Can a company director walk away from business debts?

The structure of a limited company means that, under normal circumstances, director liability is limited to the amount they invest. Known as the ‘veil of incorporation,’ it offers protection for directors’ personal finances and is often a significant factor in choosing to set up as a limited company rather than as a sole trader.

In some situations, however, this ‘veil’ can be removed leaving directors facing legal action for the repayment of business debts. If a business is liquidated, for example, an investigation takes place into the actions of directors leading up to insolvency.

If misconduct or illegal trading has occurred – maybe the company took on more debt when directors should have known that it couldn’t be repaid - they can be held personally liable for some or all of the business debts.

But could a director walk away from their business debts even when the company is liquidated, and the investigation reveals misconduct?

Walking away from business debts

In theory, it is possible for a company director to avoid liability for the debts of their business. If they don’t own any assets and have no cash, for example, they haven’t provided any personal guarantees for business borrowing in the past, and their director’s loan account isn’t overdrawn, it may be possible.

In reality, however, one of the above generally applies and the director is held financially responsible, so let’s look at these scenarios in more detail.

Repaying business debts with personal assets/funds

If a director owns any assets of value, they may be required to transfer them to the liquidator for sale, with the funds being used to repay the company’s creditors. Similarly, should the director hold significant savings or personal funds, the liquidator could ask the court that they be used to repay business creditors.

What if a personal guarantee has been provided by the director?

A personal guarantee is commonly required before business borrowing is sanctioned by a lender, and if this is the case it would be called upon by the financier, leaving the director personally responsible for repaying the entire outstanding loan amount. 

An overdrawn director’s loan account

A director’s loan account records a director’s investment in their company, but also the money taken out that isn’t salary, expense payments, or dividends. If the director’s loan account is overdrawn it means the director has withdrawn more money than they’ve invested, and as such, is a loan from the company.

An overdrawn director’s loan account is regarded as an asset of the company, which like other assets would be used to repay business debts in the event of insolvency and liquidation.  

What happens when a company is liquidated?

During liquidation all business assets are realised to pay creditors, but given the poor financial position of a company in this situation and the typically high level of business debt involved, unsecured creditors generally receive little or no return.

Directors who have failed in their statutory duties and obligations to creditors face disqualification or other penalties, depending on the severity of the case. Although it can happen in theory, walking away from business debts is not generally a realistic possibility for directors.

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