Are Directors personally liable for Company Debt

Are Directors personally liable for Company Debt

Directors are not normally personally liable for company debt. However there are some circumstances where they will be.

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Directors are personally liable for Personal Guarantees

A common way that a director can become personally liable for a company debt is by giving a personal guarantee (PG). Put simply after a PG if given if the company is liquidated the director must pay the debt in full from their own pocket.

Very often a bank or invoice finance company will demand a personal guarantee before offering the company an overdraft or loan. They are also commonly required on property lease agreements.

Personal guarantees are normal in the case of small or medium sized company borrowing. Directors of these companies must expect to give a guarantee before a bank will lend to them.

A personal guarantee may be secured against the directors assets such as their house.

Outstanding Director’s Loan Account

A Directors Loan Account is money owed to the company by the director. You may know that you took a loan from your company. Alternatively you may not be aware that this debt exists.

This type of debt builds up if you draw dividends from your company when it is not in profit. Dividends can only be paid from company profits. As such paying a dividend when there are no profits is recorded as a loan from the company to the director.

The loan account is not an issue if the company continues to trade. In these circumstances the outstanding balance can be repaid by forgoing future dividends. The problem comes if the company is liquidated.

One of the jobs of the Liquidator is to collect money owed to the company. This will include any outstanding directors loan accounts.

Personal Liability for HMRC Debt

Directors are not normally liable for debts owed to HMRC after a company is liquidated. If there is corporation tax or VAT outstanding these are treated in the same way as any other unsecured creditor.

Having said that it is possible for a director to have personal liability for unpaid PAYE. This is because at least one company director will have been required to agree to personally ensuring the collection and payment of PAYE due.

HMRC may be able successfully take legal action against a director where PAYE remains outstanding.

Can a director be personally liable for Company Debt after Disqualification

If a director is accused of wrongful trading this can lead to their disqualification. There is then a risk that they could also be held liable for some of the company’s debts.

Where this situation occurs a director can be held liable for the debts that the company accumulated from the time they started to act improperly.

This situation is rare. Generally it only happens if they have knowingly allowed a company to trade and not acted to minimise the losses of the creditors.

In the vast majority of cases of liquidated limited companies directors are not accused of wrongful trading.

Debt Management options for Directors

If you find you are liable for debt after the closure of your company this cannot be ignored. Where you cannot reach a payment agreement the creditor will usually take legal action to enforce the payment.

In circumstances where you do not have sufficient funds to pay the outstanding debt in full the bank or liquidator will normally accept a repayment agreement. This may be in the form of a monthly repayment plan or a smaller lump sum in full and final settlement.

Alternatively you could consider a more formal debt solution. If you are a home owner you might want to consider and IVA. However where you have no assets bankruptcy could be a cheaper and simpler option.

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4 Responses to “Are Directors personally liable for Company Debt”

  1. Neil Murray says:

    Hi
    I run a small company and one of my clients owes me £6500 they say they have no money , we have taken them to court and have had judgement in our favour the bailiff have visited the client and advised us they have nothing worth taking
    The client is still trading and making money.
    How can I get my money owed to me they are a limited company.

  2. Matt says:

    Can an overdrawn Directors Loan Account be offset against expenses incurred such as paying employees and suppliers with the director’s own money, as well as paying off with wages?

    • Hi Matt.

      A Director’s Loan Account (DLA) will always be offset by any money that the director has personally given to the company to pay company expenses (such as employees wages or supplier’s invoices). The offset should happen automatically when the company accounts are completed.

      Were a director has used their own money to pay company expenses is important that the person compiling the accounts is made aware of this. If they are not then the fact that the DLA should be reduced accordingly might be missed.

      This is especially important if the director has paid the expenses directly rather than paying cash into the company account allowing the company to then pay the bills from there. The accountant would not necessarily be aware of this as it would not be picked up from the bank statements.