Personal Liability in Business Insolvency

Personal Liability in Business Insolvency #

While company debts are usually separate from directors’ personal finances, there are cases where a director, business owner, or guarantor can be personally liable for company debts. If a company you are owed money from is insolvent, it’s crucial to understand whether an individual can be held responsible.


When Can a Director Be Personally Liable? #

Company directors are usually protected by limited liability, meaning they are not personally responsible for company debts. However, there are exceptions where a director can be held personally liable:

1. Personal Guarantees #

  • Many business loans, supplier agreements, and lease contracts require a personal guarantee from a director or another individual.
  • If the company becomes insolvent and cannot repay, the guarantor becomes personally responsible for the debt.
  • Creditors can pursue the guarantor directly for repayment.

2. Wrongful Trading (Under Insolvency Act 1986) #

  • If a director continues trading while knowing the company is insolvent, they could be personally liable for worsening creditor losses.
  • Creditors (or an insolvency practitioner) may take legal action to recover debts from the director personally.

3. Fraudulent Trading #

  • If a director deliberately misleads creditors or enters contracts knowing the company cannot pay, they may face legal action for fraudulent trading.
  • This is a criminal offense and can lead to personal financial liability, fines, or even imprisonment.

4. Misuse of Company Funds #

  • Directors who pay themselves, family members, or certain creditors unfairly before insolvency may be held personally responsible.
  • Illegal dividends, asset transfers, or preferential payments can be challenged by creditors.

5. Overdrawn Director’s Loan Account #

  • If a director has taken money from the company as a loan, they must repay it upon insolvency.
  • This debt is treated as an asset of the company, and creditors may receive part of the recovered amount.

What Can Creditors Do? #

If you are owed money and believe a director or guarantor is personally liable, here are your options:

1. Check for a Personal Guarantee #

  • If your contract included a personal guarantee, you can pursue the guarantor directly for payment.
  • If they refuse, you may need to take legal action to enforce the guarantee.

2. Contact the Insolvency Practitioner #

  • When a company enters administration or liquidation, an insolvency practitioner (IP) is appointed.
  • As a creditor, you can ask the IP to investigate director conduct to determine if personal liability applies.
  • If you suspect wrongful trading, fraud, or misused funds, you can report it to the insolvency practitioner or consider legal action.
  • Creditors can apply to court for an order requiring the director to contribute to the company’s debts.

4. Consider Bankruptcy Proceedings Against the Individual #

  • If a director or guarantor is personally liable but refuses to pay, creditors can:
    • Issue a statutory demand for payment.
    • Petition for bankruptcy if they owe over £5,000 and do not pay.
  • If the individual is declared bankrupt, creditors may receive a portion of their assets, but this depends on their financial situation.

What Happens If a Director or Guarantor Declares Bankruptcy? #

If an individual responsible for company debts declares bankruptcy, creditors need to act fast.

Key Effects of Bankruptcy for Creditors #

  • The bankrupt’s assets (property, savings, vehicles) are taken and sold to repay debts.
  • Creditors must submit a Proof of Debt to the bankruptcy trustee to claim repayment.
  • Personal guarantees may still be enforceable, depending on terms.
  • Most unsecured creditors receive only a fraction of what they are owed.
  • Bankruptcy wipes out most debts, making further recovery unlikely.

Exceptions: Debts That Are NOT Wiped Out by Bankruptcy #

Some debts cannot be written off, including:

  • Fraudulent debts (e.g., misrepresentation in loan applications).
  • Court fines and penalties.
  • Child maintenance payments.

If a director misled creditors, you may challenge their discharge from bankruptcy or report them for misconduct.


Conclusion #

If a company you are owed money from is insolvent, check whether a director, owner, or guarantor is personally liable. Personal guarantees, wrongful trading, and director misconduct can allow creditors to pursue individuals for repayment.

Key Actions for Creditors #

  • Check for personal guarantees and enforce them if possible.
  • Engage with the insolvency practitioner to investigate director conduct.
  • Consider legal action if personal liability applies.
  • Act fast if the director or guarantor attempts to declare bankruptcy.