Am I personally liable for business debts after closing a company?

Shaun Barton

Shaun Barton | Company Closure Expert

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Am I personally liable for business debts after closing a company?

When you set up a limited company in the UK, in most circumstances you’re protected from personal liability for the debts of your business. This contrasts with a sole trader business structure where the individual is fully liable.

This legal separation between your finances and those of your company is sometimes called the ‘veil of incorporation.’ It makes running a limited company an attractive proposition, but it’s crucial to know under what circumstances this ‘veil’ can be removed.

Personal liability and company closure

When a company closes down in a solvent position – all of its debts can be repaid and its asset value exceeds its liabilities – the business’s assets are distributed or sold to the directors and shareholders.

If its financial position is borderline, however, the difference between solvency and insolvency can be small. Contingent liabilities, such as an employee’s claim for unfair dismissal, can create a significant liability that changes the company’s position and introduces risk for the directors.

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Personal liability and insolvent liquidation

During the insolvent liquidation process, Creditors’ Voluntary Liquidation (CVL), an investigation takes place into how the business declined to the point of insolvency. In some circumstances, you could be held personally liable for your business’s debts. These circumstances include:

Wrongful trading

Some directors continue to run their company even when they know it’s insolvent in the mistaken belief that they can trade their way out of financial difficulty. The problem is that if creditors suffer unnecessary financial loss because of this, you can be accused of wrongful trading. As a result, you may become personally liable for the debts that occurred from the point of insolvency.

Fraudulent behaviour

If fraud is uncovered when the appointed insolvency practitioner closes your company, you’re likely to be held responsible for the business’s debts as well as facing disqualification as a director, and potentially a prison sentence.

Running an overdrawn director’s loan account (DLA)

When the business is financially healthy, running an overdrawn director’s loan account is unlikely to cause a problem. If a company declines and directors owe money to the business that must be repaid straight away, personal liability may become an issue.

Personal guarantees

When you provide a personal guarantee to a commercial lender it means you agree to repay the loan in full if the company can no longer afford to repay. The lender has the power to pursue you through the courts for repayment and you may be forced into personal bankruptcy as a result.

Need to speak to someone?

With multiple offices across the UK and a vastly experienced team of business closure experts, you are never far away from the advice you need. Our Licensed insolvency practitioners provide free consultations to all directors and shareholders, and can quickly ascertain which closure method is best for your business.

We are licensed by recognised professional bodies and have helped thousands of directors over many years. Contact us today for your free company closure consultation.

Personal liability and company dissolution

Failing to inform creditors

If you close your solvent company via voluntary dissolution you must inform all creditors of your intentions. Failing to do so could lead to personal liability if a creditor makes a claim after the business has closed.

Personal liability is a serious issue, even when businesses are incorporated. Company Closure are experts in this area and can provide more information – please get in touch to arrange a same-day consultation free of charge.

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