Many business owners worry that if their company fails they will personally be made bankrupt. This concern often arises when creditors begin pursuing unpaid debts or when directors realise that the business cannot continue trading.
In England and Wales, the answer depends on how the business was structured and whether the individual has personal liability for the debts.
If the business operated as a limited company, the company is usually responsible for its own debts. However, there are situations where creditors may still pursue an individual personally.
Are company debts normally personal debts?
In most cases, no.
A limited company is treated as a separate legal entity. This means the company’s debts belong to the company itself rather than the individuals who run it.
If the company becomes insolvent, creditors normally claim against the company’s assets rather than the personal assets of its directors or shareholders.
This principle of limited liability is one of the key protections offered by operating through a company.
When can business debts become personal debts?
Personal liability can arise in several situations.
One of the most common examples is where a director or business owner has signed a personal guarantee in relation to a company loan, lease or credit facility. If the company cannot repay the debt, the creditor may pursue the guarantor personally.
Personal liability may also arise if a person has been trading as a sole trader rather than through a limited company. In that situation, business debts are already personal debts.
In some circumstances tax authorities or other regulators may also pursue individuals personally if specific legal powers apply.
Can a creditor make me bankrupt?
If a creditor is owed money personally and the debt remains unpaid, they may take legal action to recover it.
This process often begins with a statutory demand. A statutory demand is a formal request for payment which gives the debtor a limited period to settle the debt or challenge it.
If the debt is not resolved, the creditor may present a bankruptcy petition to the court. If the court is satisfied that the debt is valid and unpaid, it may make a bankruptcy order.
Bankruptcy is a serious step and can have significant financial consequences, including restrictions on acting as a company director.
What happens if someone is made bankrupt?
When a bankruptcy order is made, a trustee in bankruptcy is appointed to deal with the debtor’s financial affairs.
The trustee’s role is to gather and realise assets in order to repay creditors as far as possible. This may involve reviewing bank accounts, investments and property owned by the bankrupt individual.
In some cases a person’s interest in their home may also be considered as part of the bankruptcy estate.
Bankruptcy also places restrictions on certain financial activities and on acting as a company director during the period of bankruptcy.
Taking advice early
The possibility of personal bankruptcy can be extremely worrying for business owners, particularly when a company is already under financial pressure.
However, early advice can often clarify whether personal liability genuinely exists and what options may be available to resolve the situation.
Understanding the legal structure of the business, the nature of the debts and any guarantees that have been given is usually the starting point when assessing the risk of bankruptcy.
