Director's Personal Liability When a Company Goes Wrong

At a glance

This is a general explanation. Director liability involves legal judgement; for individual situations, consult a solicitor.

What is limited liability actually protecting?

The “limited” limits a member’s liability in respect of their shares — once the capital you subscribed for is paid up, however much more the company owes, you do not have to make it up.

The company is a separate legal person: it signs its own contracts, incurs its own debts, and is sued in its own name. Creditors pursue the company, not you.

So where ordinary trading produces losses and an insolvent company has to be wound up, members and directors generally do not have to use personal assets to fill the gap. That is the design of the system — encouraging people to take the risk of going into business.

But the protection has a precondition: you have to actually run the company as a company.

Gap one: personal guarantees

This is the most common in practice, and the one people most often forget.

When a bank lends to a new or small company, it will frequently require the directors to give personal guarantees. A landlord letting premises to a company may require a director as guarantor. A supplier extending credit may want the same.

Once signed, whatever the company cannot repay, the creditor can pursue you personally — nothing to do with limited liability, because you separately promised to pay in your own name.

Two points to note:

• It may feel low-risk at signing, but a guarantee usually has no time limit and continues indefinitely
• Even after you sell your shares and resign as a director, the guarantee is not automatically released (see how partners separate)

So before signing anything, look for the words “personal guarantee”. This is one of the few risks entirely within your control.

Gap two: not discharging statutory duties

Directors have a statutory duty to ensure the company files what it has to file — the annual return, tax returns, the statutory registers.

Fail, and it is not only the company that is prosecuted — so is every responsible person. That means being charged in your own name, fined personally, and carrying a personal record. See what to do when a director receives a summons.

The distinguishing feature of this gap is that it is entirely avoidable, and cheaply — file on time and nothing happens. But many people stop all filings once the company stops trading, so the business is gone while the legal exposure keeps accumulating.

Gap three: fiduciary duties

The law requires directors to act in good faith in the best interests of the company as a whole, and to exercise reasonable care, skill and diligence.

The situations where this actually bites include:

• Using company funds for personal purposes without proper records
• Not disclosing an interest in a transaction where there is a conflict
• Making a decision knowing it will harm the company’s interests

In those situations the company (or a liquidator, or the other shareholders) can pursue the director for the loss.

There is one very practical preventive measure: keep the company’s money and your own separate. Mixing them is the easiest way to invite questions, and it is the first thing an audit or a tax enquiry looks at.

Gap four: continuing to borrow while unable to pay

This is the most serious of the four.

If the company is already unable to pay its debts and the directors keep incurring debt in the company’s name, keep trading and keep taking deposits, that may constitute fraudulent trading — the law provides for it expressly, and a director may be made personally responsible for the company’s debts, with criminal consequences as well.

Where exactly the line falls is very hard to judge for yourself. So a practical principle: the moment you begin to suspect the company cannot pay its debts, get professional advice — do not rely on “one more roll of the dice”.

Struggling on can turn “the company owes money” into “you owe money”.

How do you actually protect yourself?

Four things, all of them doable day to day:

One: look for the words “personal guarantee” before signing anything. Do not sign if you can avoid it; if you must, push for a cap or an expiry.

Two: file on time. This is the cheapest insurance there is. If you cannot get it done, delegate it — do not let it slide.

Three: separate company and personal money. Two accounts, clear records, and money taken out through proper channels (salary, dividends, a director’s current account recorded properly).

Four: get advice early when the company is in trouble. Not at the very end — by then there is very little left to choose from.

Limited liability is not everything, but it is still worth having

None of this means a limited company is pointless. On the contrary, for most ordinary trading SMEs, limited liability genuinely does protect you — provided you run the company as a company, and not as your own wallet.

Want someone keeping an eye on your statutory filings and getting company and personal money properly separated? Talk to us, or get started.

This is general information and does not constitute legal advice. Where the boundary of director and personal liability falls turns on specific facts; for individual situations — particularly litigation, liquidation or suspected insolvency — consult a solicitor immediately.