When directors are personally liable for company debts

Q: What mistakes do directors make?

Not knowing what they have guaranteed. Credit account and lease paperwork often contains a personal guarantee that no one remembers signing. Assuming resignation ends exposure. Section 212 covers anyone who "is or has been" an officer, and section 214 anyone who "is or has been" a director. The repeated insolvency notice looks back five years. Thinking a different job title protects them. Wrongful trading and the name reuse rules include shadow directors, and the National Insurance and penalty rules use a wide definition of officer that includes managers. Restarting under the old name. Successor companies with a similar name are exactly what section 216 targets. Company directors can protect the business against the cost of an HMRC check with tax investigation insurance, which pays up to £100,000 of accountant's fees with Solar Protect. Read how our cover works or get a quote.

A director is not normally liable for a limited company’s debts, because the company is a separate legal person that owes its own debts. Personal liability arises through a set of defined exceptions: debts the director has personally guaranteed, contracts signed before the company existed, court orders after insolvency for misfeasance, fraudulent or wrongful trading, breaches of the name reuse and disqualification rules, and HMRC notices that move company tax, National Insurance or penalties onto the individual.

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Why is a director not usually liable for the company’s debts?

Under section 16 of the Companies Act 2006, from the date of incorporation the members are a body corporate capable of exercising all the functions of an incorporated company. When the company signs a supply contract, takes out a loan or employs staff, the obligation is the company’s, not the director’s.

The Insolvency Service’s director information hub draws the line clearly. Company debts are debts taken on in the name of the company, such as PAYE, National Insurance contributions, Corporation Tax or VAT, supplier bills, unpaid wages and loans in the company’s name. Personal debts are those taken out in an individual’s name, such as a personal credit card or car loan, even if the money was used in the business.

Am I liable for a debt I personally guaranteed?

Yes. The Insolvency Service states that a director is responsible for any money owed by the company that the director has personally guaranteed, giving a finance agreement, overdraft or bank loan as examples. This is by far the most common route to personal liability for small company directors, and it has nothing to do with misconduct: the director simply promised to pay if the company did not.

Guarantees also appear in commercial leases, supplier credit account forms and asset finance agreements. Before resigning or selling a company, list every guarantee you have given and read its own terms on how it ends. Resigning as a director does not, by itself, cancel a promise you made personally; ask the creditor for a written release.

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Can I be liable for a contract signed before the company was formed?

Yes. Section 51 of the Companies Act 2006 says a contract that purports to be made by or on behalf of a company at a time when it has not been formed has effect, subject to any agreement to the contrary, as one made with the person acting for it, and that person is personally liable. Founders who sign leases or supply contracts while the company is still being registered are caught. The rules and how to avoid them are covered in pre incorporation contracts.

What can a liquidator recover from a director personally?

Once a company is in liquidation, the Insolvency Act 1986 gives the court several powers to order directors to contribute to the company’s assets. These are claims for the benefit of all creditors, not rights for one creditor to sue the director.

Misfeasance (section 212). Where a person who is or has been an officer has misapplied or retained company money or property, or breached a fiduciary or other duty, the court can order repayment with interest or compensation. The application can be made by the official receiver, the liquidator, a creditor or (with leave) a contributory. See misfeasance claims.
Fraudulent trading (section 213). If the business was carried on with intent to defraud creditors or for any fraudulent purpose, anyone knowingly party to it, director or not, can be ordered to contribute.
Wrongful trading (section 214). A director who knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation or insolvent administration can be ordered to contribute, unless they then took every step to minimise the potential loss to creditors. Shadow directors are included (section 214(7)). See wrongful trading and director liability.

Unlawful dividends are a related exposure: directors who authorise distributions without sufficient distributable profits can be required to restore them, as explained in unlawful dividends and director liability.

When does reusing a company name make me personally liable?

Section 216 of the Insolvency Act 1986 applies to anyone who was a director or shadow director at any time in the 12 months before a company went into insolvent liquidation. For five years from the liquidation, that person must not, without leave of the court or in prescribed circumstances, be a director of, or be concerned in the management of, a company known by a prohibited name, meaning the old company’s name or one so similar as to suggest an association with it. Breach is a criminal offence (section 216(4)).

