Can I lose my house if my company goes into liquidation?

When might your house and personal assets be at risk following business failure?

A common and understandable concern of company directors is whether they could lose their home if their limited company fails. The answer to this question, in most cases, is no. However, there are some circumstances when your personal assets could be at risk. Thankfully, this is rare, but you should understand how and when this can happen.

What happens to company debts in liquidation?

If your business can’t pay its debts and has no realistic prospect of a recovery, you can close it down voluntarily via a process called Creditors’ Voluntary Liquidation (CVL). Alternatively, the creditors can force the company to close via Compulsory Liquidation. In both cases, a liquidator will be appointed to sell the assets of the business. The proceeds will then be distributed among your creditors and any remaining debts will be written off. 

A strict hierarchy determines the order in which creditors are paid in liquidation. Unsecured creditors, including HMRC, suppliers, landlords and customers, come at the bottom of the list and often receive very little of the money they’re owed. As the finances of the business and its directors are separate, the creditors cannot pursue the directors personally for these debts and they’re subsequently written off.  

However, there are some instances where you can become personally liable for some or all of the company’s debts. If you find yourself in this position and cannot afford to pay what you owe, your home could be at risk.

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When is my home at risk in company liquidation?

You sign a personal guarantee

As a company director, you might have to provide a personal guarantee to secure a finance agreement. If the company fails and there’s not enough money to repay the lender, they could pursue you personally for the outstanding sum. The personal guarantee may be secured against your home, in which case, your house will be at risk if you cannot pay. Alternatively, you could be made bankrupt, and your assets, including your home, could be sold to cover the debt.

You have an overdrawn director’s loan account

An overdrawn director’s loan account is a legitimate way for a director to borrow money from a business. The problem comes when the company enters insolvent liquidation and you haven’t repaid the loan. At this point, the liquidator will ask that you repay the money to the company for the benefit of its creditors. If you can’t, the liquidator could take legal action to enforce the debt. That could potentially lead to personal bankruptcy and even the repossession of your home.

You don’t pay your company’s National Insurance Contributions

If you fail to pay National Insurance Contributions (NICs) on the earnings of your staff when the company is insolvent, HMRC could issue you with a Personal Liability Notice. The Personal Liability Notice makes you personally responsible for the unpaid tax and your home could be at risk if you cannot raise the funds to pay what you owe.

You’re guilty of wrongful trading

Wrongful trading occurs when you continue to trade despite knowing the company is insolvent and you worsen your creditors’ position. As a company director, you are legally obliged to put creditors’ interests first when the business is insolvent. Failing to do so can lead to personal liability issues and your home could be at risk.

You engage in fraudulent trading

If you engage in fraudulent trading as a company director, you risk being made personally liable for company debts, which could affect your home. Fraudulent trading occurs when you carry out business to purposefully defraud your creditors, including:

• using company funds to benefit yourself or connected parties personally;
• hiding company assets or selling them to connected parties for less than their true worth;
• accepting orders from customers with no intention of fulfilling them.

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Need advice?

If you’re worried that company liquidation could put your home at risk, call us today for a free consultation or arrange a face-to-face meeting at your nearest office. Our team of licensed insolvency practitioners can help you prioritise creditor interests and explore your options with personal guarantees and overdrawn director’s loan accounts.