Can Directors Be Personally Liable For Limited Company?
Posted on 29th December 2020 at 12:28
The directors are responsible for the affairs of the company and act as its managers. A company is a legal entity; therefore there is no personal liability of a company director who is acting on behalf of the company. This is one of the main reasons, to limit the director’s liabilities in a company for company debts, people usually form a private limited company or a Limited Liability Partnership (LLP). The directors have a fiduciary relationship with the company as well as its stakeholders. Nevertheless, a director can be held personally liable if he/she acts beyond their power.
These director's liabilities in a limited company do not only include being held financially accountable for the debt but in certain cases, there can also be criminal responsibility, if the actions of a director are believed to be deceitful or corrupt.
The director's liabilities in a limited company are usually of a personal nature where a company becomes insolvent. As the company goes into liquidation or some other insolvency process, directors are concerned whether they could be held responsible for the losses which only really applies if the directors have given their personal guarantees in any contracts.
When are directors liable for the debt in a limited company?
The most common director’s liabilities in a limited company usually comes as a personal guarantee. If a director has signed a personal guarantee, they will be accountable for the debt if the business cannot meet its responsibilities. The Director will have personal accountability in all the circumstances where he performs against the interest of the company. If his actions are malevolent and immoral and it is ascertained that his actions are dishonest, he will be liable.
If directors have permitted the company to trade knowing that it was bankrupt or the directors were not able to perform their duties, they can be accountable for some company debts.
Also, in relation to income tax the directors may have a personal liability to meet if the limited company fails to pay.
What happens if the director is found liable for company debt?
If a director is established to be liable for company debts, then he/she will be accountable for the repayment. Where they are not in a position to pay back the debts they might have to sell their personal assets. If that is not an option then the director may have to file for bankruptcy, which in many cases might be the best solution to deal with the problem.
In certain cases, if it is found that a director is liable because he/she did not fulfill their duties correctly as a director, they may be barred from being a director for up to 15 years.
Share this post: