Limited companies are separate entities in law, so if a business fails director liability is typically limited to the investment they have made in the company. There are circumstances where this ‘veil of incorporation’ can be removed, however.
If your company enters insolvency and you do not place your creditors’ interests first, perhaps by carrying on trading or borrowing more money in an effort to save the business, you could be held personally liable for additional creditor losses.
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Another common situation that can lead to director liability is running an overdrawn Director’s Loan Account, or DLA. If the business is in financial distress and needs to be liquidated, the amount outstanding has to be repaid as the money legally belongs to the company.
This video also describes how personal guarantees on business loans can result in liability for company directors. If the business becomes insolvent and is unable to recover, the lender will call in the guarantee and pursue you through the courts for repayment.
If company assets have been disposed of for less than their market value and the business subsequently fails, or ownership of an asset has been transferred to a family member or friend, this can also lead to director liability.
The consequences of being made personally liable for business debts are serious, and might result in your bankruptcy. Further sanctions could also be taken, including disqualification as a director for up to 15 years.
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