If My Limited Company Goes Bust, Will I Lose My House?

If there’s one question that we hear worried business owners ask more than any other, it’s if my limited company goes bust, will I lose my house?”

It’s an understandable fear too. Even small businesses can rack up huge amounts of debt that they have little ability to pay off. Once a company’s assets have been completely sold off though, where else is there to look for items of any value? For most of us, our most valuable personal asset is our houses.

Thankfully, this doesn’t usually mean that you’ll have to part ways with your home, but there are some scenarios in which it’s a possibility.

So, if my limited company goes bust, will I lose my house?

Not usually. A limited company is classed as a separate legal entity to its owner.

In simple terms, the law sees the difference between you and your company in the same way it differentiates between you and an entirely different person. If your company owes money, it doesn’t mean that you do too.

But can I lose my house if my limited company goes bust?

While it’s unlikely, it is possible. Most liquidations wouldn’t call for the need to take a business owner’s house, but certain complications might. Factors such as personal guarantees, director’s loan accounts, and wrongful trading can all make the loss of a home possible.

Outside of any complications, there’s no real threat of having your home taken away as part of a liquidation.

Reasons why you could lose your house in a business liquidation

Personal guarantees

If a director is short on financing options for their company, they may be tempted to sign a personal guarantee. This makes the securing of a loan much easier, and users personal assets as collateral to use against any loan.

Unfortunately, when a personal guarantee is taken out, it creates a blurring between the two separate legal entities. If the company becomes insolvent, those with personal guarantees will need to pay the debts off. Otherwise, they’ll have to let go of whatever asset they took the loan out against.

Houses are typically the high-value assets used to secure financing, but cars and other assets can also be used depending on their value.

Director’s loan account

It’s not uncommon for directors to use a director’s loan account to allow them to borrow money from their own business. They can even be used in the opposite way: to lend money to the business from the director.

Remember that the law sees a limited company as a separate legal entity, however. Despite any transaction feeling as if you’re merely transferring money around your own personal accounts, it is anything but.

Any loan you take out from the business will have to be paid back. If your business becomes insolvent and enters liquidation while you still owe it money, you’ll be expected to pay up in order to pay back your company’s creditors. The problem here occurs if you can’t afford to pay the loan back. An insolvency practitioner is within their rights to take legal action to enforce its repayment.

In such an instance, this legal action could have the potential to force you into bankruptcy, or even have your house repossessed.

Personal liability notice

If HMRC find a director guilty of neglecting to pay the National Insurance contributions of their employees, they are given a personal liability notice. These are typically handed out when companies enter administration and put the onus on the director to pay them what they’re due.

Keeping hold of the National Insurance contributions meant to have been paid for each employee is obviously a serious matter, and it’s no surprise that HMRC pursue such cases rigorously. If an offending director can’t pay HMRC the money they owe, then their personal home could be at risk.

Fraudulent trading

As part of the liquidation process, insolvency practitioners are required to investigate the conduct of the company director. If the director is found to have engaged in fraudulent trading, they can find themselves in breach of the insolvency act. Once this has been breached, directors can become legally liable for their company’s debts.

Insolvency practitioners will look for any suspicious activity conducted by the director. This could include the hiding or removal of assets before they can be used to pay off creditors. If assets are found to have been sold for less than market value to a party connected to the director, this would also constitute a red flag for IPs.

Similarly, accepting customer orders with no intention of fulfilling them will be flagged up too.

Wrongful trading

Once a business is declared insolvent, it’s considered wrongful trading to carry on operating afterwards. This can worsen the position of the company’s creditors if it’s still ordering supplies and using facilities while trading. In instances such as these, the business can be seen as creating more debt while knowing it’s unlikely to be able to pay it back. Cases like this can result in personal liability issues. From there, you can potentially see your home, as well as any other personal assets repossessed.

Key takeaways

While the examples above show that it’s certainly possible to lose your home if your limited company is liquidated, they should also show that its far from the norm. As long as your business isn’t guilty of any wrongdoing, then you’re unlikely to be surprised by a repossession order. Of course, if you’ve taken out a personal guarantee or director’s loan account, these risks should come as no surprise either.

Remember that your business is an entirely separate legal entity to yourself and try to treat it as such. Taking out business loans with personal guarantees or director’s loan accounts that don’t have strict repayment terms are the quickest ways to blur the lines between you and your company. By keeping the two entities separate, you’re able to shield yourself from substantial risk.

Thinking about liquidating, but unsure of the effects?

We’ve helped countless businesses to assess their options when they’ve found economic changes difficult. Call us for free, no-obligation advice from one of our friendly specialists. You’ll be given all the guidance you need for the best route to take your business.

As business rescue specialists, we can help discover the best possible solution to any issues your company is having. Call us on 0800 975 0380, or email [email protected] for a free consultation.