Can directors be held personally responsible for the company’s debts? The answer depends on several factors. Below, we’ll share the circumstances in which directors may become personally liable for a company’s debts.
What is Limited Liability?
Most companies in the UK are limited liability companies. This means that the company itself is responsible for its debts, not the directors or shareholders. The debts are tied to the company’s assets, and the personal assets of the directors or shareholders are usually protected.
Can Directors Be Held Personally Liable for Company Debts?
Under normal circumstances, directors are not personally liable for a company’s debts. However, there are some exceptions where a director may be held accountable. These exceptions usually happen when the director has not acted responsibly or has broken the law
When Could a Director Be Personally Liable for Debts?
1. Wrongful Trading
Directors must avoid allowing a company to continue trading if they know the company is going to go insolvent and unable to pay its debts. If a director continues to let the company trade while it is insolvent, they could be held personally responsible for the company’s debts.
2. Fraudulent Trading
Fraudulent trading is when directors intentionally deceive creditors or others by continuing to trade with the knowledge that the company is going to fail. This is illegal, and if a court finds that a director has engaged in fraudulent trading, they can be personally liable for the company’s debts.
3. Personal Guarantees
In some cases, directors may be required to sign a directors personal guarantee when taking out loans or agreements for the company. A directors personal guarantee is a legal promise by the director to repay the loan if the company is unable to do so. If a director signs a directors personal guarantee and the company cannot pay back the loan, the director will be personally liable for the amount.
4. Breach of Duties
If a director fails to meet their legal duties, such as by using company assets for personal gain, they could be held personally responsible for any debts.
