The simple answer to this question is no – being a limited company means as a director, you are seen in the eyes of the law, as a separate legal entity. So, any company debts are not linked to your personal finances. This is one of the attractions of being a limited company, rather than an unlimited company or sole trader.
But, there are some cases where this simple answer does not apply.
Situations where a director’s personal assets may be seized.
Taking out a personal guarantee
If a director takes out a personal guarantee, then the debt is in effect passed onto the director personally if the company cannot pay.
Often this occurs when needing a business loan; directors put personal possessions at risk for the sake of getting the loan/security. If unable to pay the loan later on, the legally binding contract, suggests the personal possession the loan is guaranteed against, will be seized. This is so the lender can sell the seized asset and get the money back they are owed.
Find out more about Personal Guarantee Insurance, which brings some protection in this case.
Acts of wrongful or fraudulent trading
If directors are found to be not complying to legal duties as a director, they can be held liable for any debts or trading losses. If the company goes into a terminal insolvency event, such as administration or liquidation, the insolvency practitioner is required to investigate the directors’ conduct. If anything is seen so support the acts occurring, the director will becomes liable.
The most common actions here are wrongful trading, when a director knowingly makes creditors position worse, in times of company insolvency, and fraudulent trading, when directors take actions they knew were unlawful i.e. fraud. In these cases, it is likely that the directors will be found personally liable for any debts that have been incurred.
Acts of misfeasance
This is when there are breaches of fiduciary duty, and what is called ‘improper activity’, by directors. For example, inappropriate use of dividends and unauthorised remuneration to directors.
Funding the business from personal methods
To increase the capital in a business, directors may choose to use personal credit cards or loans. Doing this will make the director personally liable for such debts.
Bailiffs and seizing personal assets
It is important to note that bailiffs cannot just appear at a business site and remove personal belongings. Personal belongings are only at risk of being involved in instances as described above.
Only High Court enforcement officers with a warrant have the power to force entry to a business premises. They are then not legally able to remove anything other than company goods; cash, company vehicles, inventory, machinery and office equipment. Items on hire-purchase are not included.
If you have any queries or would like further explanation to the points described above, do not hesitate to get in touch. One of our experienced advisors would be more than happy to assist.
Category: Implications for Directors