Personal Liability When Closing a Limited Company

July 20, 2021 / Business Insolvency

If you are considering closing your insolvent limited company, you may well be worried about whether the company’s debts will apply to you personally.

Typically, directors won’t be made personally liable for the debts of a limited company – because it is a separate entity to the directors and shareholders who are associated with it.

However, that doesn’t mean that a company director will never be held liable for company debts.

To help directors understand more regarding personal liability when closing their limited company Clarke Bell has put together this handy guide.

What is liability?

When it comes to business, liability refers to the debt that a company is responsible for.

Liability comes in the form of things such as loans, asset finance, unpaid salaries, unpaid invoices, accumulated tax or rent.

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Is a director personally liable for limited company debts?

If a limited company can’t meet its liabilities, the director usually has the protection of limited liability. Typically, this means that directors can’t be held personally responsible for the debts of the limited company unless they have signed personal guarantees.

However, there are certain circumstances under which a director might be held personally liable.

When is a director personally liable for company debts?

Usually, limited company liabilities belong to the business and not the director.

However, there are some situations under which a director might be held responsible for company debts. These include:

  • Personal guarantees: one of the most common occurrences under which a director can be held personally liable for their company’s debts comes from personal guarantees. Here, a director who has signed a personal guarantee will be liable for the company’s debts if it can’t pay them back.
  • Overdrawn Directors Loan Account: a director who has borrowed money from the company which it hasn’t repaid will have an overdrawn director’s loan account (ODLA) as a result. In this situation, this will need to be paid back to the company.
  • Trading whilst insolvent: if a company director is aware that the company is insolvent, meaning it can no longer pay its bills or cover its daily costs, but continues to trade the company, they can lose the protection of limited liability and be held personally liable for some of the company debts. In some cases, directors who have continued to trade when knowingly insolvent have been found to have failed in fulfilling their duties as a director. This can lead to the director to being disqualified from being a director for up to 15 years.

What happens to directors who are personally liable for company debt?

When a director is found to be personally liable for the company debts, they will be made responsible for their repayment.

In the case that the director can’t repay these liabilities, they might have to consider selling or refinancing their own assets. When this isn’t possible, creditors might force the director into bankruptcy.

What options are available to struggling businesses? 

If your company has debts and is insolvent and no longer viable, one option open to it is to enter into Creditors’ Voluntary Liquidation (CVL.)

Creditors’ Voluntary Liquidation is an option that allows insolvent companies to voluntarily liquidate. It is usually the best route to take for companies that owe money to creditors and want to avoid being forced into compulsory liquidation.

Here, the insolvent company will liquidate and dissolve whilst ensuring that all creditors are, where possible, paid back what they are owed.

This is a good option for businesses that believe they no longer have a sustainable future and their best option is to close their doors. It is a good way for a company director to take control of the situation and act before their debts get any worse. What’s more, by opting for Creditors’ Voluntary Liquidation you can avoid being forced into compulsory liquidation.

Is your limited company in debt? Clarke Bell are here to help you

Limited company debts are normally separate from personal debts. Meaning you will not be personally liable for repaying these when the company goes into liquidation.

However, as we have mentioned, there are certain instances when the director can be held personally liable. This being the case, you must repay the debts yourself which may result in personal insolvency.

If your company is facing financial difficulties and is insolvent, it’s better to act quickly. If you’re unsure about what the right course of action is for you, your company and your creditors, we are here to help.

We will work closely with directors to assess their situation and find the best way forward. Whether that is Creditors’ Voluntary Liquidation or another option.

Our team of insolvency experts has over 28 years’ experience. We have helped thousands of companies go through the liquidation process.

Our advice is free and our liquidation fees are very affordable.

Get in touch for free initial insolvency advice and find out how we can get you on the right track.