Can I be held personally liable for my company debts?

Can I be held responsible for repaying the debts of my limited company?

Directors are not made personally liable for the debts of their limited company in the vast majority of situations. However, there are certain situations where limited liability can be disregarded, leaving the director personally responsible and ultimately liable for repaying some or all the company’s debts. As licensed insolvency practitioners, we're appointed to manage the liquidation process, investigate director conduct, and help directors understand and protect their position.

Once a company becomes insolvent and enters into formal insolvency proceedings, the appointed insolvency practitioner has a duty to investigate the conduct of the directors during the time leading up to the company becoming insolvent.

During this investigation, they will be looking for any instances of misconduct or fraudulent trading which could lead to a director becoming liable for the debts of their company

Other instances where a director may be liable for company debts include:

• Having an overdrawn director’s loan account
• Signing a personal guarantee
• Debts having accumulated due to fraudulent means (such as taking on credit you knew you wouldn’t be able to repay)
• Continuing to pay shareholders dividends whilst the company is knowingly insolvent
• Withdrawing and/or using company funds for non-business activities; this is an offence known as misfeasance
• Disposing of the company's assets at undervalue or no value

What are the most common reasons I may be held liable for my company's debts?

The two most common situations director find themselves personally responsible for repaying their company's debts are:

• Personal Guarantees (PG)

Unless your company is well-established and with an unblemished credit history, it is likely that banks and other lenders will ask you to sign a personal guarantee before they will agree to any unsecured borrowing.  A Personal Guarantee provides the bank with a safety net should your company become insolvent or is otherwise unable to pay back the money it owes.  As has already been discussed, a director cannot ordinarily be held responsible for the debts of his or her company due to the protection offered by limited liability; a personal guarantee, however, removes this protection and makes the director of the company liable for repaying the debt should the company not be in a position to do so.

• Overdrawn Director’s Loan Accounts

A director’s loan account (DLA) allows a company director to extract money from their business in a way that isn’t a salary, dividend, or expense. Any transactions must be clearly recorded, and if more money is taken out than is put in, the account will become overdrawn and the director will be in debt to their company for this amount. Should a company become insolvent, any overdrawn director’s loan accounts will be seen as an asset of the business. This means directors will need to pay back the money they have borrowed from the company so that it can be used to repay creditors. Unfortunately it is often the case that directors are not in the financial position to personally repay this amount. Rules surrounding overdrawn director’s loan accounts, particularly when the company becomes insolvent, can be extremely complex and it is advisable that you seek professional guidance as soon as you possibly can if you believe you will find yourself in this position.

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What are my duties as director when my company is insolvent?

Once a company has become insolvent - that is its debts and creditors are greater than its assets - the directors of the company have a legal duty to act in the best interests of the company's creditors as a whole. If this is not done, directors run the risk of finding themselves personally liable for compensating creditors for the losses suffered.

While insolvent, company directors cannot deliberately take any actions that would cause the company's debts to increase or go unpaid.  The directors should not show any favouritism towards particular suppliers or creditors – this would be known as making a preference payment.  If a director fails to meet his or her fundamental duties of acting in the interest of all the company's creditors whilst trading insolvent, they are likely to face severe personal liabilities and disqualification from acting as a director of a limited company in the future.

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Chelsea Williams
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The creditor duty — when do directors' obligations shift?

When a company is solvent, directors have a duty to act in the best interests of the company and its shareholders. However, when a company becomes insolvent, or director's know the company is on its way to being insolvent, this duty shifts. When insolvency threatens, directors must give proper weight to the interests of creditors when making decisions about the company's future.

This was clarified by the Supreme Court in BTI 2014 LLC v Sequana SA [2022] UKSC 25, which confirmed that the creditor duty arises when a company is insolvent, bordering on insolvency, or when an insolvent liquidation or administration is probable.

If a director breaches this duty, for example, by continuing to trade and taking on new credit knowing the company cannot repay it, they may be required to personally compensate for the losses caused to creditors. If you believe your company may be insolvent, it is vital that you contact a licensed insolvency practitioner to assess the situation for you. Continuing to trade while insolvent could open you up personally to repaying money owed by your limited company. 

