is unable to keep up with the agreed repayments, the guarantor must step in and pay this money back using their personal funds. Resigning as director does not invalidate a personal guarantee.

You should therefore think very carefully before resigning from a company if you have personally guaranteed any of its debts. Once you resign, you no longer have any say on how the company is run and you will not be able to access its accounting details. Should the company take a downturn financially following your resignation, and is unable to keep up the repayments on its loans and other financial obligations there is nothing you can do to help the situation. In fact you may not even be aware of any issues until you receive a demand for your personally guaranteed loan.

What next?

If you are considering resigning from a company and would like some specialist advice, contact Real Business Rescue today. Our team of experts will be able to clarify your position and explain exactly what resigning will mean for you on a personal level. With 100 offices stretching from Inverness down to Exeter, Real Business Rescue can offer unparalleled director advice across the UK.

Keith Tully

Partner

0800 644 6080
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