Company directors are responsible for running limited companies in the United Kingdom on behalf of shareholders. If the business is facing financial trouble, then directors will want to know how much responsibility they have for the limited company’s debts.
Limited companies are set up to limit the personal liability that directors have in terms of company finances. In most cases, debts are written off if the company becomes insolvent, but there are certain instances when company directors are held personally liable for company debts.
We asked our insolvency experts to explain when a director can be held responsible for their company’s debts.
What Is a Company Director Responsible For?
Company directors have a wide range of responsibilities in terms of running the company they are appointed to oversee. Company directors are responsible for making sound business decisions, for growing the company, and for filing returns with Companies House on time.
For directors, these responsibilities are known as their ‘duty of care’. Directors have a moral (and in many cases legal) obligation to act in the best interests of the company. This doesn’t just mean aiming for short-term profitability, but planning for long-term growth, acting in the best interests of shareholders and employees, and paying creditors what they’re due.
But while a director has these obligations, the nature of a limited company ensures that they are still not personally liable for company debts if the business becomes insolvent. Limited companies afford directors limited liability, resulting in company debts not being the responsibility of the director if the company folds.
What Liabilities Does a Company Have?
If a business becomes insolvent, it means it can’t pay its debts. These debts are also known as liabilities, and they include any amounts of money owed to creditors.
The list of potential liabilities is long and can include bank loans, leases, repayment plans, unpaid invoices, and money owed to employees in wages or to suppliers for goods purchased on credit.
Company directors that have acted in the best interests of their company aren’t held responsible for any of these business liabilities if the company becomes insolvent and can’t pay these debts. Simply put, if the company goes under, the director doesn’t have to pay the company debts back out of their own pockets (they aren’t personally liable for company debts).
However, company directors can still be held responsible for certain debts should the business become insolvent. Any personal debts or personal guarantees are the responsibility of the director. If the director is deemed to have acted fraudulently or against the interests of the company, they can be held personally liable for debts.
Here are the major instances in which a company director has responsibility for company debts:
- Personal guarantees on bank loans or credit purchases
- Personal wages, income tax and national insurance payments
- Overdrawn director’s loans
- Fraudulent debts
- Liabilities accrued after insolvency occurs
- Decisions and actions classified as ‘Misconduct’
Let’s take a look at these liabilities in more detail to see when a director is responsible for debts.
Directors aren’t responsible for loans taken out in the company name, unless they have signed a personal guarantee for it. This happens if the sum of money is large or risky and the bank needs to secure its money personally. Personal guarantees can often result in a company director using their car or house as security, which is a big liability.
Overdrawn Director’s Loans
Directors have the ability to draw money from the company accounts in the form of a loan. These aren’t wages or expenses but essentially a personal loan. This money must be paid back by a company director if the business becomes insolvent.
Directors are responsible for any debts that can be classified as fraudulent after an investigation by the Insolvency Service. Fraud can occur in any number of instances, but in terms of insolvency, it’s commonly committed when directors take on debts they know the company is unable to repay. It can also occur when directors take out a personal loan in the name of the company, or secure credit using fraudulent means. If this happens, the director becomes personally liable for these debts.
Company directors have a legal and moral responsibility to act in the best interests of the company. This means they aren’t allowed to use company funds for anything that’s not related to the business. If company funds are misallocated for personal use, then this is known as misfeasance. In certain positions, misfeasance can be a criminal offence.
Liabilities Accrued After Insolvency
Directors are responsible for any debts that are accrued once a company becomes insolvent or enters into any formal liquidation procedures. A company director also has a duty of care towards their creditors. If they willingly take on new debts and continue trading when they know that their company is going under, then they become personally responsible for these debts.
Directors need to be careful about how they act while in charge of the company because if the company becomes insolvent, they can be personally investigated by the Insolvency Service. If the director is found to have committed misconduct, they can be held personally liable for the company’s debts.
Misconduct can take the form of many offences, including acting against the interests of the company, committing fraud, acting against the best advice of stakeholders, or simply making terrible business decisions. Allegations of misconduct are taken seriously by the Insolvency Service and can lead to disqualification.
Contact Irwin Insolvency Today for Your Free Consultation
Irwin Insolvency is ready to provide you with expert advice that could save your business from financial trouble. Our professional team can provide you with the expertise and knowledge you need as a company director to make the best decisions possible for your business.
Our staff have years of experience working across a range of industries, and we’re ready to help you through these tough and trying times. Contact Irwin Insolvency today for your free consultation.