What does it mean to go bust?
Going bust is simply when a business cannot continue to trade as it owes too much money to its creditors who, will or likely have already, launched legal action against the company to recover debts. There is not enough cash in the company to survive so it enters a terminal insolvency process like administration or liquidation.
Is my house at risk?
In the majority of circumstances, you will not lose your house or personal belongings if your limited company goes bust because as per the name suggests, the liability is limited. This type of protection means any consequences stay within the business. However, under certain circumstances you can be vulnerable
Risk to your home when your limited company goes bust:
If you personally guarantee a company loan
If the company you own has a poor credit record, is small or is not well established then when taking out a company loan, finance providers may request a personal guarantee before approving the loan. When the time comes around, if you cannot repay or if your company goes bust, then the creditors will come to you for repayment. You will be held personally liable. If you have not got the capital funds then your home and any other personal belongings may be at risk should you be made bankrupt. Understand more about directors personal guarantees here.
If you have borrowed from lenders and they insist on a charge over your house in addition to a personal guarantee
When taking out a company loan, the lenders who provide the loan may be worried that you may not be able or willing to pay it back if something goes wrong, so they could request a charge over your house. If your company goes bust, and subsequent creditor actions, such as calling on personal guarantees, means that some lenders may be out of pocket. Under these circumstances the lender may insist on a charge on your property as extra security. This will mean that it will be paid ahead of other creditors once or if the property is sold.
Note: It is important to know that any of the COVID recovery loans i.e. Bounce Back Loan or Recovery Loan cannot be secured against the directors primary residence..
If you have an overdrawn directors account
It is quite common for directors to have an overdrawn loan account. This is when the director takes money out of the company for personal use, but it has to be repaid at some point and accounted for as per any other transaction. The issue comes when the company goes bust and the loan is not repaid. The liquidator or administrator in this case will pursue the money, as you are a debtor of the company. Personal bankruptcy is a risk that could mean repossession of your house.
If you are found to be guilty of wrongful or fraudulent trading
When the licensed insolvency practitioner investigates the conduct of the director(s), as part of the insolvency process, they may find that you, as the director have ignored creditor interests and wilfuly piled on debt knowing that it could not be repaid. This is a serious breach of the Insolvency Act and may well result in you becoming personally liable for some, or all of the corporate debt. Such actions against directors are rare but none the less they do happen.
So, if you have acted as a director without any personal guarantees, you haven’t wrongfully traded and you can repay your overdrawn directors account, then you have nothing to worry about. Your house is not at risk. If you are unsure or would like any further advice, speak to one of our professionals today.