One of the key benefits of incorporating a business is the ‘corporate veil’, where the company is classed as a separate entity to its directors/shareholders. Within a legal context, this means that the company is a separate person from its directors/shareholders, and all the debts incurred by the company are in theory the company’s liabilities and not the legal liabilities of the directors/shareholders.

However, that said, while limited liability status provides valuable protection to directors, there are certain situations where the company status is disregarded and the ‘corporate veil is lifted’, leaving the person behind the veil in other words the director/shareholder responsible for paying the company’s debts.

Wrongful Trading

Directors can be held personally responsible for company debt by a liquidator if they permit the business to continue to trade after it became clear to them that it was insolvent. This is because it’s considered unfair to suppliers and other creditors to carry on taking credit when directors are fully aware that the company won’t be able to repay these debts.

Directors become personally liable

Directors become personally liable to contribute to the company’s assets and to help meet the deficit to unsecured creditors when they decide to continue to trade and in doing so worsen the company’s finances, rather than opting to put the company into liquidation straightaway. Put simply, the corporate veil can be lifted or pierced and all protections afforded by the veil are removed. Consequently, directors may face claims for ‘wrongful trading’ made against them personally and possibly even become disqualified for their actions.

With insolvency looming, directors should take note of the following:

·       The director’s culpability is based on the information that was known or should have been known at the relevant time, and the court will consider each director’s conduct in this light.

·       Person liability for company debts can also apply to non-executive directors. Even when a director only attends board meetings as he or she still has a role to play in the decisions about the company and will be judged accordingly.

·       Resignation is not a solution once the issues have emerged and should only be considered if a director’s views are being ignored.

How can Directors Avoid Personal Liability?

These useful tips can help to protect directors as the Court tries to underpin why decisions were taken to continue trading, as well as demonstrating that all decisions were carefully thought through.

·       Directors should make careful dated notes and take minutes of all decisions and actions taken to protect the company’s creditors.

·       They must have up-to-date management accounts and financial information, as well as a daily cash flow model and  budgets for profit and loss.

·       Directors must know the financial position of the company even when it’s not their specialism or area of interest

·       They should have regular minuted board meetings to discuss the company’s position, review cash flow and take decisions to act

·       Director should negotiate a Time to Pay or TTP arrangement with HMRC, a payment plan to repay tax arrears.

Personal Guarantees in Insolvency

In the event of the company becoming insolvent, lenders, banks and finance companies will pursue directors personally for company debt repayments. Directors may have decided to provide a personal guarantee in support of a loan or a line of credit for a number of reasons for the day-to-day running of the business. For instance, for a business loan or trade supply deal. Where these guarantees are given, directors are quite literally signing an agreement to say that if the business is unable to pay the money back in the future, they will. 

For further guidance on personal liability for company debts, as well as more information on the impact of personal guarantees, please call 08000 24 24 51 or email info@businessexpert.co.uk for free and confidential advice from one of our professional advisers.