As a general rule, a company director does not have to pay back company debt personally. However in some cases directors are liable. They can also be banned from future directorships where debts are not paid.
Included in this article:
- Is a director liable for company debt
- Personal liability after company liquidation
- Directors and company bounce back loan
- Director disqualification
- Debt solutions suitable for directors
Need advice or assistance with company debt? Give us a call (0800 180 8440) or compete the form below. The advice is free and confidential.
Is a director liable for company debt
As a general rule, the director of a company is not liable for its debts.
Because of the rules of limited liability, if the company gets into financial difficulty and has to close, the creditors can’t ask the director to pay the debts from their own funds. The outstanding balances simply have to be written off.
However, sometimes you can be liable for company debt. One of the most common ways is if you have given a personal guarantee (PG).
A PG is a legal obligation to pay the outstanding balance personally if the company is not able to.
Personal guarantees are extremely common in small or medium sized businesses. Bank’s and business loan lenders will often require directors to sign up to these before giving any form of credit.
Struggling to get your head round your liability for company debt? We can help. Call us (0800 180 8440) or complete the form below. The advice is free and confidential.
Director liability after company liquidation
Before a company is liquidated, it is important that the directors understand how much of the outstanding debt they will be liable for.
Key arears to look out for are:
Personal Guarantees
You may have signed a personal guarantee with a bank or other organisation that lent the company money. If so, you have to repay any outstanding balances.
The lender is within their rights to start chasing you for money as soon as the company stops paying. They can take legal action against you and your assets (for example your home) to enforce repayment.
Overdrawn Director’s Loan Account
If you owe the company money, the balance outstanding is known as an overdrawn director’s loan Account (DLA).
You may not even be aware of this debt. It can commonly build up if you have withdrawn money from the company as a dividend when there were no profits. The money you took then becomes a loan from the business which you have to pay back to the liquidator.
Bounce Back Loan
If you spent all or part of a bounce back loan (BBL) on yourself, it is likely you will have to pay the bank back personally if the company can’t.
Examples of where you used the money yourself rather than for the benefit of the company are where you bought something for yourself (perhaps a car). Alternatively, where you transferred all or or part of the loan into your own account and used it for personal expenditure.
Directors and company bounce back loan
Directors were not required to give personal guarantees if their company took a bounce back loan. The loans are guaranteed by the Government.
In other words, if the company subsequently has to stop trading and is liquidated, the bank can claim the balance of the unpaid loan from HMRC.
However, directors can be made personally liable for BBL debt if the money was not used for legitimate company expenses. Using the funds for personal expenditure such as a director transferring funds into their own account is not considered legitimate.
Where this has happened, HMRC are putting pressure on the lenders to take enforcement action to recover the money personally from the director.
After a company is liquidated, a report is submitted to the insolvency service about how the bounce back loan has been spent. Improper use can lead to directors becoming personally liable for the balance and disqualification.
Director disqualification
Under normal circumstances, you can be a director of multiple companies. Only time you are not allowed to be a director is if you have been disqualified.
Disqualification as a director might happen after your company has been liquidated. However it is not automatic.
The liquidator gives a report to the Insolvency Service about your conduct as a director. If there are any particular concerns such as large HMRC debts or the possibility of wrongful trading, these might be investigated further.
If they believe you are unfit to be a director, the Insolvency Service will apply to the Court for your disqualification. A Judge will decide at the hearing whether you should be disqualified and for how long. The period could be between 2 and 15 years.
You can’t be a director of another company while you are disqualified. This can make life difficult if you want to set up a new company to start trading in place of one which has been liquidated (pre pack liquidation).
You can still operate a business as a self employed sole trader while you are disqualified. It only prevents you from acting as a company director.
Debt solutions suitable for directors
You may have sufficient personal funds to repay any company debt you are liable for. If not, you will need to consider implementing a personal debt solution.
There are basically three different options you can consider. The right one for you will depend on your personal circumstances.
Debt Management Plan
A debt management plan (DMP) could be a sensible option if you have available income but just need a reasonable time to pay.
You can still be a director of another company. However, this is unlikely to be a suitable option if the Plan would last many years.
IVA
An IVA can be a good option if you would otherwise be repaying debt for many years. It typically lasts 5-6 years and you can continue to be a director of a company.
However, you need to be able to fund reasonable monthly payments or come up with an acceptable lump sum to make a full and final offer.
Go bankrupt
Where you are not a home owner and don’t want to be a company director in the immediate future, going bankrupt could be a sensible option.
You will only be bankrupt for 1 year. If you are unable to afford payment towards your debts, you don’t have to make any.
You can still run a business on a self employed basis if you want.
For help with company debt, give us a call (0800 180 8440) or complete the form below. The advice is free and confidential.
