Understanding Limited Liability and Your Personal Assets
When you run a limited company, your personal assets (like your house) are usually protected if the business fails. This is the core idea behind “limited liability.”
The “Veil of Incorporation”: Legally, the company is a separate entity from you. This separation, often called the “veil of incorporation,” means business debts typically stay with the business, not with you personally.
As insolvency practitioners, we frequently address directors’ worries about losing their homes if their company goes insolvent. This is a very understandable concern.
When Could Your Personal Assets Be At Risk?
While limited liability offers significant protection, there are specific situations where you could become personally responsible for company debts, potentially putting your house and belongings at risk.
Personal Guarantees for Company Loans:
- Why they happen: Lenders might ask for a personal guarantee if the company is new, small, has a weak credit history, or they simply want extra security.
- What it means: You personally promise to repay the loan if the company cannot.
- The risk: If the company defaults or becomes insolvent, the lender can legally pursue you directly for the money owed.
- Consequences: If you lack the funds to repay, you could face personal bankruptcy, which might put your home and other assets at risk.
- Important Note: Repossessing a home, even during bankruptcy, follows strict legal procedures and requires a court order. If you’re in this situation, consult an insolvency practitioner specialising in personal insolvency.
Charge Over Your House as Loan Security:
- Why it happens: Sometimes, lenders require more than just a personal guarantee. They might insist on securing the loan against your property by placing a “charge” on it.
- What it means: Similar to a mortgage, this gives the lender a direct claim on your property if the loan isn’t repaid.
- The risk: If the company fails and the lender isn’t fully repaid (even with a personal guarantee), the charge gives them priority. They can force the sale of the property to recover their debt, getting paid before most other creditors.
Overdrawn Director’s Loan Account:
- What it is: This occurs when you take money out of the company for personal use that isn’t salary or a dividend, creating a debt you owe back company.
- The problem: If the company becomes insolvent before you repay this loan, the outstanding amount is considered an asset of the company.
- The risk: The liquidator or administrator appointed to manage the company’s affairs has a duty to recover this money from you.
- Consequences: Failure to repay could lead to personal bankruptcy proceedings against you, potentially endangering your home.
More on overdrawn directors loan accounts
Wrongful or Fraudulent Trading:
- What it involves: This is a serious issue where a director continues trading and incurring debt when they knew (or should have known) the company was insolvent and had no reasonable prospect of avoiding liquidation, thereby harming creditors’ interests. Fraudulent trading involves dishonesty.
- Investigation: The appointed insolvency practitioner (IP) will investigate the directors’ conduct leading up to the insolvency.
- The risk: If found guilty of wrongful or fraudulent trading, a court can order you to personally contribute to the company’s debts.
- Consequences: This personal liability could be substantial and put your personal assets, including your house, at risk. (Note: Such actions are relatively rare but do happen).
HMRC Personal Liability Notices (PLNs):
- What they are: HMRC can issue a PLN making a company director personally liable for unpaid company National Insurance Contributions (NICs).
- Legal basis: This power comes from Section 121C of the Social Security Administration Act 1992.
- When they are issued: HMRC may issue a PLN if they believe the failure to pay NICs resulted from fraud or serious neglect by the company officers.
- Scope: This liability applies specifically to NICs, plus related interest and penalties.
- The risk: If you are made personally liable via a PLN and cannot pay, your personal assets, including your house, could be at risk.
In Summary: When Your House is Generally Safe
You typically don’t need to worry about losing your personal assets if:
- You have not signed any personal guarantees for company debts.
- There are no charges secured against your personal property for company loans.
- Your Director’s Loan Account is not overdrawn (or you can repay it promptly if it is).
- You have acted responsibly and have not engaged in wrongful or fraudulent trading.
- The company has met its NIC obligations, or any failure was not due to fraud or serious neglect.
Need Advice?
If you are unsure about your situation or concerned about potential personal liability, it’s crucial to seek professional advice promptly.
