Updated on July 2025
When a limited company becomes insolvent and enters liquidation, one of the biggest concerns for Directors is whether they could be held personally liable for the company’s debts.
In most cases, Directors benefit from the protection of limited liability, which means the company’s debts remain separate from their personal finances. However, there are situations where this protection no longer applies, putting Directors at risk of being personally responsible for certain liabilities.
In this guide, we’ll outline when and how Directors can become personally liable during liquidation, what that means for their financial future, and how to reduce the risk of personal exposure.
Who is liable for company debts?
When a company is undergoing the liquidation process, its liabilities must be handled properly. These liabilities refer to the debt that the company owes. This covers everything from unpaid invoices, loans, tax owed, to rent owed and asset finance.
When a company can’t meet its liabilities and pay back its debts, the Director is usually afforded protection under limited liability. This means that debts incurred by the company are the company’s liabilities and do not belong to the Directors or shareholders. This is because the company is a separate legal entity.
So, when can a Director be held personally liable for the debt of a limited company?
Related Reading: If Your Company Has Debt Problems, Make Sure You Pick
The Best Option To Deal With It
What is limited liability?
Limited liability is a legal safeguard that protects the personal finances of a company’s shareholders and Directors. It ensures that, under normal circumstances, they are only liable for the amount they have invested in the business. This principle is what separates the company’s debts from the personal finances of those who run it. If a Director breaches their legal responsibilities or acts fraudulently, that protection can be lifted.
What is classed as a company liability?
Company liabilities refer to all debts and financial obligations the business owes. These typically include:
- Outstanding invoices to suppliers
- Business loans and credit
- Tax liabilities such as VAT and Corporation Tax
- Wages owed to employees
- Lease or rental arrears
- Payments owed on equipment or vehicle finance agreements
All of these are considered when a company enters liquidation. Assets are sold, and the proceeds are used to repay as many of these liabilities as possible in order of legal priority.
When can a Director be made personally liable for company debts?
Although company debts usually belong to the business and not the Directors and shareholders, there are some instances in which a Director can be held personally liable.
Let’s look at these in more detail:
Personal guarantees
A common reason a Director can be personally liable for company debt is if they have signed a personal guarantee. If this is the case, they will be held liable for company debts if they can’t repay them.
Personal guarantees typically arise when a bank or other lender requests that a Director signs a personal guarantee before agreeing to any unsecured borrowing. This is common for companies that are relatively new or have a blemished credit history.
Overdrawn Directors Loan Account (ODLA)
A Director’s Loan Account lets a Company Director take money from the business in a way that isn’t classed as their salary, a dividend, or an expense.
Any money withdrawn in this manner must be properly recorded. If the Director takes out more money from the business than they put in, the account is overdrawn, and they will owe the company this money.
If the company becomes insolvent, an Overdrawn Director’s Loan Account will be considered as an asset of the business. This means that the Director will become personally liable and must repay the amount borrowed from the business, allowing the funds to be used to repay creditors.
Crown liability due to fraud
If a Crown liability has arisen as a result of fraud, and can be proved by HMRC, then this liability (albeit a company liability) can be imposed on the Directors personally.
Trading while insolvent
If the Director continues to trade while aware that the company is insolvent, they are committing “wrongful trading.” They can lose the protection of limited liability and can be held personally liable for some of the company’s debts.
In some cases, Directors who continue to trade whilst insolvent may also be disqualified if they are found to have failed to fulfill their Directors’ duties. This means they can be banned from being a Director for up to 15 years.
Related Reading: What Are the Risks of Trading While Insolvent?
Unlawful dividend payments
If a Director approaches dividend payments when the company lacks sufficient retained profits to justify them, those dividends may be deemed unlawful. Directors can then be required to repay the amount back into the company if it is found that they breached their duties.
Antecedent transactions
These are transactions made before the company enters liquidation that a liquidator can reserve. They include transactions at undervalue (selling assets for less than they’re worth), preferential payments (paying one creditor ahead of others unfairly), and extortionate credit transactions. If a Director authorises these, they may be held personally accountable.
Fraud and misrepresentation
If a Director is found to have deliberately misled lenders, investors, or HMRC or engages in fraudulent activity, they may be stripped of limited liability protections. This includes submitting false information to obtain credit or disguising the true financial state of the company.
