Company Personally liable Debts – What is a liability?
Liability for a limited company is the responsibility of the separate legal entity of an incorporated company. Liability of a limited company separate from an individual entity, such as a company director, maybe:
- a loan for working capital;
- Tax due to HMRC;
- unpaid supplier invoices;
- asset finance;
- rent for company commercial buildings.
Therefore, any debt that a limited company may not repay remains the liability of a director.
Generally, directors cannot be personally liable or responsible for the debts of a limited company unless they have signed personal guarantees. Then directors need to be diligent dealing with personal guarantee issues.
Can a company director be liable for debts of a limited company?
A limited company’s liabilities remain separate as a separate legal entity. However, circumstances can exist to expose directors, such as:
Signing A Personal Guarantees
- Directors who have signed a personal guarantee remain responsible for the debt if the company fails to meet its obligations.
- Continuing to trade a limited company while insolvent occurs when a company continues trading while the directors know it is insolvent, which increases its deficit. If, as a company director, you sanctioned this or failed in your duties as a director as responsible, then you risk the failure of protection afforded to directors of a limited company.
- Suppose you have borrowed money from the company, which remains repaid, resulting in an “overdrawn” director’s loan account. Then a liquidator will request repayment.
Outcomes of being liable for company debt?
If, as a director, you are personally responsible for company debts, then you will be responsible for their repayment.
If you fail to pay, you might have to sell or refinance some assets. However, should this not be possible, you risk creditors opting to make you bankrupt;
You may also face disqualification as a company director for up to 15 years.
What options exist to help?
Suppose you however anticipate closing your company and are worried about being personally liable for your company’s debts.
Closing the company while writing off company debts
Should you have an insolvent company, it is vital to seek advice rather than continue trading. You may wish to consider a voluntary liquidation option, such as a Creditors Voluntary Liquidation (CVL). Such an option closes your business, while allowing a liquidator to legally realise the assets of the company. Such actions will enable the liquidator to distribute the realised funds minus the liquidation cost to creditors. Any remaining unsecured company debt remains written off.
How to write off company debt and start again
If you are liable, what help is available for personal debt?
If the corporate veil protecting you as a company director fails? You risk being held responsible for repaying your company’s debts.
However, options exist to help you if you have financial difficulties. Still, they differ from insolvency procedures for limited companies, and your options depend on the scale of these debts and your financial situation.
An Individual Voluntary Arrangement (IVA) is a formal insolvency repayment process that consolidates your debts into a single monthly repayment appropriate to your situation to ensure affordability. An IVA requires repaying your debt over five years; writing off any remaining debt.
Should your financial status however not qualify for an individual voluntary arrangement, then bankruptcy is perhaps your best option?
Bankruptcy applies to individuals and sole traders under UK Insolvency law. However, limited companies enter a liquidation, not bankruptcy, as in the United States.
Bankruptcy writes off your debts by using the money generated by selling personal assets to repay the debts. However, you retain little control over the process. It is important to note that you are a member of a professional, such as a lawyer or accountant, and risk having your membership revoked.
Company debts are separate from your obligations, so you would usually not be held personally liable when a company goes through liquidation. However, as outlined above, there are instances where you, as a company director, would be personally responsible. In those situations, liabilities that emerge as a result may push you into personal insolvency.