In the UK, one of the advantages of operating a limited company is the principle of ‘limited liability’. This means that, in general, shareholders and directors are not personally liable for the Company’s debts. However, there are notable exceptions where personal liability can arise. Understanding these exceptions is crucial for directors and business owners to safeguard their personal assets.
1. Understanding ‘Limited Liability’
‘Limited liability’ protects shareholders from being personally responsible for the C ompany’s debts. If the Company faces liquidation, creditors can only seek to recover from the Company’s assets, not the personal assets of its owners or directors. This structure encourages entrepreneurship, as individuals can take risks without the fear of losing their personal wealth.
2. When Personal Liability Can Arise
Despite the protection offered by limited liability, there are several circumstances under which a director or shareholder may find themselves personally liable for company debts:
a. Personal Guarantees
If a director or owner provides a personal guarantee for a company loan or credit taken in the name of the Company, they become personally liable if the Company defaults on that debt. This is common in small businesses where banks or suppliers may require a personal guarantee to mitigate their risk.
b. Wrongful Trading
Under the Insolvency Act 1986, if a company goes into liquidation and it is found that a director allowed the Company to continue trading when they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvency, they may be held personally liable for the Company’s debts incurred during that period. Directors have a duty to act in the best interests of the Company and its creditors.
c. Fraudulent Trading
If a company is found to be trading with the intent to defraud creditors, directors may be personally liable for the Company’s debts. This involves a higher level of wrongdoing, where actions are taken with the intent to deceive creditors or hide the Company’s financial state.
d. Breach of Fiduciary Duties
Directors are expected to act in the best interests of the Company and its shareholders. Breaching these fiduciary duties, such as misappropriating company funds or engaging in conflicts of interest, can lead to personal liability.
e. Tax Liabilities
Certain tax liabilities, particularly PAYE and VAT, can lead to personal liability for directors. If a director fails to ensure the Company pays its tax obligations, HMRC may pursue them personally for the outstanding amounts.
3. Protecting Yourself from Personal Liability
To minimise the risk of personal liability, directors should:
– Keep Accurate Records: Maintain thorough and accurate financial records to demonstrate compliance with statutory obligations.
– Regularly Review Financial Health: Monitor the Company’s financial position regularly and seek professional advice at the earliest opportunity, if financial difficulties arise. An Insolvency Practitioner will be able to provide guidance on compliance and risk management; the earlier you seek advice, the more options will be available.
– Avoid Personal Guarantees: Where possible, avoid providing personal guarantees for company debts. If you are unsure about providing a personal guarantee, seek independent advice to ensure you are fully aware of the risks and have explored all alternatives.
Conclusion
While the limited liability structure of a UK limited company provides significant protection to directors, it is essential to be aware of the circumstances that can lead to personal liability. By understanding these risks and taking proactive measures, directors can safeguard their personal assets and ensure compliance with their legal obligations. If you find yourself in a challenging financial situation, it is important to seek advice in order to navigate the complexities of insolvency and personal liability effectively.
FAQ’S
Q: How do I protect myself from wrongful trading?
A: Wrongful trading is a subjective test and centres around when a director knew or ought to have known that the Company could not survive. A full explanation is available here. The best way to protect yourself is to seek guidance from an insolvency practitioner, as soon as you know that your company is facing financial difficulties.
Q: What should I do if I suspect my company is Insolvent?
A: If you suspect your business may need to go into liquidation there are a number of steps you should take to protect both you and your creditors. Click here for our guide for directors facing company liquidation.
Q: Can I liquidate a business myself?
A: No you can’t. You need to be a licensed Insolvency Practitioner to deal with company liquidation. You can ask the Court to wind up your company, but this can be complicated and expensive. An explanation of the differences between voluntary liquidation and compulsory liquidation is available here.
Should you wish to explore any of the matters in this article in more detail or seek a bespoke solution for your company, call 03303 411 285 for a free, confidential, no obligation conversation about your options.
