If your company is insolvent – to say, it cannot meet its liabilities when they fall due – you will no doubt have concerns around how your business debts will be paid, and whether you will be personally liable.
Liability could come in the form of a loan, asset finance, unpaid invoices, accumulated tax or outstanding rent, although your personal liability depends largely on the formal structure your business trades within. It is therefore important you understand your responsibilities from the outset.
When can I be held personally liable for my business debts?
| Personally liable for all business debts? | |
| Sole trader | Yes |
| Partnership (Limited Partnership) | Yes |
| Partnership (Limited Liability Partnership) | Typically limited to the total amount invested in the company only (see details below) |
| Private limited company | Not typically (see details below) |
One of the main reasons’ individuals form a private limited company is to limit liability for business debts incurred. However, there are circumstances in which directors and also partners of a Limited Liability Partnership can be held accountable for debts. Such circumstances include:
- If you’ve signed a personal guarantee
- If you’ve continued to prioritise shareholders over creditors despite knowing the company is insolvent
- If you’ve disposed of company assets, selling them below their market value
- If you’ve created an overdrawn director’s loan by overpaying yourself from company funds.
How can I protect myself against business debts?
If you are held to be personally liable for company debts, you will be responsible for their payment in the same way as personal debt, and failure to do so could result in bankruptcy proceedings, disqualification as a director, or associated legal action.
If your company is experiencing financial difficulties, we urge you to speak with a licensed Insolvency Practitioner (IP) sooner rather than later. Depending on the scale of your debt and structure of your company, an IP can implement formal procedures to help stabilise or minimise the impact on you as an individual. If it is your view, as a director, that the company cannot avoid insolvent liquidation, then you should seek advice immediately.
If you would like to speak to an IP on a non-committal basis, please do not hesitate to get in touch. We firmly believe that prevention is better than cure when it comes to debt matters, and we are here to provide candid, proactive advice when you need it the most.
