In most cases, as a company director, your personal finances are separated from your company thanks to limited liability protection. However, there can be situations wherein a company’s financial difficulties could affect you personally.
Who is personally liable for business debt?
It’s important to distinguish between directors of limited companies and sole traders. Sole traders’ personal finances and their business’ are one and the same with no separation between the two. Consequently, the sole trader is personally liable for all their business debts.
Limited company directors receive limited liability protection when starting their company. This separates the director’s personal finances from the company’s and means the company’s financial troubles stay within that company without personally affecting the director.
When can your company’s debts bypass the limited liability protection?
While limited liability protection protects your personal finances from being affected by your company’s debts in most situations, there can be instances where that limited liability could be bypassed:
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- Personal guarantees
You may have signed personal guarantees to secure funding or supplies during your company’s initial setup. While these add security for the lender if your company can’t repay, if that happens, the guarantees will ‘crystalise’, bypassing the limited liability protection and making you personally liable.
- Personal guarantees
- Your actions in the time leading up to and during the company’s insolvency
As part of any formal insolvency process, the licensed and regulated insolvency practitioner (IP) will investigate your directorial conduct in the time leading up to and during the period of insolvency. If you’ve acted in the best interest of the company and its creditors, you shouldn’t face personal consequences for the company’s financial problems.
Acting outside of your creditors and the company’s best interests includes:
- Continuing to trade, knowing that the company is insolvent.
- Deliberately defrauding customers and/or suppliers.
If this happens, you could not only be held liable for the company’s debts, but could also face disqualification from being a director, and even criminal charges.
How to deal with company insolvency
Fortunately, if your company is insolvent, there are things that you can do to address the issues.
Continuing to trade as if the company isn’t insolvent, or paying one creditor in preference over another, can exacerbate the situation and make it more likely that you’ll face further consequences afterwards.
If your company is insolvent, your first move should be to contact a licensed and regulated insolvency practitioner (IP). They can provide free, impartial, confidential advice on your situation and the best course of action based on your company’s level of debt and what you want for its future.
Depending on that situation, your options could include:
- Repaying a portion of the company’s debts through a formal repayment arrangement, such as a Company Voluntary Arrangement (CVA).
- Restructuring the company into a more profitable entity through administration.
- Closing the company down through a voluntary liquidation, a Creditors Voluntary Liquidation (CVL).
- Continue the business in a newly established company via a pre-pack. (This is only applicable in certain situations).
Summary
In most circumstances, your company’s limited liability protection separates your company’s finances from your personal finances and will prevent its debts from affecting you personally. However, it can be bypassed if you’ve signed personal guarantees or acted outside of the company’s best interests in your time as a director. You could be held personally liable for the company’s debts, be disqualified from being a director, and potentially face criminal charges.
If this happens, you should contact a licensed and regulated insolvency practitioner who can advise you on the best course of action for your company.