Understanding the circumstances when a director could be liable for a limited company’s debts is vital. Without knowledge of this, you as director can never be certain of your own financial security should the fortunes of your business change.
This blog aims to make it clear what constitutes a director’s liability, the circumstances where directors are at risk, and much more.
What are the Liabilities of a Director?
The liabilities of a director refer to any money or debts owed to a company that, for one reason or another, are deemed to be the director’s responsibility to pay. The liabilities of a director can take the form of a loan not paid back, an unpaid invoice, and much more.
One of the greatest advantages of being a director in a limited company, as opposed to a sole trader, is that unlike sole traders, directors of limited companies are only liable for company debts in very specific scenarios thanks to the legal protection afforded thanks to limited liability.
The basis for limited liability is that in the majority of cases, any and all debts accrued by a limited company should be seen as exclusively the company’s liability and not that of the directors or shareholders. This is because under limited liability, the company is regarded as a completely separately legal entity from the shareholders and directors.
When can Directors be Held Personally Liable?
Directors can be held personally liable for a variety of potential reasons. This includes when they are found to have acted either unlawfully or unethically in the lead up to insolvency. Another instance would be if they have agreed to some liability down the line, in a shareholders agreement for example.
Examples of when directors can be held personally liable include:
- Fraudulent Trading: If the director of a business fraudulently accumulates debt. For example, if they lie to obtain finances, or continue trading after entering into liquidation.
- Overdrawn Directors Current Accounts: If a business enters liquidation due to financial issues, any overdrawn director’s current accounts would need to be repaid/recovered immediately.
- Personal Guarantee: Sometimes, a director may agree to a personal guarantee in order to acquire additional funding. If repayments are missed, the lender could claim directly against the directors assets.
- Shareholders Agreement: It is possible that a shareholder agreement may stipulate that directors are required to provide security and would be personally liable for company debts.
In addition to directors of a limited company being liable for debts, should the director be found guilty of anything mentioned above, there are a variety of potential sanctions they could be faced with. This includes:
Disqualification
Should the courts be involved in investigating the conduct of a director, it is very possible that they may determine that they should be no longer able to act as a director of a business.
Typically, disqualification as director lasts between 2-15 years.
Termination
A typical sanction for any company director found to have breached their fiduciary duties is the termination of their contract as director. The circumstances surrounding the termination can vary depending on the severity of the breach. For example, a director can be terminated with notice, without notice, or with payment in lieu of notice.
While disqualified, directors are unable to act in the role in their company, or any other for the duration of the sentence issued. However, it may be possible for a disqualified director to operate as a shareholder should certain guidelines be met.
Repay, Restore, or Account
In the event that the director has acted unlawfully in any way involving company assets or finances, such as trading fraudulently or misfeasance, the courts may order that all misappropriated funds be repaid, restored, or accounted for in some way.
Can Business Assets be Seized for Personal Debts
The effect your personal debts can have on the operation of your business is determined by exactly what type of company you run. If you are director of a limited company then you have no reason to worry, your business assets cannot be seized. However, if you are a sole trader this is not the case.
If you are a sole trader and you have personal debts that you are unable to repay, it is entirely possible that assets held by your business could be seized/repossessed in order to help pay off the debt to your creditors. However, this is generally seen as a drastic measure and in most cases can be avoided with proper crisis management.
How Inquesta’s Insolvency Experts Can Help
Are directors of a limited company liable for debts? In most cases, no. Generally, due to the legal protection afforded by limited liability, all company debts will remain just that — company debts. This ensures that the personal lives of directors cannot be completely flipped upside down due to the failure of their business.
However, there are certain circumstances where you, as director of a limited company, would be found liable for debts. If you are a director, it is vital that you get total clarity and insight over your situation — no matter how well you may feel your company is doing currently.
At Inquesta, our team of expert insolvency practitioners have been supporting directors in many facets of their business, including ensuring that they remain protected against personal liability, for decades.
No matter how big or small your operation or what industry you are in, our experienced team is on hand to help. We can support you and ensure that no matter what happens, you don’t need to panic.
We understand exactly how unique a company’s operation is, and we have built our service with this in mind. We know that what may work for one company won’t automatically work for the next. Our experts will always conduct a thorough investigation into every aspect of your business to ensure that nothing can slip through the cracks.
We operate in a variety of areas in the field of insolvency, both corporate and personal. For support with administration, business recovery, company voluntary arrangements (CVAs), and much more, get in touch with a member of our team today or request a free no-obligation consultation.