Personal liability for your company’s debts. Can they bankrupt you?

Normally, limited company directors receive limited liability protection when they set up that company and register it at Companies House. This separates the company’s finances from their own, so any debts in that company won’t affect you as its director.

Limited liability applies in most circumstances, but you can still be held personally liable for your company’s debts in some situations.

Personal liability for your company’s debts

Limited liability protection is only available to directors of limited companies. Sole traders do not have the same protection as their business and personal finances are the same.

Your company’s limited liability protection doesn’t guarantee you’ll never be held personally liable for your company’s debts. Instances where you can include:

• You’ve signed personal guarantees
  You may have signed a personal guarantee while applying for funding. If you miss or default on your associated payments, these guarantees crystallise and become enforceable. This can bypass your company’s limited liability protection.
• The company is trading whilst insolvent
  If your company has debts, you may want to trade on and hope that takings improve enough to make up the difference. Unfortunately, continuing to trade while knowing that the company can’t repay what it owes when the amounts fall due means that the company is trading whilst insolvent. This can lead to your company’s limited liability protection being bypassed, worsen its standing with creditors, and lead to accusations of wrongful and/or fraudulent trading.
• You’ve taken money out of the company and not repaid it
  You can borrow money from your own company, which you should repay as soon as possible. If your company becomes insolvent and you owe the company money, that amount will be treated as a company asset, and you will be expected to repay the outstanding balance. What can happen if you’re found personally liable for your company’s debts?

Being held personally liable for your company’s debts means you may have to repay them out of your personal finances. Depending on how you came to be held liable, you could also face the following consequences:

• Banned from being a company director
  You could face a directorial ban for up to 15 years if you acted outside of the company’s best interests. This is more likely to happen if your company has traded whilst insolvent, or if you’re found to have committed wrongful trading during your time as director.
• Bankruptcy
  In the UK, companies cannot go bankrupt. ‘Company bankruptcy’ relates to US-based companies but is sometimes used interchangeably with the correct term: ‘insolvent company liquidation’. If the company’s debt becomes your own and you can’t afford to repay it, you may have to declare yourself bankrupt.
• Prosecution
  In the most extreme cases, such as where you’ve deliberately tried to defraud your company’s creditors or even its customers, criminal proceedings, charges, and potentially, a prison sentence may follow.

How you can minimise the risk of personal liability for your company’s debts

While there’s no get-out-of-jail-free card to absolve you of responsibility for your company’s debts if you’re found personally liable, you can take some steps to avoid finding yourself in that situation. While acting as the company’s director, you should prioritise the best interests of the company and its creditors.

Even if you do everything right, avoiding company insolvency isn’t always possible. Speak to a licensed and regulated insolvency practitioner (IP) if your company has unaffordable debts. They will look into your company’s situation and advise you on the best route forward based on those circumstances.

To summarise

Limited liability protection separates your personal finances and your company’s in most circumstances, meaning you won’t be liable for any of the company’s debts if it can’t afford to repay them. This protection can be bypassed if the company becomes insolvent and you’ve acted outside of the creditors’ best interests, if you signed personal guarantees in exchange for company funding, the company has traded whilst insolvent, or if you owe your own company money.

Once you’re aware that your company can’t pay its debts on time, speak to a licensed and regulated IP. They will advise you of the best way to proceed, and it means you’re more likely to achieve a positive outcome.