Section 217 adds civil liability. A person involved in management in breach of section 216 is personally responsible, jointly and severally with the company, for all its debts incurred while they were involved. The same applies to anyone involved in management who acts on instructions from a person they know is in breach.

What if a disqualified person carries on running a company?

Under section 15 of the Company Directors Disqualification Act 1986, a person who is involved in the management of a company in breach of a disqualification order or undertaking, or while an undischarged bankrupt in breach of section 11, is personally responsible for the company’s debts incurred during that time, jointly and severally with the company. Anyone involved in management who acts on instructions from a person they know to be disqualified or an undischarged bankrupt is caught in the same way.

Separately, section 15A lets the court make a compensation order against a disqualified director where their conduct caused loss to creditors of an insolvent company, or of a company dissolved without becoming insolvent. The Secretary of State must apply within two years of the disqualification order or undertaking. See director disqualification.

Can HMRC make a director pay the company’s tax?

Only through specific statutory notices. Unpaid company tax is a company debt unless one of these applies.

Route	Legislation	When it applies
Personal liability notice for National Insurance	Social Security Administration Act 1992, section 121C	The company failed to pay contributions on time and the failure appears attributable to fraud or neglect by one or more officers. HMRC can apportion the debt between culpable officers according to their culpability, with interest from the date of the notice.
Joint and several liability notice: avoidance or evasion	Finance Act 2020, Schedule 13, paragraph 2	The company entered tax avoidance arrangements or engaged in tax evasive conduct, is subject to (or seriously at risk of) an insolvency procedure, and there is a serious possibility the tax will not be paid. The individual must have been responsible for, benefited from or facilitated the conduct.
Joint and several liability notice: repeated insolvency	Finance Act 2020, Schedule 13, paragraph 3	At least two old companies connected with the individual became insolvent within five years owing tax, a new company carries on a same or similar trade, and the old companies’ tax debts exceed £10,000 and 50% of their unsecured liabilities. The notice can cover the new company’s tax for five years.
Officer liability for penalties	Finance Act 2007, Schedule 24, paragraph 19; Finance Act 2008, Schedule 41, paragraph 22	A company penalty for a deliberate inaccuracy, or a deliberate failure to notify, is attributable to an officer. HMRC can make the officer pay up to 100% of the penalty, due within 30 days of the notice.

HMRC’s guidance confirms the Schedule 13 rules apply to liabilities for periods ending on or after 22 July 2020, and that “company” includes a limited liability partnership. A repeated insolvency notice must be issued within two years of HMRC first having enough facts to conclude the conditions are met. More on directors’ tax duties is in directors’ tax responsibilities.

How does this work for a typical failed company?

Illustration only. Sam is sole director of a company that goes into creditors’ voluntary liquidation owing a bank overdraft of £40,000, trade suppliers £60,000 and VAT of £25,000. Sam personally guaranteed the overdraft.

The bank can call on Sam’s guarantee and recover the £40,000 from Sam directly.
The suppliers have no direct claim against Sam. Their recovery depends on the liquidation.
The VAT stays a company debt unless HMRC can use a route in the table, for example if the VAT shortfall came from a deliberate inaccuracy attributable to Sam.
The liquidator reviews Sam’s conduct. If the company kept trading and building debt after Sam ought to have concluded insolvent liquidation was unavoidable, a wrongful trading claim is possible.
If Sam starts a new company under the same or a similar name within five years, without an exception or court leave, Sam risks both prosecution and personal liability for the new company’s debts.

What mistakes do directors make?

Not knowing what they have guaranteed. Credit account and lease paperwork often contains a personal guarantee that no one remembers signing.
Assuming resignation ends exposure. Section 212 covers anyone who “is or has been” an officer, and section 214 anyone who “is or has been” a director. The repeated insolvency notice looks back five years.
Thinking a different job title protects them. Wrongful trading and the name reuse rules include shadow directors, and the National Insurance and penalty rules use a wide definition of officer that includes managers.
Restarting under the old name. Successor companies with a similar name are exactly what section 216 targets.

Company directors can protect the business against the cost of an HMRC check with tax investigation insurance, which pays up to £100,000 of accountant’s fees with Solar Protect. Read how our cover works or get a quote.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.