If you are a sole trader or a member of a partnership, you are responsible personally for any debts your business may incur. In comparison, if you’re the director of a limited company, the liability of the business debts falls on the company rather than its directors.
Broadly speaking, the personal finances of the director should be unrelated to the debt of the business. That said, there are some exceptions to this general rule of thumb.
If, as a director or shareholder you have given personal guarantees for a company property lease or a business loan for example, and the company is not able to make the agreed repayments, you will be held personally responsible. If all avenues for collecting the debt from the company have been exhausted a creditor can legally target you personally for full repayment of the loan. It is therefore important that you check the agreed terms to ensure you are familiar with the requirements should this situation arise.
A company is considered insolvent if it is not able to make debt payments as and when they fall due and/ or the company’s asset value is less than its liabilities. If a director increases the company’s debt with knowledge that the business has no means of paying the debt back, this is considered wrongful trading. In such cases, the director, despite acting on behalf of the company, may be personally liable for the debt and losses incurred from the date they were aware of the company’s insolvent position and may even be asked to pay for damages. Similarly, if a claim of misfeasance is brought against a company, whereby a director has deliberately acted improperly, resulting in other parties suffering, the directors again may be held personally liable.
If a director has an overdrawn director’s loan account upon commencement of a company liquidation, he/she might be liable personally for repaying that loan. The director loan is in effect a in debt to the company and it is the duty of the insolvency practitioner to act in the creditor’s interest so can make demand repayments on that loan. If a director does not co-operate, legal action can be taken which may even result in personal assets (such as a house or car) being repossessed. If you have any concerns related to these issues, it is important to get legal advice without delay.