Directors’ Liability And Exposure: The Facts

It is often wrongly assumed that directors are not liable for the debts of a limited company. However, there are some circumstances in which directors could be liable and forced to pay these large debts, putting their personal assets at risk.

Although there are a variety of factors that could see directors dealing with personal liabilities, there are a few common scenarios to be aware of.

If you Have Signed a Personal Guarantee…

Often directors are required to sign a personal guarantee for business loans. Creditors will use this like any other security e.g. property to recover money owed.

If you have a personal guarantee, insolvency means that any previous repayment agreements become void. This means that you are liable for the full value of the loan, not the monthly repayments.

Everyone who signed the personal guarantee is liable and creditors can request repayment at any time. This means that if you and another person signed the personal guarantee, you are both jointly responsible. If the other party does not pay, you could end up being forced to repay the full value. Unless you have the cash to pay, the creditor can issue a statutory demand and make you bankrupt, putting personal assets at risk.

If you Received a CBILS or BBLS loan

The Government has introduced new laws as a result of the misuse of these schemes. This bill opens the door for investigations into current and past company directors.

The Insolvency Service could use this to remove any protection offered by a limited company, leaving former directors liable for the company’s debts. This is especially likely if the company was a recipient of a CBILs/BBLs loan. If you used one of these loans for anything other than business expenses, you will likely find yourself being investigated. If you think you may have misspent this loan, it is important to contact insolvency specialists to get clarity.

If you Have Borrowed Money From Your Company

A director’s loan account (DLA) is a record of transactions between directors and the business. If a director takes more money out of the company than they put back in, it is seen as an asset of the business. Directors have exactly 9 months from the end of the company’s accounting period to repay their DLA. After this deadline, the loan account becomes ‘overdrawn’.

Companies often write off director’s loan accounts in end-of-year accounts. However, they do not always go away, as these loans are subject to interest and tax. This means that the amount you owe can continue to increase.

If the company enters insolvency the director’s loan account is treated as an asset of the company. As such, you may have to pay the full value back. If you are unable to repay the loan, you may have to follow a formal insolvency route such as bankruptcy.

If you Have ‘Traded Wrongfully’

When your business enters insolvency, your responsibility shifts from the needs of shareholders to those of creditors. If a director has knowingly continued to trade during insolvency, they can face a series of legal and financial penalties.

Although this once would have been rare, it has become much easier to punish directors recently. You could face disqualification or even jail time. As well as this, you can be made liable for all your business debt, regardless of personal guarantees. Again, if you cannot pay these debts, you could be opening yourself up to formal insolvency proceedings such as bankruptcy.