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Are Directors Liable For The Debts Of The Business?

The quick answer

There are three answers to the question of whether directors are liable for the debts of the business:

  1. Limited companies have directors and they are not normally liable for the company debts unless they have specifically guaranteed them, for example, a bank may have asked for a personal guarantee.
  2. Partnerships have partners. If the partnership was registered as an LLP then the partners are not liable unless they have separately guaranteed the debt.
  3. If it is just a normal partnership (so not an LLP) then the partners are liable for all the business debts.

In more detail

Limited Companies

The word ‘limited’ in limited company describes the fact that company liabilities are restricted to the company itself and not the owners or directors personally. So, if the limited company fails and goes into liquidation, like it or not, the directors can just walk away.

There are some exceptions and these include when the directors have guaranteed debts or are taken to court for wrongful or fraudulent trading.

Partnerships

If the partnership is just a normal (and not a Limited Liability Partnership) then if the business fails, the creditors can also claim against the partner’s personal assets.

The alternative is an LLP. This creates a partnership but the liabilities are limited to a claim on the partnership assets only.

An LLP has to be registered at Companies House. You can easily check here.

The advantage to an LLP is the limited liability but the disadvantage is that you have to file accounts at Companies House. The tax rates are the same on an LLP  as compared to a partnership.

tip

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David Kirk

Licensed Insolvency Practitioner