This is definitely one of the most frequently asked questions from people wanting to set up a company, as well as from those wanting to enter into partnerships or supplier agreements with others.
The answer actually depends on the type of company involved. It is also the case that there are several exceptions to the general rule that directors are not personally liable for a company’s debt.
Company types and rules around liability
PLCs are often referred to as ‘public companies’ and are able to sell shares to the public to raise funds. PLCs must have a minimum of two directors as well as a company secretary. The liability of a PLC is limited to the value of its reserves, and company directors are not personally liable.
A private company limited by guarantee has no share capital and has members rather than shareholders. These must have at least one director and one member (which can be the same person). The liability is limited to an agreed amount that each member must pay if the company is wound up.
Private companies limited by shares are the most common type of company in the UK. As with PLCs, the amount for which shareholders are liable is limited to the value of the company’s reserves, and directors are not personally liable. There is no minimum capital requirement which means that many can be started with a very small initial investment.
Private unlimited companies are quite rare. This is mostly because there is no upper limit to the amount that the members have to pay if the company is wound up. These companies do not have to submit annual accounts which means that they do not have to disclose their financial status. They must have at least one director and one member (can be the same person). Directors have the same (unlimited) liability as other members.
Directors guarantee
A directors guarantee is a legal document that makes the director personally liable for the company’s debts. Therefore, before entering into a personal guarantee of this kind, legal advice should always be sought from a specialist such as https://www.samconveyancing.co.uk/news/conveyancing/directors-guarantee-the-risks-of-personal-guarantees-by-directors-9999.
Exceptions to the general rule
The main exceptions to the general rule and the instances when directors can become personally liable are centred around negligence, dishonest conduct, and what is referred to as “wrongful trading”.
Additionally, if a director signs a directors guarantee, they are accepting personal liability for the company’s debts. This is sometimes done as part of supplier agreements.
