Are company directors liable for their business debt?
By Mr Bankruptcy
29th September 2021
When company directors set up a limited company, in part this decision is driven by the desire to limit personal liabilities if the business gets into financial difficulty, but are they fully protected from all liability?
What is a financial liability?
Liabilities are monies or debts owed by a company and when a business is incorporated as a limited company it becomes its own legal entity. This means that if the business runs into financial difficulty, the company directors aren’t usually held personally responsible for the company’s debts. However, there may be occasions when company directors are held liable for debts.
When are company directors liable?
There are specific instances when a company director could find themselves being held responsible for paying company debts. These include:
- Signing a personal guarantee
- Overdrawing the director’s loan account
- Paying shareholders dividends while the company is insolvent
- Disposing of company assets which are undervalued
- Withdrawing and using company funds for non-business activity
- Debts accrued due to fraudulent activities
- VAT and Corporation Tax, if HMRC believe there’s been deliberate payment avoidance
These reasons for liability illustrate the importance of understanding the responsibilities of being a company director because any suspicion of mismanagement can change your situation in terms of your liability and, subsequently, your personal financial position.
How to avoid unnecessary financial liability
When dealing with business debt, it’s vital for company directors to acts responsibly and, if a company has become insolvent, to fulfil their statutory duty to act in the best interests of the company’s creditors to ensure repayment of debts from company resources.
If continuing to trade worsens the company’s finances or directors fail to meet their duty to act in the interest of their creditors, they could be accused of wrongful trading and be made personally liable for company debts, risking disqualification from acting as a company director in the future.
To avoid the risk of personal liability, it’s important to seek advice if your company enters financial difficulty. Depending upon the scale of the debt and the director’s personal financial situation, various debt management options are available. Seeking advice early on ensures that you’re not just diligently fulfilling a director’s statutory duties, but also minimising the wider potential impact on your personal situation because of the company’s problems.
James Rosa Associates
James Rosa associates is a firm of debt advisors and debt adjustors. With a supportive and friendly approach, we offer a full range of advice and professional services to individuals and business owners/directors who face unmanageable debt or who are involved in civil or commercial disputes. Our services include:
- Insolvency support
- Negotiated settlements
- Personal assisted bankruptcy
- Mediation
We are authorised and regulated by the Financial Conduct Authority (FRN665061) to work with clients to produce bespoke solutions to fit their specific circumstances.
Find out if you qualify for a free consultation
If you want to deal with an unmanageable debt, or bring a dispute to a swift and cost-effective resolution, contact James Rosa Associates, ring 0845 6807217 or email enquiries@jamesrosa.co.uk to find out whether you qualify for a free consultation.
Please be advised that all views expressed in these posts are those of the author and not of James Rosa Associates ltd.