Can I Be Made Personally Liable for my Limited Company Debts?

If you are a director of a Limited Company, you enjoy limited liability, which essentially means that you are not responsible for business debts unless you have personally guaranteed the payments (for example, a bank loan or rent agreement may require this).

However, if your business is in trouble, you will need to take certain steps to retain your limited liability.

If you are found guilty of wrongful conduct, you will become personally liable for any debts the company has accumulated.

This can catch directors out more easily than you may think! Keep the following things in mind to protect yourself from adopting your business debts.

You become personally liable if you continue to trade when failure is a certainty

This is why it is easy to get caught out. Most directors have put a lot of time and effort into their business and find it hard to admit that there is no possibility of returning to profitability.

In order to avoid personal liability, though, you must prove that you believed within reasonable doubt that the company can be saved, and that you did everything in your power to minimise potential loss to creditors right up to the point of liquidation.

This is because it’s bad practice to take credit from suppliers or other creditors that you know will not be paid back.

You could also be found liable if you’re found guilty of misfeasance – you can read more about misfeasance in our blog post

Advice to avoid personal liability

• Too much hindsight can deter you from making the right decision. Whatever has happened in the past, wrongful conduct will be judged on the information you have available to you at the relevant point in time.
• Your personal experience is taken into account. If you have a specialised proficiency you will be judged with this in mind, so you may have more responsibility than a ‘lay’ director who would not have the knowledge you are assumed to with your expertise.
• The liability doesn’t fall only on the manager of the company. If you are an investor or a ‘non-executive’ director, even if you only attend occasional board meetings, it will be assumed that you had a part to play in the most important business decisions and you will be judged accordingly.
• Once problems have become apparent, resignation is usually not the best way forward. This should only be considered if your wishes as a director are being ignored.
• Making careful and detailed notes (including dates) of all action taken to protect your creditors from being unpaid will provide evidence that you have done so in the eventuality that you are put before the courts.

What to do if you feel stuck

‘Passive’ directors that aren’t heavily involved in the day to day workings of the business are not exempt from this rule, as mentioned above.

Limiting your involvement will not protect you from being personally liable for your company’s debt, because after all, it is your company.

The same applies to shareholders, lender and investors who are present when decisions are made – you can’t protest that you were just protecting your investment.

The best way to avoid liability may be to become an ‘observer’ with board meeting attendance under contract, with no Companies Act Director status.

This route may not give you the same prestige, but it certainly helps when things are looking rough.

It is possible to have the same amount of control over a business without risking personal liability – just ensure a well-drafted agreement has been drawn up to avoid being treated by the courts as a shadow director.

Get free advice today

If you business is struggling it’s important to seek professional advice, so why not contact us today and take advantage of a free consultation with one of our business rescue specialists. You can call us on 0800 975 0380 (free form mobiles and landlines) or email [email protected]

We will be able to assess the situation and then offer advice on appropriate solutions depending on your specific situation and requirements. You can then decide whether you want us to help you with your problems. With offices across the UK, you’re never far away from expert and confidential advice.