Published: 31st March 2015
The answer is sometimes yes, they can. Sole traders and individual members of a partnership are personally responsible for any business debts, but if you own a limited company then the limited liability status of your company means that any business debts are limited to the company and not the directors. This means that as a director your personal finances should not be affected. However, although this sounds quite straightforward there are exceptions.
If you have any personal guarantees on anything obtained for the company, for example on a business loan or property lease, and the business is unable to meet the agreed payment terms, then as a director you will be personally responsible. If you don’t meet the payment schedule, then the creditor, whether it’s the landlord or the bank, will pursue you personally for the debt. Make sure you look at all your agreements to see exactly what your situation is.
A company is classed as insolvent if it’s unable to pay its debts when they’re due or when its liabilities are greater than its assets. If you know that your company is insolvent and you continue trading and adding to the company debt, then as a director, you can become personally liable for that debt. In these circumstances, if the director racks up more debt whilst knowing that the company has no chance of recovering and paying that debt back then this may be classed as fraudulent trading. If a company director is found guilty of fraudulent trading, even though they have been acting through the company, they may become personally liable for any losses suffered as a result and they may have to pay damages too. This is the case whether the business can meet the debts or not. Likewise, if a misfeasance claim is brought against the company, where the directors have knowingly acted in an inappropriate way and another party suffers as a result, then again directors may become personally liable.
Having an overdrawn directors’ loan account when a company goes into liquidation also means that the directors will be personally liable for repaying that loan. The insolvency practitioner handling the liquidation can demand repayment of the loan as it is their duty to act in the interest of company creditors. They can even take legal action against directors to force them to pay, which could even lead to bankruptcy if they are not able to. Make sure you seek professional advice from an accountant or insolvency practitioner if you’re concerned about the financial position of your company.