Understanding personal liability as a company director

As a limited company director, you’re legally responsible for the smooth running of your limited company. This means fulfilling your reporting obligations, paying the relevant taxes, protecting the financial interests of creditors, and acting with integrity. While limited company directors are protected by limited liability, there are exemptions which could place you outside of the veil of incorporation.

Jon Munnery, a company liquidation expert and licensed insolvency practitioner at UK Liquidators, the UK’s largest liquidators, explains the intricacies of limited liability when running a limited company and under which circumstances you could be held personally liable for company debts.

What is limited liability?

When operating a limited company, you are covered by limited liability; this is a form of legal protection granted to the owner(s) and shareholder(s). It means that the director(s) will not be held personally liable for company debts as it is a separate legal entity. If the business accumulates financial losses, repayments will ultimately lie with the business, although there are exceptions under which you could be held personally liable for company debts.

What is personal liability?

Personal liability is when you are held personally responsible for the debts of your company, and no longer protected by limited liability. The threat of personal liability prevents limited company directors from committing wrongdoing and putting the best interests of creditors second.

When can a limited company director be held personally liable for company debts?

You can be held personally liable for limited company debts under the following circumstances:

• Signing a personal guarantee - A personal guarantee is often required when taking out a business loan as it provides reassurance to lenders that if the business enters financial difficulty or becomes insolvent, the payment will be covered personally by the company director. Personal guarantees are common when borrowing large sums of money as it reduces the risk of making a financial loss for lenders.

• Trading while insolvent – If you continue trading while your business is knowingly insolvent, you will be held personally liable for company debts. It’s your duty as the company director to maintain the financial health of your business and prevent the financial position of creditors from further worsening.

• Director misconduct – If you act improperly and without integrity, such as by borrowing additional funds that you cannot afford to repay or continue paying dividends to shareholders, you could be held personally liable for company debts, also known as director misconduct.

• Director misfeasance – If you use company funds for non-business purposes, you may have to repay this personally – this is known as director misfeasance.

• Selling company assets for below market value – If you dispose of company assets below market value, the company will be put at a loss and therefore, worsen the financial position of creditors. If you sell company assets for cheaper than they are worth, you could be held personally liable for company debts.

• Overdrawn director’s loan account (DLA) – A company director can borrow funds from the business through what’s known as a director’s loan account, which must be repaid. If you take more out than you put in, this could become problematic if the business becomes insolvent.

If you’re held personally liable for company debts and cannot afford to pay, what next?

What happens if I’m personally liable and can’t afford to pay?

If you’re held personally liable for company debts and cannot afford to pay, the consequences could be dire as your personal finances will be at risk. If you can’t raise enough cash, your assets could be repossessed, or you could be made bankrupt. If you seek insolvency help at the earliest opportunity, an insolvency practitioner may be able to rescue your business and put a plan in place to make company debts manageable.

If you fail to seek advice from a licensed insolvency practitioner and continue trading, the consequences can be serious.