When Are Directors Personally Liable For Company Debts?

If you’re the director of a company that is facing insolvency, one of the questions you may have is “are directors personally liable for company debts”. It’s natural to be concerned that your company’s debts won’t have an impact on your personal financial situation. The good news is that so long as directors have acted correctly, for the most part they will be protected under limited liability. However there are instances in which directors may be held personally liable for debt. Let’s take a look at the main examples of this.

In What Instances Are Directors Personally Liable For Company Debts?

Personal Guarantees

A personal guarantee is an agreement in which an individual assumes personal responsibility for debt in the event that the company cannot repay it. This means that the lender/supplier may enforce the guarantee in order to recover the money if necessary. It will be considered a breach of the terms if a director fails to repay the personal guarantee. 

Making Preferential Payments Prior to Liquidation

In the period leading up to a liquidation it’s essential that repayments are made fairly to all parties. A hierarchy for order of repayment will be determined under the guidance of a licensed insolvency practitioner. This means that if one creditor is paid in favour of another where they should not be, this could be a breach of insolvency law. 

Overdrawn Director’s Loan Account

Another instance in which a director may be held personally liable for company debts is if they create an overdrawn director’s loan account. This occurs when a director takes out money from the company which is not treated as salary or dividends, that they cannot repay. So when discussing the question of “when are directors personally liable for company debts” it’s important to emphasise the significance of directors acting appropriately at the first signs of financial difficulty. Seeking the advice of an insolvency professional early on is important for directors to protect their individual situation as well as to work in the best interests of creditors.

Transactions At An Undervalue

When a company becomes insolvent, directors are required to act in the best interests of creditors. When an asset is sold for less than its true value, this reduces the return that can be made to creditors and may be immediately reversed by the liquidator. If the liquidator finds evidence that the director has sold assets below their market value then they are at risk of being held personally liable.

Unlawful Dividend Payments

If a company declares dividends to shareholders but there are insufficient distributable reserves, shareholders will be liable to repay these dividends in a liquidation scenario.  Furthermore, if the company was insolvent at the time of the declaration, then this is another occasion in which directors could be held personally accountable. If you see signs of financial trouble within your company it’s essential to address them rather than continuing to trade and putting your position as a director, as well as the stability of your company at risk. 

Trading Whilst Insolvent Or Wrongful Trading

If a company continues to trade knowing that they are insolvent, the directors may be in breach of the Insolvency Act and consequently could be made personally liable for debts and furthermore could face disqualification. When a director is found guilty of trading whilst insolvent or wrongful trading they are not protected under limited liability. So when discussing the question of “ when are directors personally liable for company debts”, this is a key instance in which they could be held liable.

Fraud Or Inaccurate Record Keeping

When answering the question of “when are directors personally liable for company debts”, it’s not always the case that the directors have deliberately breached insolvency law. Often, being misinformed or uneducated about insolvency procedures can result in directors failing their responsibilities. Failing to keep accurate records of financial information is an example of this. Directors are obliged to keep accurate records of their company’s accounts, meaning that failure to do so could leave them personally liable. Additionally, if a director has deliberately misrepresented the information then this is classed as fraud and a breach of insolvency law.

When discussing the question of “when are directors personally liable for company debts”, it’s essential to emphasise the importance of seeking professional help. Speaking to a licensed insolvency practitioner at the first signs of financial difficulty, will ensure that you follow the correct insolvency procedures and protect yourself from becoming personally liable. Don’t hesitate to get touch with the team at My Liquidation today for tailored, confidential advice.