Pre-insolvency advice Company Liquidation: Are Directors Responsible for Company Debts?

Company liquidation involves the dissolution of a business and the sale of its assets to pay creditors. This process can be voluntary or creditors can force a company into liquidation. Regardless of the motivation, the process has serious ramifications for directors personal liability.

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Company Liquidation: Are Directors Responsible for Company Debts?

If your company is entering into liquidation it is unlikely that you will be personally liable for the company’s debts. However, there are a few key issues that could give you a nasty surprise in the event of your company’s liquidation. These are identified below, and if these debts are not paid, you could be personally liable for these debts, therefore putting your personal assets at risk.

If your company is likely to enter or is already in liquidation, you could be at risk if you:

  1. Signed a personal guarantee
  2. Have an overdrawn director’s loan account
  3. Have traded wrongfully

Personal Guarantees

Creditors often require a personal guarantee as security for business loans. This is security and lenders will use this to recover money owed, just like any other security e.g. Property or assets

Am I Liable?

Insolvency usually means that any previous repayment agreements become null and void. This means the guarantor(s) are liable for the full value of the liability.

All guarantors are liable and creditors can request repayment at any time. If you do not have the cash reserves to satisfy the creditor’s demand this will result in serious repercussions.

In this case, the creditor can issue a statutory demand and make you bankrupt. This could result in the repossession of your personal assets including your home and other businesses.

Overdrawn Director’s Loan Account

A director’s loan account (DLA) is a record of transactions between directors and the business. If a director takes more money out of the company than they put back in, the loan account becomes ‘overdrawn’.

Am I Liable?

During liquidation, an Insolvency Practitioner will attempt to recover money on behalf of creditors. As a result, your overdrawn DLA becomes a company asset, and you, as a director, are liable.

Companies often write off Director’s loan accounts in end-of-year accounts. However, if the liquidator finds that this contributed to the failure of the company, they can reinstate these debts.

If you are unable to repay the loan, you may have to follow a formal insolvency route such as bankruptcy.

Wrongful Trading

When your business enters insolvency, your responsibility shifts from the needs of shareholders to those of creditors. If a director has knowingly continued to trade during insolvency, they can become liable for some or all company debts.

Am I Liable?

Although it can be hard to define, if you have not followed the correct procedure the ‘corporate veil’ can be lifted. Essentially, this means the protection offered by a limited company is removed. If you have received a CBILS/BBLS loan you are likely to come under greater scrutiny.

If this is the case, you can be made liable for all of your business’ debt, regardless of personal guarantees. Again, if you cannot pay these debts, you could be opening yourself up to formal insolvency proceedings.

How can we help?

Your liquidator works to recover debts on behalf of creditors. You and your business are always our priority at Bell & Company.

Our expert team have been successfully assisting with company liquidations for over a decade. We can provide the specialist advice required to manage your situation.

Call us today on 0330 159 5820 or email [email protected] to speak to a member of our team.

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