When Does A Director Become Personal liable for company debts?
Many people believe that having a company with debts will affect their own personal credit rating and they could be liable for the company debt but this could not be more wrong! If your company uses a Company Voluntary Arrangement (CVA), goes into administration or liquidation, it’s important to remember the company’s debt belongs to the company. (unless you've acted fraudulently).
There are only a few exceptions to this which are outlined below:
Many directors arrange personal guarantees with landlords and creditors in order to acquire loans and funding. However, if payments can’t be met, the director is personally responsible for covering the shortfall. This would affect a personal credit rating if he/she is unable to pay and ends up going bankrupt or goes into an IVA
Overdrawn Director’s Current Account
If a company is doing well, directors can pay themselves a small salary and withdraw dividends from profits. They are charged at a low tax rate of 10% for dividends up to £31,785 and 32.5% above that level, the idea being that it incentives and rewards directors for making profits.
If the company starts to struggle financially and the director(s) continue to withdraw dividends, this is where the problem begins. The tax rate effectively becomes higher yet many directors do not realise this so they continue withdrawing dividends as usual. By being taxed too little, they are essentially therefore in debt to HMRC. This pattern can spiral out of control and eventually produce a large overdrawn directors’ account. If the company goes insolvent, the director will likely be ordered to pay back everything they owe to creditors, making them personally liable for the debt. However a deal can be done depending on the circumstances.
How does being in a partnership affect your personal credit rating?
The partnership structure is completely different to that of a limited company. If you trade as a partnership, the business’s debt becomes your debt and you are personally liable if the business gets into financial trouble. By having to pay off the debt from your own savings and investments, your own financial situation and credit rating will be harmed. In some cases, individuals have had to declare bankruptcy because they are unable to afford the partnership’s debts. .
Your company’s credit rating
If any business falls into financial difficulties, the company’s credit rating will undoubtedly suffer. If there have been County Court Judgements, debt and general cashflow problems, credit agencies will pick up on this. Of course if things improve, so will the company’s credit rating.
Keith Steven discusses company voluntary arrangements and their impact on company credit ratings in Credit Today: http://www.credittoday.co.uk/blog/post/118/risky-business
Categories: Implications for Directors