Generally, a company’s financial troubles stay confined within that company. A key benefit of starting a limited company is that it provides limited liability protection, separating your company’s finances from your own.
While limited liability covers most situations, there can be exceptions to this rule where your company’s debts can affect your personal finances. How can this happen, and what can you do to resolve the issue before it has longer-lasting consequences?
When does limited liability protection not apply?
Your company becomes insolvent when it can no longer afford to pay its debts as and when they fall due. Should this happen, in most cases, the company’s limited liability protection shields your personal finances from the effects of insolvency.
However, you may find your creditors could bypass this protection if the following applies:
You’ve signed personal guarantees
- In securing funding or supplies, you may have had to sign personal guarantees to lenders, suppliers, or landlords. These are an added layer of security should your company be unable to repay the guaranteed amount. Failing to stay within the guarantee’s terms means it will crystallise. Personal guarantees can be especially problematic if your company becomes insolvent, bypassing the company’s limited liability protection and leaving you personally liable for the debts.
If you’ve acted outside of the company’s best interests
- If your company becomes insolvent and the only viable solution is to liquidate, the insolvency practitioner (IP) will investigate your conduct as director in the time leading up to and during the company’s financial issues. As a director, you should always act in the best interest of your company and its creditors.
You may have acted outside of those best interests if you’ve committed the following: -
- Continuing to trade despite knowing that the company was insolvent, potentially worsening the deficit and the company’s position with its creditors.
- Attempted to defraud customers and suppliers.
These could see your limited liability protection bypassed and make you personally liable for your company’s debts, which means you could be disqualified from being a director.
How to deal with your company’s insolvency
Regardless of whether you have personally guaranteed anything, if your company is insolvent, you should contact an IP. These licensed and regulated professionals can advise you on the best way to manage and deal with your company’s debts and carry out the process best suited to your company based on its situation, including its volume of debts and what you want for its future.
Depending on your company’s situation, the IP may suggest one of the following options:
- Repaying a portion of the company’s debts through a Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement is a formal repayment plan, allowing your company to repay a portion of its unsecured debts in a single, consolidated payment on a monthly basis and at a rate tailored to what you can afford. One of a CVA’s most attractive elements is that it allows the company to continue trading while it repays its debts, retaining its standing in the market and goodwill with customers. That said, a CVA is usually only suitable if the company has a viable business model which could be profitable were it not for its unaffordable debts. - Restructuring the company through administration
If the company has deeper-rooted issues, more substantial restructuring may be required to return it to a profitable state. Administration involves an IP looking into the company and making the necessary changes to return it to a profitable state. Administration may be viable if the company could be rescued as a going concern, or if it would achieve a better result for the company’s creditors. - Closing the company through a Creditors Voluntary Liquidation (CVL)
In some situations, the company would be better off closing, drawing a line under its debts and allowing you, as director, to move on and start afresh. A CVL is a formal closure process, and upon its completion, the insolvent company ceases to exist, with its unsecured debts written off.
Summary
While limited liability protection usually keeps a company’s finances separate from those of its directors, it can be bypassed in certain situations. Signing personal guarantees which then crystallise and acting outside of the company’s best interests in the time leading up to and during it becoming insolvent could leave you personally liable for your company’s debts, potentially bypassing the limited liability protection. Should this happen, contact a licensed and regulated insolvency practitioner (IP) who can advise you of the best way forward for your company.
I’m Laura Wilson, a passionate blogger and content creator with a deep interest in business, finance, and entrepreneurship. I’ve had the opportunity to write for several premium blogs, sharing insights & practical advice for individuals & small businesses. I’m the founder and publisher of ukbusinessmag.co.uk, where I focus on creating valuable, easy-to-understand content to help UK startups & SMEs grow.
