Understanding Personal Liability as a Limited Company Director

Understanding personal liability as a limited company director can be complicated.

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

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 the company’s debts.

What is limited liability?

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

If you find yourself in this position, you could be held personally liable for the debts of your company. This could have long term repercussions.

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 acting against the best interests of creditors.

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 (PG). If you sign a personal guarantee, which is common when taking out a business loan, this provides reassurances to the lender that if your business enters financial difficulty or becomes insolvent, you will make the payment personally, and therefore, they will not make a loss.
  • 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 the business and prevent the financial position of creditors from further worsening.
  • Director misconduct. If you act improperly and fail to uphold integrity, such as by borrowing additional funds that you are unable to repay or continuing to pay 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, also known as director misfeasance, you may have to repay this personally.
  • Selling company assets for below market value. If you dispose of company assets below market value, the company will have made a loss, worsening the position of creditors, therefore, 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 you must repay. If you take more out than you put in, this could become problematic if the business becomes insolvent.

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.

You must seek advice from a licensed insolvency practitioner at the first sign of persistent business distress. If your business becomes insolvent and you continue trading, the consequences can be serious.
Blog written by
Jon Munnery
Jon Munnery

Jon Munnery is an insolvency and company restructuring expert at UK Liquidators, a leading provider of company liquidation services to both solvent and insolvent limited companies. Jon supports businesses at risk of insolvency and already insolvent as a result of creditor pressure and the build-up of business debts.

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