Liability for Business Debt

Contents

Overview

It's important for business owners to carefully consider the risks and benefits of different business structures and to seek professional advice if they are unsure about their personal liability for business debts.


Limited liability companies provide some protection for business owners by limiting their personal liability for the debts and liabilities of the business. However, directors can be held personally liable if found guilty of wrongful trading and or fraudulent trading.


Partnership or sole traders are personally responsible for the debts and liabilities of the business, and their personal assets may be at risk if the business is unable to pay.

Types of Business Debt Liability

The liability of business owners for debts depends on the type of business structure.




If your business is facing financial difficulties and is unable to pay its debts, it may be necessary to take legal advice to explore the options available to you, including insolvency procedures such as a company voluntary arrangement or a winding-up petition.

Personal Guarantees

A personal guarantee is a commitment by an individual to repay a debt if the borrower (usually a company) is unable to repay the debt. Personal guarantees are often required by lenders when a company is seeking finance, especially if the company has a limited trading history or is considered to be a higher risk.

Here is a simple guide to personal guarantees.

It is important to note that personal guarantees can have serious financial consequences, and it is important to fully understand the terms of the guarantee and the extent of the liability before agreeing to provide one. If a company is unable to repay a loan, the individual providing the guarantee may be liable to repay the debt, and their personal assets may be at risk.

Wrongful Trading

Wrongful trading applies to directors only and is covered in section 172(3) of the companies act 2006.


Wrongful trading is a type of director misconduct. It refers to a situation where a director of a company continues to trade even though they knew, or ought to have known, that there was no reasonable prospect of the company avoiding insolvent liquidation. 


This means that the director continued to trade even though they knew or should have known that the company was likely to become insolvent. A director may face personal liability for any losses that have occurred because of the continued trading past the point of insolvency. 


If it is found that a director allowed the company to trade while insolvent, they can be held personally liable for any losses incurred by the company's creditors as a result. This liability can be in the form of unlimited fines, compensation orders, or even disqualification from acting as a director in the future.

Insolvent Trading

Insolvent trading refers to a situation where a company continues to trade even though it is unable to pay its debts as they fall due. Sole traders and partnerships can be found accountable for insolvent trading but they are already personally liable for business debts and may be subject to a bankruptcy restriction order instead.


This can occur when your business is in financial distress and is struggling to meet its obligations, but continues to trade in the hope of improving its financial situation.


Even if a director believed that the company would recover, this does not necessarily relieve them of their duty to act in the best interests of your company and its creditors. The courts will consider all the circumstances of the case, including the director's knowledge and expertise, in determining whether they have acted appropriately.

Fraudulent Trading

Fraudulent trading is a type of criminal offence in the UK that involves the deliberate and deceitful carrying on of business with the intention of defrauding creditors or other third parties. The key elements of fraudulent trading are dishonesty and a deliberate intention to deceive.


Companies Act 2006: Under the Companies Act 2006, if a director is found to have been involved in fraudulent trading, they may be subject to criminal penalties, including a fine or imprisonment. They may also be disqualified from acting as a director for a specified period of time.


Prosecution: In order for a prosecution for fraudulent trading to be successful, it must be established that the director knew that the company was trading in a manner that was likely to defraud its creditors or other third parties. It is not sufficient to simply prove that the company was trading while insolvent.


It is important to note that fraudulent trading is a serious offence, and any director who is concerned that they may have engaged in fraudulent trading should seek legal advice as soon as possible.

Statute Barred Debt

A statute-barred debt is a debt that is too old to be legally enforced. This means that the creditor cannot take legal action to recover the debt.

Here is a simple guide to statute-barred debts:

It is important to note that the rules regarding statute-barred debts can be complex, and it is important to fully understand the terms of the limitation period before making any decisions about the debt. If a debt is statute-barred, the creditor cannot take legal action to recover the debt, but the debt may still appear on the debtor's credit file.

Challenge a Statute Barred Business Debt

If you believe that a debt is statute-barred, you can challenge it by taking the following steps:

It is important to note that the process of challenging a statute-barred debt can be complex, and it is advisable to seek professional advice if you are unsure about your rights or if the creditor is refusing to accept that the debt is statute-barred.