How are company debts usually paid during liquidation?
During liquidation, a licensed insolvency practitioner is appointed to oversee the sale of company assets. These proceeds are distributed to creditors in a specific order:
- Secured creditors with a fixed charge (such as asset finance providers)
- Preferential creditors (usually employee wages and specific pension contributions)
- Secured creditors with a floating charge
- Unsecured creditors (including suppliers and HMRC)
- Shareholders, if anything remains (rare)
If asset sales don’t cover the debts, any unpaid liabilities are usually written off unless the Director is personally liable for any portion.
What does personal liability mean for Directors?
If the Director is found personally liable for their company’s debts, they are responsible for repaying them, just as they would with any form of personal debt.
Unfortunately, it is often the case that Directors can’t afford to repay these debts. If this is the case, the Director will have to consider selling or refinancing their own assets. When this isn’t an option, creditors to whom you owe money may force you into bankruptcy.
Related Reading: Personal Guarantees and Insolvency
Can I lose my home due to limited company debts?
If a Director has given a personal guarantee secured against their home or becomes personally liable for company debts, they may be at risk of losing their property. This depends on the level of debt, the value of personal assets, and whether bankruptcy proceedings are initiated.
What are the consequences for a Director if they become personally liable for company debts?
Consequences of personal liability can be severe. These may include personal bankruptcy, legal action from creditors, disqualification from acting as a Director for up to 15 years, and seizure of personal assets, including homes, vehicles, or savings.
This is why it’s so important for Directors to seek expert guidance before taking any risky decisions in an insolvent company.
Shareholders’ liability for company debts
Shareholders are generally not liable for company debts beyond the value of their shareholding. However, if they also act as Directors and breach their fiduciary duties, they can be held liable in that capacity.
Sole traders and personal liability for business debts
Unlike limited Company Directors, sole traders are personally liable for all business debts. There is no legal separation between the individual and the business, meaning creditors can pursue personal assets to recover debts.
Partnership and personal liability for business debts
In a traditional partnership, each partner is jointly and severally liable for the partnership’s debts. This means that if the business cannot pay, creditors can pursue one or all partners for the full amount owed, regardless of who incurred the debt.
How to avoid becoming liable during liquidation
There are several steps Directors can take to avoid personal liability:
- Act early when facing financial difficulties. Delaying can increase the risk of wrongful trading.
- Avoid taking out personal guarantees unless absolutely necessary.
- Ensure Directors’ Loan Accounts are properly documented and not overdrawn.
- Do not prioritise one creditor over another without good reason.
- Keep accurate financial records and seek professional advice when needed.
Related Reading: How Does Redundancy Pay Work For Company Directors?
What options do you have?
If your company is insolvent, entering into a CVL can help you deal with the situation responsibly. It can protect you from wrongful trading, reduce personal liability, and take control before creditors take action. Acting early can make a significant difference to the outcome.
As part of the CVL process, you may also be entitled to claim Director’s redundancy pay, a legitimate claim if you’ve worked for the company for at least two years, were paid through PAYE, and had a defined role. The amount you could receive depends on your salary, age, and length of service, and it can provide a valuable financial cushion at a difficult time.
Clarke Bell can help guide you through the CVL process from start to finish and help you claim what you’re entitled to as part of that journey.
Related Reading: Creditors’ Voluntary Liquidation: The Complete Guide
Considering a Creditors’ Voluntary Liquidation? Clarke Bell is here to help you
A CVL is often the best option for an insolvent business that wants to avoid being forced into compulsory liquidation. Thousands of directors use this process each year to sort out their company debt problems once and for all. This option enables the business to repay creditors what it owes and allows the Director to claim redundancy, where applicable.
Although it results in the liquidation and dissolution of your company, the benefits of a CVL include showing that the Directors are fulfilling their legal obligations to their creditors and helping the Directors avoid any wrongful trading.
If you’d like to learn more about a Creditors’ Voluntary Liquidation, Clarke Bell is here to help and ensure you get the best advice.
Over the past 30 years, we’ve helped thousands of businesses through the liquidation process. We work closely with Company Directors — and their Accountants, where applicable — to ensure we get the best outcome under the circumstances.
Contact Us Today for a free, no-obligation consultation and find out how we can help you.
