The Benefit of Limited Liability
One of the important benefits of working through a Limited Company is Limited Liability.
This means that legally the officers and owners of the company – thats to say the Directors and Shareholders – are not normally liable for debts of the company should it fail.
Shareholders will, however, lose the paid up value of their shares, but this is normally a very nominal amount. In the case of Companies Limited by Guarantee, the Guarantors will need to pay their Guarantee amount, normally £1.
Limited Liability is a valuable protection for businesses with more complex affairs. The protection of Limited Liability means that if something unforeseen happens, and Covid was an example of this, then the personal assets of directors and shareholders is not at risk. Another example could be a serious incident, eg a fatal accident in the workplace / business premises.
We often recommend that Freehold Property and other valuable assets are held outside of a trading company so that they are ring-fenced from company debts. This could be achieved by trading through a company and owning the property either personally, via another company or via a LLP.
It should be noted Limited Liability Partnerships offer similar protection, but they are outside of the scope of this guide.
Personal Liability
There are some circumstances in which Directors and Shadow Directors (people who are not officially directors, but who give instructions) can be personally liable for company debts. These are where there are offences under the Companies Act or Insolvency Act, such as:
- Wrongful Trading
- Fraudulent Trading
- Insolvent Trading
- Phoenixing – folding a business and restarting with a similar name
Generally these offences occur when a company’s directors have continued to trade when they knew, or should have concluded, that there was no reasonable prospect that the company would avoid insolvent liquidation or insolvent administration.
If your company is insolvent – that is to say it cannot pay its debts as they fall due or meet other obligations on time, eg fulfilling orders which deposits have been taken for – then professional advice should be taken, possibly from an Accountant or Solicitor in the first instance. but ultimately from an Insolvency Practitioner. If advice is taken and company directors act responsibly then personal liability can be avoided – generally these offences target recklessness in differing degrees of culpability, along with fraudulent intent.