When are company directors personally liable?

Limited liability and its limits

A limited company is a separate legal person. It owns its assets, enters into its own contracts and is responsible for its own debts, so a director who acts properly on the company's behalf is not normally liable for what it owes. The Insolvency Service's guidance for directors says the same: directors are not normally personally responsible for company debts, but where a director has been responsible for the company being mismanaged they can become personally liable, for example through wrongful trading, fraudulent trading, misfeasance and compensation orders.

Personal liability usually arises in one of three ways. The director may have made a personal commitment, such as a guarantee. An office-holder may bring a claim after the company has entered liquidation or administration, based on how the director behaved beforehand. Or a public body, such as the Insolvency Service or HMRC, may use its statutory powers. These risks grow once a company is in financial difficulty, and most can be reduced by acting early.

Personal guarantees and other personal commitments

A personal guarantee is the most direct way a director becomes liable for a company's debts. Lenders, landlords, asset finance companies and suppliers offering credit often ask directors to guarantee the company's obligations. A guarantee is a separate contract between the director and the creditor, and it is not released because the company goes into liquidation or administration. If the company defaults, the creditor can usually demand payment from the guarantor, subject to the terms of the guarantee, which may cap the amount, cover all present and future debts, or make each of several guarantors liable for the whole sum.

Guarantees can be signed years before trouble starts, or be contained in the terms of a supplier's credit application. Find and read every guarantee you have given before the company takes any formal step. Check also whether you have given a personal indemnity or security over your home, or taken out a lease or loan in your own name for the business. Be aware that the company repaying a guaranteed debt ahead of other creditors, so that your guarantee is released, can be challenged as a preference, as explained below.

The Bounce Back Loan scheme let smaller businesses borrow between £2,000 and £50,000 with a government guarantee, on the condition that the money was not used for personal purposes. The Insolvency Service has said that misuse of Covid support schemes, and Bounce Back Loans in particular, makes up a high proportion of the misconduct it targets for investigation, which is covered in the section on disqualification.

Wrongful trading

If a company goes into insolvent liquidation, the liquidator can ask the court under section 214 of the Insolvency Act 1986 to order a director to contribute to the company's assets, and an administrator can do the same under section 246ZB. The claim succeeds if, at some time before the insolvency, the director knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation or insolvent administration.

The defence is that, from that time, the director took every step with a view to minimising the potential loss to creditors that they ought to have taken. Both the knowledge test and the defence are judged against a reasonably diligent person with the general knowledge, skill and experience expected of someone carrying out the director's functions, and with the knowledge, skill and experience the director actually has. The test includes functions entrusted to the director even if they did not carry them out, so a director who left the finances to someone else is not protected for that reason. The risk is greatest where a company keeps taking credit after it is clear the debts cannot be repaid, without a realistic plan and without any record that the directors considered the creditors' position.

Fraudulent trading

Under section 213 of the Insolvency Act 1986, if a company's business has been carried on with intent to defraud creditors, or for any fraudulent purpose, the court can order anyone who was knowingly a party to it to contribute to the company's assets. The claim is not limited to directors, and it requires proof of that intent and of knowing involvement. Section 246ZA gives administrators the equivalent power. Fraudulent trading is also a criminal offence under section 993 of the Companies Act 2006, carrying a maximum sentence of ten years' imprisonment on conviction on indictment.

Misfeasance and breach of duty claims

In a liquidation, section 212 of the Insolvency Act 1986 allows the liquidator, the Official Receiver or a creditor to apply to the court against a current or former officer who has misapplied or kept company money or property, or has been guilty of misfeasance or a breach of fiduciary or other duty to the company. The court can order the director to repay or restore the money or property with interest, or to pay compensation to the company. Examples include paying themselves more than was properly authorised, taking company assets, paying dividends when there were no profits available, and taking decisions that ignored the creditors' interests once the company was insolvent or close to it.

Liquidators and administrators can also sell or assign certain claims to a third party, including claims for wrongful trading, fraudulent trading, preferences and transactions at an undervalue, and the buyer can then pursue the director.

Overdrawn director's loan accounts and unlawful dividends

In many owner-managed companies, directors draw money during the year and decide later how to treat it, for example as dividends. If the company then fails, those arrangements are examined closely. Money a director has taken that was not validly paid as salary or dividends is usually recorded as a debt the director owes the company, in an overdrawn director's loan account. That debt is an asset of the company, and a liquidator or administrator will normally demand repayment and, if necessary, sue for it.

A company can lawfully pay dividends only out of profits available for distribution, which are its accumulated realised profits less its accumulated realised losses. A shareholder who knew or had reasonable grounds to believe that a dividend was unlawful is liable to repay it, and directors who authorised an unlawful dividend can face claims for breach of duty. Even a dividend that meets the accounting test can be challenged if it was paid when the company was insolvent or close to it and the directors did not consider the creditors' interests.

