If your business can’t pay its liabilities when they fall due, then it could be insolvent. With insolvency and a risk of closure comes a perceived risk of personal liability.
In reality, if your business is conducted through a limited company, the threat of personal liability is minimised thanks to limited liability protection.
However, there can still be situations where this is not the case, and you could find yourself personally liable for your company’s debts.
So, when can you be held personally liable for a company’s debts, what steps can you take to minimise the threat, and how can you stop it from affecting you in the long term?
When Can You Be Personally Liable For Business Debt?
Operating your business as a sole trader means you and your business’ finances are one and the same, giving you no liability protection if your company gets into debt.
If you’ve incorporated the business in a limited company, you’ll benefit from limited liability protection. This protection separates the business’ finances from your personal finances.
While this helps in most situations, limited liability protection can be bypassed if you’ve acted outside of the company’s best interests, such as if your company has traded whilst insolvent or you’ve subsequently committed wrongful or fraudulent trading.
The same is true if the company becomes insolvent and you have an overdrawn directors loan account.
Limited liability can also be bypassed if you’ve signed personal guarantees to secure the company funding and the company can’t make its agreed repayments.
What Can Happen If You’re Found Personally Liable
If you’re found personally liable for your company’s debts, it becomes like any other personal debt, with you responsible for its repayment.
If you can’t raise the funds necessary to repay, this could ultimately lead to personal bankruptcy.
As previously stated, personal liability for your company’s debts can result from trading whilst insolvent, wrongful or fraudulent trading.
The latter of these two can lead to directors bans of up to 15 years. Fraudulent trading is a criminal offence and can result in a prison sentence.
How To Avoid Personal Liability For Your Company’s Debts
The main way to avoid personal liability for a company’s debts is to ensure you act in its best interests, including those of its creditors.
- Ensure overdrawn directors loan accounts are repaid in a timely manner.
- Ensure personal guarantees are tenable and can be repaid.
- Always being aware of the company’s solvent position and taking appropriate action if the company becomes insolvent.
Doing so can mean there are fewer complications if the company becomes insolvent, which itself can’t always be avoided.
Fortunately, there are options available if your company can’t afford to repay its liabilities as and when they fall due.
Speaking to a licensed and regulated insolvency practitioner can help you make sense of your situation and the potential options available.
Depending on your company’s circumstances, it may be possible to repay a portion of its debt in affordable monthly instalments.
This can be done through a Company Voluntary Arrangement (CVA), which allows the company to continue trading while it repays what it can afford, usually over a period of around five years.
The process allows your business to retain goodwill with customers while you repay its debts, and once it concludes, all remaining unsecured debt is written off.
Whereas, if recovery isn’t viable, you may be better off closing the company through a Creditors Voluntary Liquidation (CVL). This will draw a line under the insolvent company and its debts, writing them off with its closure and allowing you to move on.
While the cost of liquidation may seem prohibitive, it can vary depending on the level of debt and the number and value of assets, and there are several ways in which you can raise funds for a liquidation.
To Conclude
While sole traders’ business finances are inseparable from their personal finances, limited company directors benefit from limited liability protection, separating the two.
This separation can help in insolvency, with the debts confined to the company so they won’t affect you personally.
However, there can be situations wherein this limited liability protection is bypassed, potentially resulting in you being held personally liable for your company’s debts. These situations can include:
- You’re found to have traded whilst insolvent, where you’re deemed to have acted outside of the company’s and its creditors’ best interests.
- Instances of wrongful or fraudulent trading.
If your company does become insolvent, acting in its and its creditors’ best interests would involve seeking insolvency advice from a licensed insolvency practitioner.
They can advise you of the best way forward for your company based on its circumstances, potentially minimising long-term consequences.
