If your limited company is struggling financially, one of the first things you’ll worry about is the potential impact on your personal finances and whether you could lose your home if it fails. The good news is that, although there are certain circumstances when your home could be at risk, in reality, it’s very rare.
Here we discuss the likely impact if your limited company fails and outline the few exceptions that could leave you personally liable for company debts. Even then, you’d still need to be forced into personal bankruptcy or have a charging order issued on your property for your home to be at risk.
When you incorporate a company, it becomes an independent legal and financial entity. As a company director, your personal finances and the business’s finances are separate, and any debts it has are its own. You do stand to lose some money if your limited company fails, but your loss will be limited to the value of your shares and any other money you’ve put into the business. This is called limited liability.
The situation is very different if you run a sole proprietorship or general partnership. The finances of the business and its owners are one and the same. Subsequently, if the business racks up significant debts it cannot repay, the owners are liable. In some cases, that could put personal assets, including your home, at risk.
If your limited company has debts it cannot pay when they are due, it is insolvent. At that point, you must contact a licensed Insolvency Practitioner. They will assess the company’s financial position and explore whether they can save it. If the business is no longer financially viable, you can liquidate it voluntarily via a Creditors’ Voluntary Liquidation or wait for your creditors to force it into Compulsory Liquidation.
A liquidator will be appointed to wind up the company’s affairs. They will sell the company’s assets and use the proceeds to repay its creditors as far as possible. They must repay the creditors in a strict hierarchy, and any debts the liquidator cannot pay in full will be written off. That means some creditors may receive some or even none of the money they are owed.
As the business and its owners are separate entities, the creditors who are left out of pocket cannot take action against the owners to recover the money and the debt dies with the company.
If you wind up your company via insolvent liquidation, certain scenarios could lead to you becoming personally liable for some or all of its debts. And if you cannot afford to pay those debts, your home could be at risk.
If you’re struggling to obtain finance for the company, you might agree to sign a personal guarantee. That allows the lender to pursue you personally for repayment if the company defaults. If you cannot afford to pay the outstanding amount, the lender can take legal action against you, apply for a charging order on your property and even force the sale of your home to recover the debt.
A director’s loan account allows company directors to lend or borrow money from the business. The director's loan account becomes overdrawn when you borrow money from the company. Ordinarily, that’s not a problem. However, if the company enters insolvent liquidation, the liquidator will expect you to repay the loan for the benefit of the company’s creditors. They can take legal action against you to force the repayment, potentially leading to bankruptcy and the repossession of your home.
It’s not unusual for a company to enter insolvent liquidation with outstanding debts to HMRC. While some tax debts can be written off during the liquidation process, National Insurance Contributions (NICs) are a different matter. If you have unpaid NICs for your employees, HMRC can issue a Personal Liability Notice to recover the debt. If you cannot pay what you owe, you could be made bankrupt which will put your house at risk.
As part of the liquidation process, the liquidator will investigate your conduct as a director in the period leading up to and during the insolvency. If they find you carried on trading once you knew the business was insolvent and accrued more debt (known as wrongful trading), or engaged in fraudulent trading such as hiding or removing assets, you could be made personally liable for company debts. Large contributions could lead to bankruptcy proceedings and you may be forced to sell your home.
The likelihood of losing your home when your business fails is very slim, but there are some steps you can take to reduce those risks further.
You should always pay close attention to your company’s financial position, but particularly when it’s struggling. If your company cannot pay its debts when they’re due or its liabilities outweigh its assets, it’s technically insolvent. At that point, you should contact a licensed Insolvency Practitioner (IP) like the team at UK Liquidators immediately.
Your legal responsibilities as a company director change when your business is insolvent. An IP will ensure you understand the rules and advise you on the steps you must take to protect your creditors’ interests. They will also discuss your options for navigating issues such as personal guarantees and overdrawn director’s loan accounts that could lead to personal liability.
If you’re worried that company liquidation could put your home at risk, please contact our experts for a free consultation. We will discuss your situation, assess your business and explain the likely implications of liquidation in your specific circumstances. If you prefer, you can also arrange a meeting at one of our 100+ offices throughout the UK.
If you are considering liquidation for your limited company, taking advice from a licensed insolvency practitioner can help you understand your options.
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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.
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