Is a company director personally liable for business debts?
When running a business, you have two main options as to how structure your operations. You can either choose to operate as a sole trader, or alternatively incorporate your business as a limited company. There are pros and cons to each option which your accountant will be able to talk you through. However, one of the main benefits of operating as a limited company is that you enjoy what is known as limited liability.
What is limited liability?
Limited liability is essentially a layer of protection placed between yourself as an individual and your company. It is important to understand that a limited company is classed as its own entity, and not an extension of its directors. Therefore if a limited company owes money, those debts belong to the company and not to any individual director. If a company later falls into insolvency, the benefits of limited liability really come into play as the director will not find him or herself liable to pay any outstanding amounts. Instead the debts die with the company; so long as the director takes the necessary steps to close the company down, any outstanding liabilities will be written off.
Exceptions to the rule
There are a couple of exceptions to this rule, however. The first one is if you are found guilty of wrongful trading or misfeasance during your time as director, you can be held personally liable for some or all of the company’s debts. It should be said here that this is extremely rare, and so long as you have not intentionally led your company to an insolvent state, you have nothing to worry about.
Understanding personal guarantees
The second exception is much more common, and this relates to the giving of personal guarantees (PGs). Signing a PG is often a caveat to a bank lending you money either through a loan, overdraft, or credit card. This is particularly common for newly established companies or those with a less than perfect credit history. By signing a PG you are agreeing to take over responsibility for the borrowing should your company ever be unable to do so. A PG removes the protection afforded by limited liability and therefore provides the lender with an added layer of security should your company default on the borrowing terms.
While your company is trading and continuing to be profitable, the PG will not affect you; your company will continue to make the payments towards this line of credit from its own resources. However, should the company experience financial difficulties and subsequently enter an insolvency procedure, the responsibility for the borrowing shifts away from the company and over to the individual who signed the PG. Although all other debts will be wiped out once the company is liquidated, any PG debts will remain active. It goes without saying that this can be absolutely devastating to a director who has lost their company, and often their only or main source of income in the process, and is then faced with making monthly repayments towards a potentially large debt. It is not uncommon for a director to then have to consider personal insolvency options to deal with the situation they have found themselves in.
Understanding director redundancy
In a company insolvency procedure such as liquidation or administration, it's often the case that the company director(s) can make a claim for director redundancy. This isn't always common knowledge and there are certain criteria that need to be met in order to make a valid claim, but if a director is eligible, it can provide a very welcome windfall just when it's needed most. Redundancy payment comes from the government and is essentially one of the reasons why we all pay National Insurance. According to figures, an average director redundancy payment is around £9,000 and in many cases, a director can use this payment to help fund liabilities such as personal guarantees - and even use the redundancy payment to pay the liquidator's fee.
Next steps
If you are concerned about your business’s financial situation and are worried about whether you could be liable for the debts of the company, you should speak to your accountant in the first instance. They will be able to examine your situation and determine whether you are currently trading insolvent and if so refer you on to an insolvency practitioner for further help and advice. To find your perfect local accountant start your search here.