An overdrawn loan account also has tax consequences. GOV.UK guidance explains that where a director who is also a shareholder does not repay a loan within nine months of the end of the company's accounting period, the company may have to pay corporation tax on the outstanding amount, which can be reclaimed once the loan is repaid, and that a loan which is written off, including when the company goes into liquidation, is taxed as the director's income.

Preferences and transactions at an undervalue

When a company enters liquidation or administration, the office-holder can ask the court to reverse certain transactions made before the insolvency and to restore the position to what it would have been. Directors are often involved, either because they benefited directly or because they are connected with the person who did.

A preference is anything the company does that puts a creditor, or a guarantor of the company's debts, in a better position than they would otherwise have in an insolvent liquidation, where the company was influenced by a desire to produce that result. The look-back period is six months before the onset of insolvency, or two years where the person preferred is connected with the company, which includes its directors and their relatives. For a connected person the desire to prefer is presumed unless the contrary is shown. Repaying a director's own loan to the company, paying off an overdraft the director has guaranteed, or paying a supplier owned by a director's family ahead of other creditors can all be preferences.

A transaction at an undervalue is a gift, or a transaction in which the company receives significantly less in value than it provides, entered into in the two years before the onset of insolvency. Selling a vehicle or equipment to a director below market value, or transferring the business to a new company for too little, can fall into this category. The court will not reverse a transaction entered into in good faith for the purpose of carrying on the business, where there were reasonable grounds for believing it would benefit the company. For both preferences and transactions at an undervalue, the company must have been unable to pay its debts at the time or have become unable to pay them as a result, and for a transaction at an undervalue with a connected person that is presumed.

Separately, where an asset is transferred for significantly less than its value for the purpose of putting it beyond the reach of creditors or prejudicing their claims, section 423 of the Insolvency Act 1986 allows the court to reverse the transaction and protect the victims. That section is not tied to the look-back periods that apply to preferences and transactions at an undervalue.

Director disqualification, including Bounce Back Loan misuse

When a company enters liquidation or administration, the office-holder must send the Secretary of State, in practice the Insolvency Service, a report on the conduct of each person who was a director on the insolvency date or in the three years before it. If a director's conduct makes them unfit to be concerned in the management of a company, the court must disqualify them for between two and fifteen years, and the Secretary of State can accept a disqualification undertaking instead of applying to court. The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 extended these powers to directors of companies that were dissolved without going through an insolvency procedure.

Disqualification has direct financial consequences. The Secretary of State can apply, within two years of the disqualification, for a compensation order against a disqualified director whose conduct caused loss to the creditors of the company. A person who acts as a director while disqualified commits a criminal offence and becomes personally liable, jointly with the company, for the company's debts incurred while they were involved in its management.

Bounce Back Loans feature in many of these investigations. The Insolvency Service's fact sheet on the loans says they must be repaid, that a company may be investigated if the money is not repaid even if it has been dissolved, and that misconduct can include providing false information on the loan application, using the loan for personal benefit and dissolving the company to avoid repaying it. It says the consequences can include the company being wound up by the court, the director being disqualified and a court order for the director to pay compensation to creditors. Overstating turnover on the application appears in several of the cases the Insolvency Service has described.

HMRC's routes to directors personally

HMRC has statutory powers that can make a director personally responsible for tax or penalties the company owes. The most significant are joint and several liability notices under Schedule 13 to the Finance Act 2020. HMRC's guidance explains that they apply only to liabilities for periods ending, or events occurring, on or after 22 July 2020. An authorised HMRC officer can give a notice where the company is subject to an insolvency procedure, or there is a serious possibility that it will be, in three types of case.

• Tax avoidance and tax evasion. Where the company entered into tax avoidance arrangements or engaged in tax-evasive conduct, an individual who was responsible for it, or knowingly benefited from it, while a director, shadow director or participator can be made jointly and severally liable for the tax.
• Repeated insolvency and non-payment. Where an individual has been connected with at least two companies that entered an insolvency procedure within five years with tax unpaid, those companies' tax debts are more than £10,000 and more than 50% of their debts to unsecured creditors, and the individual is connected with a new company carrying on a similar trade, they can be made jointly and severally liable for the new company's tax, including tax arising over the next five years while the notice has effect.
• Penalties for facilitating avoidance or evasion. Where a company has been charged, or faces proceedings for, certain penalties for promoting or enabling tax avoidance or evasion, anyone who was a director, shadow director or participator at the time of the conduct can be made liable for the penalty.

A notice offers the individual a review, which must usually be accepted within 30 days, and there is a right of appeal to the First-tier Tribunal. HMRC has other powers too. Where a company fails to pay National Insurance contributions and the failure appears to be due to fraud or neglect by one or more of its officers, HMRC can serve a personal liability notice on those officers. Where a company is liable to a penalty for a deliberate inaccuracy that was attributable to an officer, HMRC can require the officer to pay part or all of the penalty.

