There are circumstances where a company director can be personally liable for business debts. Debts secured with what is known as a directors personal guarantee must be repaid by the named director if the company is liquidated or becomes insolvent. A director may also become liable if they have obtained the money through fraud or are guilty of misconduct.
Directors personal liability explained
Generally speaking, directors are not personally liable for debts incurred by a limited company, as these businesses have limited liability. This means that personal liability is limited to a director’s investment in the company. A limited company is seen as a separate legal entity.
There are times, however, when a company director can be held personally liable and limited liability is disregarded. If a company faces formal insolvency proceedings, the practitioners appointed will investigate directors’ conduct leading up to the insolvency. If any fraudulent trading or misconduct is discovered, a director may become personally liable. An overdrawn director’s loan account, using company money for activities not related to the business, disposing of assets, and paying shareholder dividends when the company is clearly insolvent may also be grounds for personal liability. You can read more about director duties and insolvency on the government website
Director’s personal guarantee
A director may also be liable if they have signed a directors personal guarantee. This type of agreement should only be entered into after professional legal advice, offered by companies such as https://www.parachutelaw.co.uk/director-guarantee.
A directors personal guarantee can allow unsecured borrowing by offering the lender the security that a loan will be repaid if a business fails, but it carries personal risks for directors. It removes the protection of limited liability and means that a director becomes responsible for repaying debts if the company cannot.
Director’s loan accounts
DLAs allow directors to take money from a business in a manner that isn’t an expense, dividend or salary. If this is overdrawn at the time of insolvency, directors must repay any funds borrowed from the business in order to repay creditors.
