Are Directors liable For Company Debt

Are directors liable for company debt? Written by John A Waller, Director. June 9th, 2024.

In an insolvency of a limited company. Usually directors have no liability for company debts.

However, the corporate veil protecting them can be removed I directors are guilty of::

  • Wrongful Trading,
  • Fraudulent trading,
  • Breach of directors duties,
  • Unpaid tax.

Many company directors believe however, they are personally liable for company debts if the business fails or becomes insolvent. However, this belief is untrue!. Limited company’s debt belongs to the company. A limited Company is a separate legal entity in law. Therefore, the company’s debts are not the personal liability of the directors or shareholders as with a sole trader who has no protection.. However, exceptions exist.

This page explains what are directors’ liabilities when involved in a limited company.

So if your business is facing financial difficulty seek advice today from the experienced team at HNG Advisory.

So When Can A Company Director Face Personal Liability?

A Limited Company’s Status

The legal status of a limited company limits the liability of a company’s directors for debts incurred by the company. However, should the company fail in financial difficulty, directors risk liability personally if they take any measures or do not act, thereby worsening the position of its creditors.

  • Personal Guarantee

Many directors have signed a personal guarantee with landlords and creditors to obtain loans and funding. However, the director is held personally  liable for the debts of the company if it cannot meet payments. However, this will affect a personal credit rating if they cannot pay and face bankruptcy, putting their home and other personal assets at risk.

  • Wrongful Trading of A Limited Company

Wrongful trading of a limited company remains a civil offence, as per section 214 of the Insolvency Act 1986.

It happens when directors continue trading when:

  • knowing there was no reasonable likelihood of avoiding insolvent liquidation.”
  • Failed to take steps to minimise losses to creditors of the company.

If they are found guilty of the above, the directors of the company risk personal liability for the failed company’s debts and even a prison sentence.

However, it is difficult to prove wrongful trading, as the lack of court cases shows.

Are Directors Liable For Company Debt? – Overdrawn Director’s Current Account

Operating a viable company subject to profit allows directors to earn a salary and issue legal dividends. The tax rate is lower at 8.75% for dividends up to £50,270 and rises to 33.75% above that.

However, directors may find themselves in trouble if the company they run begins to struggle and the directors continue to take dividends from the company without enough profit. Tax rates rise, but many directors remain unaware and maintain dividend payments. Therefore, unknowingly not paying sufficient tax, resulting in unknown tax liability and potentially a significant overdrawn directors’ credit account. So if the company becomes insolvent, the director will need to pay back the company what they owe. However, a deal can be reached with the insolvency practitioner, depending on the circumstances.

Making False Representations To Apply For Loans

Applying inaccurate or false information to gain finance remains a form of the above. The insolvency service investigates directors of companies who made false statements on Bounce Back Loan applications. Those deemed guilty of such false representations risk disqualification. Nevertheless, face having to repay it if not used for the business.

Are Directors Liable For Company Debt? – Selling company assets below market value

Selling company assets below market value remains an issue only if the company liquidates and the liquidator deems directors deliberately defrauded creditors. The liquidator then could demand the directors repay the money.

Company directors need to seek advice when considering selling assets before liquidation.

Importantly, company directors must act in the best interests of the company.

Are Directors Liable For Company Debt? – Bounce Back Loans and Liquidation

When the Bounce Back Loan scheme was launched in May 2020. It was a condition of lending that no borrower gave a guarantee should the borrower default and enter liquidation. Directors need clear guidance on bounce back loans and liquidation

Unpaid taxes, such as VAT and PAYE?

HMRC now remains empowered since July 22nd, 2020, through the Finance Act 2020, Schedule 13, to assign company liability to the directors. HMRC is now empowered to hold company directors accountable for all unpaid taxes of a limited company through insolvency.

Those company directors are suspected of not paying HMRC the tax owed, either by “alleged” tax evasion or tax avoidance. Then personal liability notices may be issued, allowing HMRC to collect directly from directors.

The changes to the law aim to pursue company directors who continually fail to meet tax liabilities by misusing insolvency or a Phoenix. HMRC feels closer to protecting outstanding taxes and aiding other creditors through such changes. It stops serial liquidations by the same directors dumping debt with intent.

However, genuine cases remain unaffected.

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