A limited company is a separate legal person, so its directors are generally not personally liable for its debts. But that protection has real limits, and directors who get it wrong, especially as a company heads towards insolvency, can end up personally liable. Here is a plain-English guide for England and Wales.
The general rule: no personal liability
Because the company is separate from the people who run it, directors are not normally responsible for the company's debts. Creditors look to the company. But the exceptions below are important, and common.
When directors CAN be personally liable
1. Personal guarantees
The most frequent route. If a director has given a personal guarantee (for a bank loan, lease or supplier credit), they are personally liable under it if the company defaults, regardless of limited liability.
2. Wrongful trading (Insolvency Act 1986, s 214)
If a director continues trading when they knew, or ought to have known, there was no reasonable prospect of avoiding insolvent liquidation, and they fail to take every step to minimise losses to creditors, a court can order them to contribute to the company's assets. This is a key reason to take advice early when a company is in financial difficulty.
3. Fraudulent trading
Carrying on business with intent to defraud creditors can make directors personally liable in civil proceedings under Insolvency Act 1986, s 213 (in liquidation) or s 246ZA (in administration). Separately, fraudulent trading may also constitute a criminal offence under Companies Act 2006, s 993.
4. Misfeasance and breach of duty (s 212)
Directors who breach their statutory duties (Companies Act 2006, ss 171–177) or misapply company money/property can be ordered to compensate the company, duties that, as insolvency approaches, shift towards protecting creditors' interests.
5. Unlawful dividends and preferences/transactions at undervalue
- Paying dividends without sufficient distributable profits can require directors to repay them.
- Preferences (favouring one creditor) and transactions at an undervalue before insolvency can be challenged by an office-holder and set aside or lead to restoration orders against the recipient. Directors are not personally liable merely because such a transaction occurred; personal exposure usually requires a separate basis such as breach of duty or misfeasance.
6. Specific statutory and tax liabilities
Directors can face personal liability under specific provisions, for example certain unpaid taxes (HMRC personal liability notices in some cases) and other statutory duties.
7. Personal wrongdoing
A director personally committing a fraud or tort can be liable for it.
Disqualification (a related risk)
Quite apart from financial liability, directors of failed companies whose conduct was unfit can be disqualified from acting as a director (Company Directors Disqualification Act 1986) for up to 15 years.
How directors can protect themselves
- Be cautious with personal guarantees, negotiate caps and take advice.
- Monitor solvency closely; if the company is in difficulty, take professional (insolvency) advice immediately and act to minimise creditor losses.
- Keep proper records, hold board meetings, and document decisions.
- Only pay dividends out of genuine distributable profits.
- Comply with directors' duties and avoid preferring connected creditors near insolvency.
Key takeaways
- Directors are usually not personally liable for company debts, but key exceptions apply.
- The main routes to personal liability are personal guarantees and, near insolvency: wrongful trading (s 214), fraudulent trading (civil: IA 1986 s 213; criminal: CA 2006 s 993), misfeasance/breach of duty (s 212), and unlawful dividends. Preferences and transactions at an undervalue are company transactions that can be challenged and set aside; they do not of themselves impose personal liability on directors; exposure requires a separate basis such as breach of duty.
- Directors can also face disqualification (CDDA 1986) and certain tax liabilities.
- Take insolvency advice early, watch solvency, keep records, and be careful with guarantees and dividends.
Sources
- Companies Act 2006 (directors' duties, ss 171–177; rules on distributions/dividends)
- Insolvency Act 1986: s 212 (misfeasance), s 213 (fraudulent trading), s 214 (wrongful trading), ss 238–239 (transactions at undervalue and preferences)
- Company Directors Disqualification Act 1986; general law on personal guarantees and personal wrongdoing
--- This article is general information about the law of England & Wales as at 2026, not legal advice. If your company is in financial difficulty, take qualified insolvency advice promptly.