Could I lose my house...?

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Definition: Limited Liability: condition under which the losses that owners (shareholders) of a business firm may incur are limited to the amount of capital invested by them in the business and do not extend to their personal assets.

How could I lose my house?

The protection of limited liability means that during a liquidation, any personal assets such as a house will be protected. But there are some circumstances during a liquidation that could force a director’s hand to sell their property.

7 General Areas of Responsibilities of Directors

1.  Duty to act within powers
2.  Duty to promote the company
3.  Duty to promote the success of the company
4.  Duty to exercise independent judgment
5.  Duty to exercise reasonable care, skill and diligence
6.  Duty to avoid conflicts of interest
7.  Duty to declare interest in proposed transaction or arrangement

Personal guarantees

These are normally the biggest problems for Directors.
If the company is new or has a poor credit record or without assets, it will often find it hard to raise finance.

Providers of finance normally ask the directors to sign a personal guarantee, this is a form of security.  The guarantees are often joint and several, so each director can be liable for part or the whole of the debt.  Often, without these guarantees, the company is unable to secure finance.

In the future if the company finds it is insolvent and in need of liquidation and the loans cannot be repaid by the process of liquidation, then the creditors in question can call on the personal guarantee in order to get repaid.  It is the liquidators responsibility to raise as much funds as possible from any of the companies debtors, including directors.

Directors loan account

It’s common for directors to have a director’s loan account, often these are in credit and the company owes the director.  But sometimes the director owes the company.

The Directors Loan Account (DLA) is an account that the director can use to take money out of the company as a loan, as well as loaning money back to the company. Either transaction has to be repaid at some point and accounted for just like any other loan.

If a company enters liquidation whilst the director has an overdrawn director’s loan account ie. owing money into the company, then a personal property could be sold in order to refund the overdrawn account.  This is an extremely hard and long process but it can be a remedy sought by a liquidator to seek monies from the directors.

Wrongful or fraudulent trading

During a liquidation procedure, the insolvency practitioner investigates the conduct of the directors.

If the liquidator finds that the director is guilty of wrongful trading and have deliberately been adding debt to the company, or other misconduct such as removing assets from the company, giving preferential treatment to one creditor over another, they could be in breach of the insolvency act and potentially become personally liable for the company’s debt.

HMRC does have the power to make limited company directors personally liable for unpaid taxes where evidence shows the failure to make payments was deliberate or the result of neglect or fraud.