Banks: Household credit ‘significantly’ reduces
How credit card debtors are targeted by firms
6th September 2017
Wages stagnant as unemployment falls
16th September 2017
Show all

When are limited company directors liable for business debts?

Index finger pointing forward

Limited company directors are not automatically liable for their business debts, but there are two main circumstances under which the director would be held responsible for the debts.

The director would be responsible if they have offered a personal guarantee on any debts or if a court determines that a director (or directors) has broken their fiduciary duties to creditors.

We explore these circumstances in a little more detail below.

Personal guarantees

Limited companies are private businesses where the owners are not legally responsible for the debts of the company. However, when a company takes on a commercial loan or another type of credit, the lender will often insist on a personal guarantee from the company’s director or directors.

In other words, the loan is provided on the understanding that the director will cover the debt if the business becomes insolvent.

These cases are relatively definitive. If a director has offered a personal guarantee then they will have to honour that if the company becomes insolvent. If the director cannot afford the debt then they may have to pursue some type of personal debt solution.

Cases where a director has broken their fiduciary duties are less clear and usually involve more legal wrangling.

Director duties

Directors will also be held personally liable for a limited company’s debt if a court decides that they have broken their statutory duty to act in the best interests of the company’s creditors.

Directors have a fiduciary (the highest) duty to act in the interests of the company. In the normal running of a company, this duty is underscored by a responsibility to consider the actions of creditors of a company. However, when a company becomes insolvent, the directors’ duty to promote the success of the company is replaced by a duty to act in the best interests of the company’s creditors.

In other words, the directors’ new duty is to protect the value of company assets and minimise losses to creditors wherever possible.

Directors also have a responsibility to ensure that managers, employees and shareholders don’t act in a way that would be to the detriment of creditors.

They should also seek the advice of a licensed insolvency practitioner as soon as they become aware of insolvency. This can help minimise the risk of personal liability for company debts.

A director can be held personally liable for company debts if it can be shown that they acted improperly. When the company is insolvent, this can include:

  • Continuing to pay shareholder dividends.
  • Fulfilling undervalue transactions.
  • Preference to repay certain creditors over others.
  • Withdrawing/using company funds for non-business activity (this is a criminal offence that is also known misfeasance).
  • Overpaying yourself from company funds.
  • Fraudulent and wrongful trading. Directors are liable if they knowingly carried on business with the intent to defraud creditors.

In some circumstances, directors may take the view that it is in the best interests of the company and creditors to continue trading out of difficulties. But this is a risky strategy and it is recommended to take specialist advice before pursuing it.

If you have any concerns or need additional advice, please contact a member of our experienced debt management team today. Call: 0800 611 8888.