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.
3. Make a Legal Claim #
- 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.