A liability in the business world refers to a debt owed by a company and this can take the form of a loan or an invoice, unpaid rent, invoices and hire purchase agreements which have not been paid. One of the main advantages of forming and running a limited company is the limited liability factor. This is essentially a cloak of protection which surrounds the company and the individual directors. If the company falls into debt and cannot repay any money owed, then the directors cannot be held responsible.
When do directors become liable for business debts?
However, there are times when directors will be liable if the company racks up money owed, despite a firm’s debts technically belonging to the firm. If you’ve signed a personal guarantee, knowing the company is insolvent, and you’ve continued to prioritise shareholders over creditors, this is a red flag.
Often directors will give a guarantee to obtain a loan and they will be solely liable for repayment if the company cannot find the cash. A company director can sometimes be held accountable for a debt under section 75 of the Pensions Act 1995, on the ending of a pension scheme, where they have been served with a contribution notice by the Pensions Regulator.
A company director can take advantage of positive tax rates on dividends. However if a company begins to mount up debt, and the director continues their withdrawal of dividends, then the tax rate rises. Not enough tax will have been paid, so this will result in the director owing money to HMRC. A director will also be liable for debt if they use fraudulent activity in any shape or form. This includes receiving finance through submitting wrong information, or accepting payment for goods which will never be delivered.
A director’s guarantee ensures the director is liable
If directors are found to be liable for a firm’s debts then they will have to pay the sum of money, similar to having accrued a personal debt. Of course there is a directors guarantee which ensures that the director will be liable for any company debt. A directors guarantee is a win-win situation, but prior to signing a guarantee, it’s essential that directors are fully aware of all their roles and obligations, especially as there are some important points that have to be considered.
According to the government the Insolvency Service will be given powers to probe directors of companies that have been dissolved. This will close a legal loophole and act as a deterrent against abusing the dissolution process.
Expert advice of course should be sought prior to signing any documents as running and operating a business involves huge financial responsibility.