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.

Included in this article:

Personally liable for your company’s debt? Give us a call (0800 180 8440) or complete the form below

Directors are personally liable for Personal Guarantees

Giving a personal guarantee (PG) is a common requirement in the case of small or medium sized companies. Directors will almost always have to give a guarantee before being able to secure credit for the business.

The bank will normally require a PG before extending an overdraft facility of loan to the company. Invoice factoring providers and landlords will also almost certainly require a personal guarantee.

If the company is liquidated, the director then becomes personally liable for and PGs they have signed. These debts have to be paid by the director from their own pocket.

If you have become liable for personal guarantees contact us for advice (0800 180 8440).

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.

The liquidator must collect money owed to the company. This includes any outstanding directors loan balances.

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.

Have you become personally liable for company debt? Give us a call (0800 180 8440) or complete the form below for more advice.

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

    1. Neil Murray says:

      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.

    3. David C says:

      I am owed money by a company that went bust. Can I claim off the director?

      • Hi David,

        Unless the director signed a personal guarantee with you, they are not personally liable for the company’s debt. As such you will not be able to pursue them directly for the money you are owed I’m afraid.