Limited liability holds in most insolvencies: the company’s debts are the company’s. There are specific, well-defined exceptions, and directors usually worry about the wrong ones. This page sets out what they actually are. It is general information, not advice about your position — if any of it looks close to home, that is a reason to speak to a practice, not to a website.
A limited company is a separate legal person. Its debts are its own, and the insolvency of a company does not make its directors liable for what it owes. That principle survives liquidation intact in the great majority of cases.
What follows are the exceptions. They are narrower than director anxiety usually assumes, but they are real, and two of them — personal guarantees and overdrawn loan accounts — are extremely common in small companies.
This is the most common route to personal liability and the least legally interesting: you signed something. Banks, landlords, finance companies and some trade suppliers routinely require a director’s personal guarantee, and when the company fails the guarantee is called.
A guarantee is a contract you entered into voluntarily, so there is no insolvency defence to it. What can be done is practical: find every guarantee before appointing anyone, because which route the company takes can affect when and how guarantees are called, and a practice cannot advise around a guarantee it does not know exists. Directors frequently forget one.
If you have drawn money from the company beyond your salary, dividends and legitimate expenses, the balance is a debt you owe the company. In a liquidation it becomes an asset the liquidator is obliged to collect, and they will pursue it.
This surprises directors constantly, particularly where drawings were taken as anticipated dividends that the company’s profits later could not support. A dividend paid out of insufficient reserves is unlawful and can be recharacterised as a loan. The practical point: establish the loan account position early, because it is often the single largest personal exposure in a small-company liquidation, and it is one the liquidator has a statutory duty to chase rather than a discretion to overlook.
Wrongful trading, under section 214 of the Insolvency Act 1986, applies where a director knew, or ought reasonably to have concluded, that there was no reasonable prospect of the company avoiding insolvent liquidation, and did not then take every step to minimise loss to creditors. A court can order that director to contribute personally to the company’s assets.
The test is objective as well as subjective: “I did not realise” is not a defence if a reasonably diligent director in that role would have realised. The defence that does work is taking proper advice at the point things became doubtful and acting on it, which is the concrete reason early contact with a practice reduces personal risk rather than merely feeling responsible.
Fraudulent trading, under section 213, is a separate and much rarer matter requiring actual intent to defraud. It carries criminal as well as civil consequences.
A liquidator can apply to have certain transactions unwound. A preference is where the company put a particular creditor in a better position than they would otherwise have been in, at a time when it was insolvent, because it wanted to — repaying a director’s loan, or a debt personally guaranteed by a director, ahead of other creditors is the classic example. A transaction at an undervalue is where the company sold or transferred an asset for significantly less than it was worth.
The look-back period is longer where the other party is connected to the company: two years rather than six months for preferences. Selling company assets cheaply to a friend or a new company shortly before liquidation is the single most reliably investigated thing a director can do.
Every liquidator must investigate the conduct of the directors and report to the Insolvency Service. Where conduct is found to make a person unfit to be involved in the management of a company, the Secretary of State can seek a disqualification order or accept an undertaking, for between two and fifteen years.
Common grounds include continuing to trade while knowingly insolvent, failing to keep proper accounting records, failing to file returns, and using company money for personal purposes. The reporting is routine and happens in every case; disqualification is not. But the report is written from the records, which is a practical argument for keeping them.
Three things, in order of effect. Take advice early — the wrongful trading test turns on what you did once you knew or ought to have known, and taking advice is the clearest evidence of taking steps. Keep records — board minutes recording why decisions were made, and proper accounting records, are what a conduct report is written from. Stop making it worse — taking new credit, or paying selected creditors, after the point of no reasonable prospect is what turns a difficult insolvency into a personal one.
You can find a practice in the directory and contact it directly. Initial conversations are normally free, and having one is not a commitment to anything.
Am I personally liable if my company is liquidated?
Usually not. A limited company’s debts are its own. The main exceptions are personal guarantees you signed, an overdrawn director’s loan account, wrongful trading, and transactions the liquidator can unwind such as preferences and sales at an undervalue.
What happens to an overdrawn director's loan account in liquidation?
It becomes an asset of the company that the liquidator has a duty to recover, and they will pursue you for it personally. This is one of the most common sources of personal liability in small-company liquidations, and it often arises from dividends taken when profits could not support them.
What is wrongful trading?
Continuing to trade after the point where a director knew, or ought reasonably to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation, without taking every step to minimise loss to creditors. A court can order the director to contribute personally to the company’s assets.
Can I be a director again after my company is liquidated?
Generally yes, unless you are disqualified. There are restrictions on reusing the insolvent company’s name or a similar one under section 216 of the Insolvency Act 1986, and breaching them is both a criminal offence and a route to personal liability for the new company’s debts.
Does taking early advice actually reduce personal risk?
Yes, and specifically so. The wrongful trading test asks what a director did once they knew or ought to have known the position. Taking and acting on professional advice at that point is the clearest available evidence of taking steps to minimise creditor loss.