Last Updated on January 24, 2025 by admin
Many entrepreneurs form a limited company since it is a separate legal entity that offers limited liability to the owners, directors, and shareholders. Unlike sole traders, directors of a limited company will not be liable for the company’s debts.
But who is liable for debts in a limited company? This guide will highlight everything you need to know about company debts, who is liable, and what happens in case of insolvency.
What is limited liability protection?
Limited liability protection is a legal protection offered to limited company structure meaning business owners’ personal assets are not held liable in case of company debts or financial losses. This means that all the assets a company will acquire will be held liable in case of debts or insolvency.
Limited liability protection applies to all stakeholders, whether they have 1% or 50% of the company shares. Shareholders are only liable for the amount of money they have invested in a limited company. This means shareholders’ personal assets will not be at risk if the company becomes insolvent and owes more money than it can repay.
However, limited liability does not protect shareholders and directors from potential liabilities if they commit unlawful acts. Shareholders and directors could be held personally liable for their fraudulent or wrongful acts. If shareholders or directors provide personal securities for the company’s debt, they will be held personally liable by creditors.
But how does limited liability protection work? The legal protection makes it easier for investors and partners to collaborate with a limited company since creditors cannot claim their assets. If investors acquire equity in a company that is not protected by limited liability, creditors and stakeholders can claim their investments with that of the company making them lose a lot of money than the company has.
Assets deemed to be owned by the company i.e. machines, investments, equipment, and real estate, will be used to pay company debts and are subject to seizure in case of liquidation.
Who is liable for debts in a limited company?
The company:
Since limited companies offer limited liability to the stakeholders, directors, and owners, who then is liable to company debts? The company is liable for its debts since it is a legal entity on its own. It can purchase assets that are subject to seizure in case of debts or insolvency.
The director:
Directors are also liable for company debts if they have borrowed money from the company. During insolvency or creditors seizing company assets, an overdrawn director’s loan account will be seen as an asset if it exceeds £10,000 and must be repaid.
Directors can also be held liable for the company’s debts if during liquidation they sell company assets undervalued. If creditors find out that the company sold the company’s assets undervalued, the director will be held liable for the remaining debt.
Directors will also be personally liable for the company’s debts if they signed personal guarantees when the company was acquiring a loan. With the personal guarantee, directors will be held responsible if the company fails to repay the loan. The director’s assets will be personally liable and are subject to seizure in case of insolvency.
Another way a director can be held personally liable for the company’s debts is if the loan was acquired fraudulently. If the director or the company took a loan fraudulently or for unlawful reasons, the director will be held personally liable. The director can face legal repercussions.
As much as a director can be held liable for the company’s debt, it is not automatic. There are specific legal requirements that should be met before a director can be held personally liable for a company’s debts. However, directors must understand their responsibilities and potential liabilities to avoid any legal and financial repercussions.
Shareholders:
There are circumstances where a shareholder will be held personally liable for company debts such as;
- If the shareholder has given a personal guarantee to the company’s loan
- If they have acted fraudulently with the company’s funds
How can directors and shareholders protect themselves from limited company debts?
As much as directors and shareholders of a limited company are protected with limited liability, the protection doesn’t protect them from potential liabilities. To avoid being liable for the company’s debts, directors and shareholders should ensure;
To run the company legally and responsibly
Directors and shareholders have roles and responsibilities to the limited company. Directors have a role to ensure they act in the company’s best interest whereas, shareholders have the responsibility of attending company meetings and voting on important decisions.
Avoid personal guarantee on company’s loan
Shareholders and directors should avoid personally guaranteeing the company’s loans or giving their securities because when the company defaults on the loan, their personal assets will be seized by creditors and used to pay the loan.
Dissolve the company if it is not trading
If the company has stopped trading, directors should dissolve the company so that it stops incurring debts. This will minimise all the company’s assets from being seized by creditors.
Avoid trading fraudulently
When a company takes a loan, it should be willing to pay. Getting into debt fraudulently without the intention of paying the loan can make directors and shareholders face legal repercussions.
Understand legal obligations
Directors can mitigate the risk of their personal liability by understanding their legal obligations. Company rules are highlighted in the Articles of Association. They are also responsible for filing statutory records, paying Corporation Tax, keeping company records, and reporting company changes.
Who is liable for debts in a limited company? The company is liable for its debts since it is a separate legal entity. A separate legal entity means that it offers limited liability to the company owners, directors, and shareholders. Their personal assets can’t be used to pay the company’s debts in case of default or insolvency. A limited company can own assets, take a loan and pay its debts.
Want to dissolve your business? Contact BusinAssist who will help you with the company closure from the start to the end. Closing down a company can be tricky since there are legal processes one has to follow from dissolution application to the actual closure of the company. We communicate with Companies House on your behalf in regard to the closure of the company and make sure it is listed in the First & Final Gazette.
For more information about company dissolution in any aspect, contact us at [email protected].
FAQs
Q: Can I sell my limited company with debt?
Ans: Yes, you can sell your limited company with debts. However, selling an insolvent company doesn’t remove the company’s debts.
Q: Who is liable for limited company debts?
Ans: A limited company is liable for its own debts, however, there are circumstances where directors and shareholders can be held liable. That is if they have given a personal guarantee on the company’s loan, took the loan fraudulently, or have an overdrawn director’s loan account.
Q: Are directors liable for debt in a limited company?
Ans: Directors are not liable for the debt in a limited company since they are protected by limited liability. However, they can be liable for the company’s debts under certain circumstances.
Q: Can you close a limited company with debt?
Ans: Yes, you can close a limited company with debts. However, it is essential to adhere to legal regulations should there be any allegations of fraudulent activity in the dissolution process.
Q: What happens if a limited company cannot pay its debts?
Ans: If a limited company cannot pay its debts, it can wind up its trading activities. The company can be dissolved.
Q: Are shareholders liable for limited company debts?
Ans: No, shareholders are not liable for limited company debts. A limited company is a separate legal entity that offers a limited liability to shareholders protecting their personal assets.
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