Directors are not normally liable for debts that a company cannot afford to pay. However there are some circumstances where personal liable can exist.
- Directors Personal Guarantees
- Outstanding Directors Loan Accounts
- Liability for debts after Disqualification
- HMRC Debt
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A common way that a director can become liable for a company debt is with a personal guarantee. If a guarantee is given the director becomes personally liable if the company cannot pay the debt. This would be the case if an insolvent company was liquidated.
Very often a bank will demand a personal guarantee before offering the company an overdraft, credit card 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. However this is not always the case.
Outstanding Loan Accounts
Directors are also liable for outstanding Directors Loan Accounts. This situation is often a less widely appreciated. Loan accounts occur when a director draws dividends from a company that is not in profit.
Dividends can only be paid from company profits. As such drawings when there are no profits are simply a loan from the company to the director.
An directors loan account is no problem if a company continues to trade. In these circumstances the outstanding balance can be repaid if the associated director foregoes future dividends.
The problem comes when an insolvent company is closed. Then one of the jobs of the Liquidator is to collect any debts owed. These include outstanding loans owed by any directors.
Liability for Company Debt after Disqualification
If a director is accused of wrongful trading this can lead to their disqualification. If they are disqualified 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. In the vast majority of cases of failed limited companies the directors are not accused of wrongful trading. Generally it only happens if they have knowingly allowed a company to trade and not acted to minimise the losses of the creditors.
Directors are generally not liable for debts owed to HMRC after a company is closed. 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 use this to take legal action against named directors where PAYE remains outstanding.
Directors debt payment options
If a director is liable for debt after the closure of a company this cannot be ignored. If an agreement cannot be reached the creditor will normally resort to taking legal action to enforce payment.
Very often a director will not have sufficient funds personally to simply pay the outstanding debt in full. In these circumstances the bank or liquidator will normally accept a reasonable agreement regarding the debt’s repayment. This may be in the form of a monthly repayment plan or a smaller lump sum in full and final settlement.
If a payment arrangement cannot be reached for any reason the director must then implement a formal debt solution. An Individual Voluntary Arrangement (IVA) is a good way for a director to protect themselves . However where the situation is right Bankruptcy is also be a sensible solution.
An IVA allows outstanding personal debt including HMRC debts to be written off. It also allows the individual to continue to act as a director of other companies.