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Am I liable for company debts during insolvent liquidation?

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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.

Liability for company debts in liquidation

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?

When are you liable for the debts of your insolvent business?

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:

Wrongful trading

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.

Antecedent transactions

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.  

Fraud

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.

Personal guarantees

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.

How to avoid becoming liable for company debts during liquidation

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.

Can you claim director redundancy during insolvent liquidation?

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, 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.

Jonathan Munnery
Partner

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