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Are Directors and Shareholders Liable for Company Debt?

Directors and shareholders are not usually liable for any debts of the company that are in excess of the nominal value of their shares, or the sum of any personal guarantees they have given. This is because companies that are limited by shares are a separate legal entity and are therefore responsible for their own debts and actions.

In this same sense, directors and shareholders enjoy limited liability for the actions and debts of the company, which is one of the main benefits of having this set-up.

What is the liability of company directors?

If a company is in financial difficulty and becomes insolvent, or is sued by a third party, directors and shareholders are not normally held personally liable beyond their own investment or personal guarantees. However, there are exceptions to this rule.

Whether or not they are also shareholders, directors can be held personally liable for debts and/or liabilities in the company if they:

  • pay dividends to shareholders when the company is insolvent
  • continue to trade while having no intention of repaying company debts
  • take payments from customers while knowing that goods and/or services cannot be delivered
  • attempt to pay debt through fraudulent means
  • undervalue company assets and sell them
  • make preferential payments to some creditors but not others
  • engage in fraudulent trading 
  • have an overdrawn directors loan account
  • are negligent in their actions
  • knowingly permit the company to act unlawfully.

Directors have a statutory duty to act lawfully and in good faith, in the best interests of the company and its shareholders. They are also expected to take every reasonable step to minimise financial loss to company creditors. If they knowingly allow a company to act unlawfully or improperly, this is in a direct contravention of these duties.

What is the liability of company shareholders?

The liability of shareholders is limited to the “nominal value” of the shares they hold. Typically, this value is set at just £1, therefore minimising the personal financial liability of shareholders if the company can’t pay its own debts.

Example 1

  • The company has 1 shareholder
  • The company issues 1 share with a value of £1
  • Total liability of the shareholder: £1

Example 2

  • The company has 1 shareholder
  • The company issues 10 shares with a value of £1 per share
  • Total liability of the shareholder: £10

Example 3

  • The company has 2 shareholders
  • The company issues 10 shares with a value of £1 per share
  • Each shareholder has 5 shares
  • Total liability of each shareholder: £5

Example 4

  • A company has 10 shareholders
  • The company issues 100 shares with a value of £1 per share
  • Each shareholder has 10 shares
  • Total liability of each shareholder: £10

Most of the time, shareholders pay for their shares immediately. This means that the shareholders will have no further liability to the company.

However, it is possible for shares to be taken unpaid, or partly paid. If this happens, the shareholders are obligated to pay the outstanding nominal value of their shares when the company “calls up” (demands) the unpaid share capital.

This usually happens if the company becomes insolvent or is wound up. However, sometimes shareholders are simply given more time to pay for their shares if immediate payment is a barrier to investment.

Shareholders are only personally liable for company debts above the value of their shares if:

  • they provide personal guarantees on loans, leases or other contractual agreements on behalf of the company
  • they are also directors of the company and engage in certain actions that constitute an offence

It is common for a shareholder to also be a director of the company, especially if the company is set up and operated by just one or two people. While this can be a benefit, it is important to bear in mind that setting up a limited company is not a blanket protection from certain debts and liabilities.

Are there any consequences of being liable for company debt?

There can be significant consequences if you are found liable for company debt, or if there are legal claims against you.

Directors can end up facing personal bankruptcy as well as facing legal action brought against them by third parties. This is on top of being disqualified as a director for a period of up to 15 years. In serious cases, you can even face imprisonment and criminal convictions.

Such consequences can be avoided if you are acting lawfully and responsibly at all times.

Can company debt be written off?

A company may be able to enter into a Creditors’ Voluntary Agreement (CVA), which is a legally binding agreement for payment of all, or part of, a company’s debts over a defined period. Once the CVA payments have been paid within the agreed time frame, the remaining debt will be written off.

If a company becomes insolvent and cannot continue trading, the directors may be able to arrange a Creditors’ Voluntary Liquidation (<a href=”/blog/should-i-be-scared-of-liquidation”>CVL</a>). This will result in the company being wound up (closed), its assets being sold and the proceeds of these sales being used to pay for the liquidation process and to settle any company debt. Any remaining debt is then written off.

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