Is A Director Personally Liable For Company Debts If It Goes Into Liquidation?

Fast Liquidation Fact

Is a director personally liable for company debts if it goes into liquidation? No, a director is not personally liable for company debts if it goes into liquidation. There has to be something else for that to arise. Ordinarily, company debts remain a liability of the company. Only if a director has personally guaranteed a company debt or engaged in serious misconduct can they be personally liable for company debts.

A Limited Company Is Separate From The Directors

A limited company is a separate legal person from its directors.

A company is a registered being at Companies House. The directors who run the company are recognised as individuals who are separate from the company. Even when the directors are the owners of the company they are still not the company; they own the shares in it.

Company Debts Belong To The Company

As the company is separate from the directors, its debts are not the debts of the directors.

Four Ways A Director Can Be Personally Liable For Company Debts

There are four ways a director can be personally liable for company debts:

1. Provide a personal guarantee voluntarily through which they accept responsibility for a company’s debt. This will typically be done to secure credit (such as loans or supplies) so the company can trade which it otherwise would not be able to obtain.
2. A director has reused the company name of another company that has already gone into liquidation when they were also a director, in breach of the provisions set out in Section 216 of the Insolvency Act 1986.
3. A director has acted as a director when they were not permitted to because they had been disqualified.
4. If their conduct has been sufficiently fraudulent and or dishonest a court has made them liable.

Misconduct Leading To Compensation

Whilst there are other instances when a director may have to pay compensation to a company for example in a case of wrongful trading, it is not a liability for company debt; it is an example of a liability that results from misconduct, calculated based on the level of debts.

Overdrawn Director’s Loan Account

An overdrawn director’s loan account is an asset of a company. It is a loan made by the company to the director that the liquidator will request is repaid.

It is not a personal liability for any of the company’s debts; it is an item of property just like any other asset of a company.