Insolvency can bring with it many complications that ripple out beyond the business failure itself. We explore whether a corporate liquidation can provoke the loss of a family home.
Does Liquidation Mean Losing the Family Home?
A company director can lose their family house during liquidation if they have either signed a personal guarantee, or engaged in directorial misfeasance. Other than these scenarios, the legal seperation between a limited company and its directors should prevent this scenario.
Of course, those operating as sole traders do not benefit from this protection and are therefore at risk if their business venture fails.
Examples of When you Could Lose a House if the Business Fails
Personal Guarantee – These documents are specifically designed to penetrate the corporate veil. This means that by signing them you are waiving the limited liability intrinsic in company law and putting a personal asset on the line, typically as loan security.
Misfeasance – Misfeasance means a legal transgression and, from a directors point of view covers a variety of scenarios. Legally the concept is covered in Section 212 of the Insolvency Act 1986 (IA 1986) where it outlines that directors can be made personally liable where misfeasance can be proven. These include:
- wrongful trading – continuing to trade despite knowing the company is insolvent
- preferential payments – paying one person in preference to another despite awareness of the company’s insolvent position
- transactions at undervalue – selling a business asset at a falsely cheap price
- unlawful dividends – issuing dividends even though the company couldn’t afford to do so
Overdrawn Directors Loan Account – Directors loan accounts are considered a personal debt and will be called in during insolvency. In this situation, the limited company director becomes a creditor to their own company and, should they not be able to pay, could be forced into personal bankruptcy which would implicate the family home.
