Are Directors Liable For The Debt In A Limited Company?

Many directors believe that they are personally liable for their limited company’s debts if it goes into liquidation. It is important to remember the company’s debt belongs to the company. However, there are some exceptions which are addressed below.

When Can a Director Be Held Personally Liable?

Personal Guarantees

Many directors arrange personal guarantees with landlords and creditors in order to acquire loans and funding. However, if payments cannot be met, for example in a liquidation, the director is personally liable for covering the shortfall. This could affect a personal credit rating and may lead to a director losing their home or other personal possessions.

Overdrawn Director’s Current Account

If the company starts to struggle and the director(s) continue to withdraw dividends, a large overdrawn directors’ loan account can be created. If the company goes into liquidation, the liquidator will likely order the director to pay back everything they owe to the company. However, a deal can be done with the insolvency practitioner depending on the circumstances.

Making False Representations To Apply For Loans

This occurs when obtaining finance by providing inaccurate or false information. The Insolvency Service is now investigating directors of companies who made false statements on Bounce Back Loan applications. In the first instance, they may be disqualified for such actions. They may also be made to repay the loans if they were not used for business purposes.

Disposing of Company Assets Below Their Market Value

If a company goes into liquidation, a liquidator may insist that money is paid back if they find assets were sold for less than their market value. If the purchaser of the assets cannot pay, then the director could be liable.

Wrongful Trading

Wrongful trading or ‘trading irresponsibly’ is a civil offense. It occurs when a company director continues to trade when they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation. If a director is found guilty, they may be made liable for the debt. While it is very difficult to prove, wrongful trading can have severe consequences for a director.

HMRC and Tax Liability

Since July 2020, HMRC has been empowered to transfer a company’s liability to its directors, holding them accountable for tax debt in an insolvent company. If directors are suspected of not paying the tax owed, personal liability notices may be issued, which enables HMRC to collect the tax owed directly from the directors. The purpose of this new law is to target directors who repeatedly fail to meet tax liabilities through insolvency, a practice known as phoenixing. While a one-off instance of phoenixing may not be a problem, a pattern that indicates a ploy rather than a necessity is a serious concern for HMRC.

How to Avoid Personal Liability

Acting sensibly, reasonably, and responsibly is always the best policy for directors. If the company has cash flow problems, you must ACT. This includes:

• Holding regular, minuted board meetings to discuss the company’s financial position.
• Having up-to-date management accounts and financial information.
• Making a plan to do deals with creditors or a CVA.
• Introducing new money or taking salary sacrifices.

If the company’s performance continues to weaken, and the board cannot meet its redundancy payments, then more radical surgery may be required, such as putting the company into administration or a CVA. If the company is not viable, then liquidation is the answer. The liability for other transactions only extends for a certain period of time, so it is important to act quickly.

Need Advice?

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