If your limited company enters insolvent liquidation, under normal circumstances you’re protected from personal liability for company debts. The ‘veil of separation’ is part of the limited company structure, and legally separates you as a director from the affairs of your business.
There are circumstances in which you can become liable for company debts during insolvent liquidation, however, and it’s worth knowing when this can happen and how it might affect you.
But what happens to company debts in a ‘typical’ scenario?
When a company enters liquidation, any assets it owns are sold by the liquidator to generate funds for creditors. Once all creditors have been repaid as far as funds allow, any remaining debts are written off.
Unsecured creditors often receive a poor deal from an insolvent liquidation mainly because, as a group, they’re placed at the bottom of the statutory hierarchy for repayment. So in which circumstances can you become personally liable for some or all of your company’s debts?
There are various scenarios that could result in personal liability for directors during insolvent liquidation, generally centred on misconduct or some form of wrongdoing in office.
This could range from unknowingly placing creditors at greater risk of loss by continuing to trade, to making deliberate attempts to defraud or avoid repayment. Here are just a few examples:
Directors often believe they can improve their company’s financial position by continuing to trade, even when they’re insolvent. In reality, however, this can lead to creditors suffering further losses.
This is called wrongful trading, and it means you’ve failed to place the interests of your creditors first, which is a legal obligation when your company has slipped into insolvency. In this case, you and other directors could become personally liable for these additional losses.
These are transactions that have negatively affected the company’s financial situation. Examples include making preferential payments - repaying a particular lender in favour of another, for example - maybe repaying a loan with a personal guarantee attached. Selling assets at undervalue is another example of an antecedent transaction that could result in personal liability following reversal by a liquidator.
Deliberately defrauding creditors is a serious offence and can result in personal liability for company debts, disqualification as a director, and in the most serious cases, a prison sentence.
If you’ve provided a personal guarantee for company borrowing and the company enters insolvency, the lender is likely to call in the guarantee. This makes you personally liable for the sum agreed, which may be the full outstanding amount.
The lender can enforce this debt by pursuing you through the courts, making you bankrupt, and using the asset on which the guarantee is secured to recover their money. Clearly, this has serious implications if that asset is your home.
One of the most important aspects of insolvency is prioritising creditor interests over your own, and those of your company. You need to show that you’ve protected creditors from further losses by ceasing trade and seeking professional help. If the business is beyond rescue, it will need to be liquidated.
It’s worth knowing that Creditors’ Voluntary Liquidation (CVL) is a better option than compulsory liquidation, even though it attracts professional fees. You may be wondering how you could afford the fees for a CVL when your business is in such dire financial straits, but you may be able to pay for it by claiming director redundancy.
If you’ve worked for the company as an employee for two years or more, fulfilled a practical role, and taken a regular salary via PAYE, you could be eligible to claim redundancy pay as a director.
With the average director redundancy claim being around £9,000 in the UK, this money could cover the costs of a CVL and protect you from becoming liable for company debts. By acting quickly and stopping trade, and then entering into a CVL if necessary, you can avoid allegations of misconduct or wrongful trading.
For more information on this or any other liquidation issue, please contact one of our partner-led team at UK Liquidators. We have over 25 years’ experience of liquidation, and can provide the reliable professional advice you need. With an extensive network of offices nationwide, we can arrange a free same-day consultation to quickly assess your best options.
If you are considering liquidation for your limited company, taking advice from a licensed insolvency practitioner can help you understand your options.
Take our 60 second test and find out
If you are considering liquidation for your company, taking expert advice at an early stage is crucial. At UK Liquidators, our team of licensed insolvency practitioners are committed to providing limited company directors with the help and advice they need to make an informed decision.
Looking for immediate support?
Complete the below to get in touch