A guide, not advice. This explains how things generally work. A licensed insolvency practitioner will tell you what applies to your company or to you.
The General Rule
A limited company is a separate legal entity from its directors and shareholders. In the normal course of events, the company's debts belong to the company - not to the people who run it. This is the core protection of trading through a limited company.
This means that, in most insolvencies, directors are not personally liable for the company's unpaid debts. The company's creditors can pursue the company's assets, but not the directors' personal assets.
When Personal Liability Can Arise
There are, however, several important exceptions where a director can become personally liable:
Personal Guarantees
If you have signed a personal guarantee for a company loan, overdraft, or supplier credit, the lender can pursue you personally for that debt if the company cannot pay. Personal guarantees are common with bank borrowing, commercial finance, and sometimes with trade suppliers and landlords.
Wrongful Trading
If you continued to trade the company when you knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation, a court can order you to contribute to the company's assets. This is why taking advice early is so important - acting responsibly once insolvency is apparent protects you.
Overdrawn Director's Loan Account
If your director's loan account is overdrawn at the date of liquidation (you have taken more money out of the company than you were entitled to), the liquidator will require you to repay the balance personally.
Certain Tax Debts
In limited circumstances, HMRC can pursue directors personally for company tax debts - for example, where a Personal Liability Notice has been issued for PAYE or National Insurance, or where there has been deliberate tax evasion.
Fraudulent Trading
Where a business has been carried on with intent to defraud creditors, directors can be held personally liable and may face criminal prosecution.
How to Protect Yourself
- Take professional advice as soon as you suspect insolvency
- Keep clear, accurate financial records
- Do not continue trading recklessly once you know there is no reasonable prospect of avoiding insolvent liquidation
- Review any personal guarantees you have given
- Avoid building up an overdrawn loan account
Speak to a Licensed IP
If you're concerned about personal liability, an honest assessment of your position can bring real peace of mind. Our Manchester-based practitioners will explain exactly where you stand - free and confidential.