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What is limited liability?
Limited liability means that when a business fails the personal belongings of its owners are protected. It encourages entrepreneurship which is a good thing for the economy.
To benefit from this protection, company directors have legal responsibilities including keeping proper accounting records and filing accounts and confirmation statements at Companies House.
Company directors must also exercise reasonable care, skill and diligence and avoid conflicts of interest. The obligations apply to those who act as if they are a director and not just those who have been legally appointed.
When a company becomes insolvent certain conduct by a director may mean that the privilege of limited liability is lost. In these circumstances, the personal belongings of directors (and those acting as directors) may be at risk.
How can you tell if a company is insolvent?
It can sometimes be difficult to tell whether a company is insolvent. Some signs of insolvency are:
- having creditors issuing reminder letters and starting legal action
- accounts being placed on stop or pro forma
- liabilities being greater than assets
- HMRC arrears
What is wrongful trading?
When a company is insolvent the director must put the interests of the creditors ahead of their own.
A director may claim that they did not know that their company was insolvent, but they will lose the limited liability if they ought to have known. If a director continues to trade whilst insolvent it can mean that they are personally liable for the debts of the company. This is called wrongful trading.
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