As licensed insolvency practitioners, potential liability is something we assess in our early conversations with directors. If you are in any doubt as to whether you may be trading while insolvent, speak to one of Real Business Rescue's licensed insolvency practitioners today for immediate guidance. 

What are the consequences for a director if they become personally liable for company debts?

If directors are held personally liable and responsible for company debts then they will be expected to pay these just as they would any other personal debt.

Unfortunately being the director of an insolvent business often has a negative impact on that individual's personal finances. Perhaps personal savings have been depleted in an attempt to keep the company afloat, or maybe the closure of the company resulted in the loss of the director’s only source of income.

Regardless of the reason, it is an unfortunate fact that these problems often go hand in hand. Just as the company was unable to pay its debts and had to consider insolvency options, if you as an individual cannot meet your liabilities, you will also be required to look at the various personal debt solutions which exist.

Depending on the scale of your debts and the level of personal assets you have, options can range from a payment plan, through to more formal insolvency procedures such as an Individual Voluntary Arrangement (IVA) or bankruptcy.

Can I lose my home due to limited company debts?

Due to limited liability, directors of a limited company are not ordinarily at risk of losing their home due to the debts of the business. As your company is a separate legal entity, your personal assets (including your home) will not be touched if the company enters into a liquidation process. There are, however, a couple of exceptions to this rule.

Your property could be at risk of being repossessed if you took out a secured loan against it (i.e. used your home as collateral for a business loan) or if you signed a personal guarantee for any company borrowing. If you have given a personal guarantee for any borrowing your company now cannot afford to repay, you will become personally responsible for clearing the debt. In some cases, this may mean you have to access any equity tied up in your home in order to repay what you owe.

If you believe you may be in this position, you should make it a priority to contact a licensed insolvency practitioner who will be able to help you better understand the position you are in.

Sole traders and personal liability for business debts

If you are operating as a sole trader, the situation with business debts is different. As a sole trader there is no legal distinction between yourself and your business, and there is no sole trader equivalent to limited liability. Therefore any debts your business accumulates will be classed as personal liabilities. Ceasing trading and closing down your business will not wipe out your debts, and you will be expected to continue paying them using your personal finances.

Should your sole trader business run into financial difficulties and you find yourself unable to keep up with your obligations to suppliers, HMRC, or your debt repayments, there are still options out there for you, but they differ to those available for directors of limited companies. Instead of looking at company liquidation, you will need to consider personal insolvency options such as IVAs and bankruptcy.

How can you reduce your risk of personal liability?

If you are concerned about personal liability for your company's debts, there are some practical steps our insolvency practitioners recommend you take to protect your position:

• Keep accurate financial records — Make sure your company's books are up to date and that you have a clear picture of its financial position at all times.
• Take professional advice early — If your company is struggling financially, speaking to a licensed insolvency practitioner sooner rather than later can make a significant difference. Our insolvency practitioner's speak to directors dealing with financial worries and signs of insolvency every single day. Early advice helps you understand your legal obligations and may open up options, such as a CVA or administration, that could save the business or reduce your personal exposure.
• Think carefully before signing personal guarantees — Once a personal guarantee is in place, it continues even if you resign as a director or the company goes into liquidation. Before signing a personal guarantee for company debts, consider whether you can negotiate a cap on the amount or specific conditions for release.
• Avoid making preferential payments — When a company is insolvent, paying one creditor ahead of others can be classed as a preference and may result in personal liability. Treat all creditors fairly and take advice before making any significant payments.
• Do not continue trading if there is no reasonable prospect of recovery — Continuing to take on credit or incur debts when you know the company cannot avoid insolvency is one of the most common routes to personal liability. If you are unsure whether to continue trading, seek advice from a licensed insolvency practitioner immediately.
• Document your decisions — Being able to show that you considered the company's position, took advice, and made reasonable decisions once you became aware your company was insolvent, demonstrates your desire to act in a responsible manner.

Worried about personal liability for company debts? Your Next Steps

If your business is experiencing financial difficulties and you are concerned about being held liable for these debts, contact the specialists at Real Business Rescue today. We will take the time to understand your position and work alongside you to come to a plan going forwards. Call our expert team today.

With 100+ offices Real Business Rescue can offer unparalleled director advice across the UK.