When a limited company is insolvent and is undergoing liquidation, directors will inevitably want to know who is liable for its debts.
After all, although directors aren’t usually held personally responsible for company debts and are protected by limited liability, there are some instances in which the director can be held personally liable.
To help find out more, in this guide Clarke Bell outlines everything directors need to know about personal liability during liquidation.
Who is liable for company debts?
When a company is going through the liquidation process, its liabilities need to be dealt with in the correct manner. These liabilities refer to the debt that the company owes. This covers everything from unpaid invoices, loans, tax owed, to rent owed and asset finance.
When the company can’t meet its liabilities and pay back its debts, the director is usually given the protection of limited liability. This means that debts incurred by the company are the company’s liabilities and do not belong to the directors or shareholders. This is because the company is a separate legal entity.
So, when can a director be made personally liable for limited company debt?
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When can a director be made personally liable for company debts?
As we’ve mentioned, although company debts usually belong to the business and not the directors and shareholders, there are some instances in which a director can be held personally liable.
Next, we will look at each of these in more detail:
A common reason that a director can be made personally liable for company debt is if they have signed a personal guarantee. If this is the case, they will be held liable for company debts if they can’t repay them.
Personal guarantees usually arise when a bank or other lender asks the director to sign a personal guarantee before they agree to any unsecured borrowing. This is common for companies that are relatively new or have a blemished credit history.
Overdrawn Directors Loan Account (ODLA)
A director’s loan account lets a company director take money from the business in a way that isn’t classed as their salary, a dividend or an expense.
Any money taken out as such has to be properly recorded. If the director takes out more money from the business than they put in, the account is overdrawn and they will owe the company this money.
If the company becomes insolvent, an overdrawn director’s loan account will be considered as an asset of the business. This means that the director will become personally liable and must pay back what they have borrowed from the business, so that the amount can be used to repay creditors.
Crown liability due to fraud
If a Crown liability has arisen as a result of fraud, and it can be proved by HMRC, then this liability (albeit a company liability) can be put on to the directors personally.
Trading whilst insolvent
Finally, if the director continues to trade whilst aware that the company is insolvent, they are committing ‘wrongful trading’ and can lose the protection of limited liability and can be held personally liable for some of the company’s debts.
In some cases, directors who continue to trade whilst insolvent may also be disqualified if they are found to have failed in fulfilling their director’s duties. This means they can be banned from being a director for up to 15 years.
What does personal liability mean for directors?
In cases that the director is found to be personally liable for its company’s debts, they are responsible for repaying them, just as they would with any form of personal debt.
Unfortunately, it is often the case that directors can’t afford to repay these debts. If this is the case, then the director will have to consider selling or refinancing their own assets. When this isn’t an option, creditors to whom you owe money may force you into bankruptcy.
What options do you have?
One option that directors have is to claim director’s redundancy.
If you have worked for the company as an employee for 2 years or more and have received a regular salary through the PAYE system, then you may be able to claim director redundancy pay.
So, if the company is insolvent and is closed down through a formal insolvency procedure such as Creditors’ Voluntary Liquidation (CVL,) then you could receive director’s redundancy.
The amount you will be eligible to claim will depend on how long you have worked, the salary you have taken and your age. This can be helpful as it could help to cover your personal liability.
If that sounds like the best move for you, the next step will be to kick start the CVL process.
That’s where Clarke Bell can help – with the CVL and with your director’s redundancy, as part of the process.
Considering a Creditors’ Voluntary Liquidation? Clarke Bell are here to help
A CVL is often the best option for an insolvent business that wants to avoid being forced into compulsory liquidation. This option allows the business to repay creditors what they owe and will also let the director claim redundancy, where applicable.
Although it results in the liquidation and dissolution of your company, the benefits of a CVL include showing that the directors are fulfilling their legal obligations to their creditors and helping the directors to avoid any wrongful trading.
If you’d like to find out more about a Creditors’ Voluntary Liquidation, Clarke Bell are here to help and ensure you get the best advice.
Over the past 26 year’s we’ve helped thousands of businesses through the liquidation process. We work closely with company directors – and their accountants, where applicable – to ensure we get the best outcome under the circumstances.
Get in touch now for free advice about our CVL service. How to claim director’s redundancy and when you could be made personally liable during the liquidation of a company.