What a director should do early

Most of the claims described here turn on what the director did, and what the records show they did, in the months before the company failed. First, get an accurate picture of the company's finances and of your own position: up-to-date management accounts and a cash-flow forecast for the company, and a list of every guarantee, indemnity and loan account balance for you. Second, take advice from a licensed insolvency practitioner on the company's options while there is still time to use them, and separate legal advice on your personal exposure, because an insolvency practitioner advises the company and, once appointed as office-holder, acts in the interests of its creditors. Third, hold board meetings and minute the information considered, the advice received and the reasons for each decision, including any decision to keep trading. Fourth, stop taking credit the company may not be able to repay, do not pay yourself, connected businesses or guaranteed creditors ahead of others, and do not move assets or dissolve the company to escape its debts. Finally, keep the company's records and cooperate with any office-holder, as the law requires.

If a claim has already been made, such as a liquidator's letter demanding repayment of a loan account or alleging wrongful trading, or a letter from the Insolvency Service about disqualification, take advice before you reply and keep to any deadline. There may be defences, set-offs or a basis for settlement, and a negotiated settlement or disqualification undertaking can sometimes avoid contested court proceedings. We advise directors facing these claims, including directors referred by insolvency practitioners and turnaround advisers for independent advice on their own position, and we agree the scope and cost of our work in writing before we start.

Frequently asked questions

Can a director be personally liable for a limited company's debts?

Not normally, because a limited company is responsible for its own debts. A director can become personally liable if they have given a personal guarantee, if a court orders them to contribute to the company's assets or pay compensation after an insolvency for wrongful trading, fraudulent trading or misfeasance, if they are disqualified and ordered to compensate creditors, if they act while disqualified, or if HMRC issues a notice making them liable for certain company tax or penalties.

What is the difference between wrongful trading and fraudulent trading?

Wrongful trading does not require dishonesty. It applies where a director knew or ought to have concluded that the company could not avoid insolvent liquidation or administration and did not then take every step to minimise creditors' losses. Fraudulent trading requires proof that the company's business was carried on with intent to defraud creditors, or for a fraudulent purpose, and applies to anyone knowingly party to it. Both can lead to an order to contribute to the company's assets, and fraudulent trading is also a criminal offence.

Will a liquidator make me repay my overdrawn director's loan account?

Usually, yes. An overdrawn director's loan account is a debt owed to the company, so a liquidator or administrator will normally demand repayment for the benefit of creditors and can sue if it is not paid. Directors sometimes argue that the money was salary or dividends, but that depends on whether the payments were properly authorised and, for dividends, whether there were profits available for distribution. Take advice before responding, because there may be a basis for set-off or settlement.

Can I be disqualified for misusing a Bounce Back Loan?

Yes. The Insolvency Service says that misconduct in the use of a Bounce Back Loan, such as giving false information on the application, using the money for personal benefit or dissolving the company to avoid repaying it, can lead to the director being disqualified, the company being wound up and an order to compensate creditors. Directors of dissolved companies can also be investigated. Disqualification lasts between two and fifteen years, and acting as a director while disqualified is a criminal offence.

What is an HMRC joint and several liability notice?

It is a notice under Schedule 13 to the Finance Act 2020 that makes an individual, such as a director, personally liable together with the company for certain amounts the company owes HMRC. It can be given where the company is subject to an insolvency procedure, or there is a serious possibility that it will be, in cases of tax avoidance or evasion, repeated insolvency and non-payment, or penalties for facilitating avoidance or evasion. The individual can ask for a review and appeal to the First-tier Tribunal.

Does a personal guarantee end when the company goes into liquidation?

No. A personal guarantee is a separate contract between you and the creditor, so the company's liquidation or administration does not release you. The creditor can usually call on the guarantee for the amount it covers, depending on its terms. Paying off a guaranteed debt ahead of other creditors shortly before the insolvency can be challenged as a preference, so take advice before the company makes any such payment.

Can I be personally liable if I start a new company with a similar name?

Yes, in some cases. If you were a director of a company at any time in the twelve months before it went into insolvent liquidation, you cannot for five years be involved with another company or business using the same name, or one so similar as to suggest an association, unless the court gives permission or a prescribed exception applies. Breaching this is a criminal offence and makes you personally liable for the debts incurred while you were involved in managing the new business.

Sources & further reading

• legislation.gov.uk — Insolvency Act 1986, section 214: wrongful trading
• legislation.gov.uk — Insolvency Act 1986, section 212: summary remedy against delinquent directors
• legislation.gov.uk — Insolvency Act 1986, section 239: preferences
• legislation.gov.uk — Company Directors Disqualification Act 1986, section 15: personal liability
• The Insolvency Service — Fact sheet: Bounce Back loans
• HM Revenue & Customs — Overview of joint and several liability notices
• legislation.gov.uk — Finance Act 2020, Schedule 13: joint and several liability of company directors
• The Insolvency Service — Director information hub: director duties upon insolvency

This article is general information, not legal advice. The law changes and depends on your circumstances — always take advice on your specific situation before acting. Last reviewed 17 September 2026. Buzz Solicitors is a trading name of AD Solicitors Limited, a recognised body regulated by the SRA (no. 8011228).