Jason Elliott at Bolton Insolvency Experts explains why sometimes business cashflow problems can affect you personally. Sole traders and individual members of a partnership are personally responsible for business debts, but if you own a limited company then the limited liability status of your company means that any business debts are limited to the company and not the directors personally. This means that as a director your personal finances should not be affected. However, although this sounds quite straightforward there are exceptions which you should be aware of.
If you have signed personal guarantees, for example on a business loan or property lease, and the business is unable to meet the agreed payment terms, then as a guarantor you will be personally responsible. If you fail to meet the payment schedule, then the creditor, whether it’s the landlord or the bank, will pursue you personally for the debt. You should look at all your agreements to see precisely what your situation is.
Trading whilst insolvent
A company is classed as insolvent if it’s unable to pay its debts as they fall due or when its liabilities exceed its assets. If you believe that your company is insolvent and you continue to trade, adding to the company debt, then as a director, you can become personally liable for that debt. In these circumstances, if a director incurs further debt whilst knowing that the company has no chance of recovering and paying that debt back then this can be classed as wrongful trading. If a company director is found guilty of wrongful trading, even though they have been acting through the company, they can become personally liable for any losses suffered as a result and they may also have to pay damages. Likewise, if a misfeasance claim is brought against the company, where the directors have knowingly acted in an inappropriate way and another party suffers as a result, then again directors can become personally liable.
Overdrawn directors’ loan account
Having an overdrawn directors’ loan account when a company goes into liquidation also means that the directors will be personally liable for repaying that loan. The insolvency practitioner handling the liquidation can demand repayment of the loan as it is their duty to act in the interest of company creditors. They can even take legal action against directors to force them to pay, which could lead to bankruptcy if they are not able to pay. If your company is in financial distress and you are worried about the impact this could have on you personally, contact our team at Bolton Insolvency Experts now on 0300 303 8284 or via our contact us page.