Directors of insolvent limited companies are protected from personal liability by limited liability protection. Establishing a limited company separates a director’s personal finances from their company and ensures that any liabilities are contained.
While limited liability protection covers most situations, there can be circumstances wherein this protection could be bypassed and leave you personally liable for your company’s debts. If this happens, there are steps you can take to minimise how it will affect you and ensure you’re acting in the best interest of your company and its creditors.
When can you be held personally liable for your company’s debts?
Limited liability protection typically stands in most situations, provided you’ve acted in the best interests of the company and its creditors.
These situations can include, but are not limited to:
- Personal guarantees
If you’ve signed a personal guarantee to secure funding for your company, then the guarantee can crystallise and become enforceable if you’re unable to repay it, which can bypass any limited liability protection if the business is conducted within a company.
- Trading whilst insolvent
Your company is trading whilst insolvent if you continue trading despite knowing that the company can’t repay its liabilities on time. This can potentially worsen the company’s situation and its standing with creditors, which can lead to accusations of wrongful and even fraudulent trading. If, during any subsequent insolvency proceedings, you’re found to have traded whilst insolvent, it could lead to your limited liability protection being bypassed.
If you operate as a sole trader business, you don’t benefit from limited liability protection as you and your business are one and the same.
Consequences for personal liability for company debt
If you’re held personally liable for your company’s debts, you are responsible for repaying the outstanding amount and could face the following consequences:
- Personal bankruptcy
With the company’s limited liability protection bypassed, its debt becomes your own. If you’re unable to repay the amount with the funds you have available, you may have to file for bankruptcy.
- Directorial bans for up to 15 years
If, during your time as director, you acted outside of the company’s and its creditors’ best interests, including committing wrongful trading or trading whilst insolvent, you could face a ban from holding further directorships for up to 15 years, depending on what is found.
- Criminal proceedings
If you’re found to have broken the law in your time as director, or have deliberately tried to defraud customers and creditors, you could face criminal charges and even a prison sentence.
How to avoid being held personally liable for your company’s debts
You can help avoid the potential pitfalls wherein you’d become personally liable for your company’s debts by acting in the best interests of the company and its creditors during your time as director. This will put you in a better standing if the company ever becomes insolvent.Â
Should that ever happen, you should speak to a licensed and regulated insolvency practitioner (IP), who can discuss your potential options, which may include:
Summary
If you’re the director of an insolvent company, your personal finances are separated from your company’s by limited liability protection. This can help if the company is insolvent, so its financial issues won’t affect you personally. However, if you’ve acted outside of the company’s best interests and of its creditors, you could still be held personally liable for the debts.
Your best way to avoid personal liability for your company’s debts is to act within the best interests of the company and its creditors in your time as director, and if it does become insolvent, to speak to a licensed and regulated insolvency practitioner as soon as you become aware that the company can’t afford to pay its liabilities. This will ensure that you get advice in a timely manner and minimise the risk of long-term consequences.