Liability for Business Debt

Types of Business Debt Liability

The liability of business owners for debts depends on the type of business structure.

1. Sole traders: In the case of a sole trader, the owner is personally liable for all the debts of the business. This means that their personal assets, such as their home, can be used to repay the debts if the business is unable to do so.

2. Partnerships: In a partnership, all partners are personally liable for the debts of the partnership. This means that each partner's personal assets can be used to repay the debts if the partnership is unable to do so.

3. Limited companies: In the case of a limited company, the liability of the owners (known as shareholders) is limited to the amount they have invested in the company. This means that their personal assets are generally protected, and they are only liable for the debts of the company to the extent of their shareholdings.
   
   

4. Limited liability partnerships (LLPs): In the case of an LLP, the liability of the owners (known as members) is limited to the amount they have invested in the company. This means that their personal assets are generally protected, and they are only liable for the debts of the company to the extent of their membership.
   
   

5. Personal Guarantee: Directors of a limited company or members of an LLP may be held personally liable for the debts of the company if they have provided personal guarantees.
   
   

6. Fraud or negligence: Directors of a limited company or members of an LLP may be held personally liable for the debts of the company if they have acted fraudulently or negligently.

7.  Statute Barred: A statute-barred debt is a debt that is too old to be legally enforced. This means that the creditor cannot take legal action to recover the debt but may still chase your company for the debt.
   
   

If your business is facing financial difficulties and is unable to pay its debts, it may be necessary to take legal advice to explore the options available to you, including insolvency procedures such as a company voluntary arrangement or a winding-up petition.

Personal Guarantees

A personal guarantee is a commitment by an individual to repay a debt if the borrower (usually a company) is unable to repay the debt. Personal guarantees are often required by lenders when a company is seeking finance, especially if the company has a limited trading history or is considered to be a higher risk.

Here is a simple guide to personal guarantees.

1. Understanding the commitment: A personal guarantee is a legally binding commitment and can have serious financial consequences for the individual providing the guarantee. It is important to fully understand the terms of the guarantee and the extent of the liability before agreeing to provide one.
   
   

2. Consideration of alternatives: Before agreeing to provide a personal guarantee, it may be worth exploring alternative sources of finance, such as secured lending, or negotiating with the lender to reduce the extent of the liability.
   
   

3. Reviewing the loan agreement: The terms of the personal guarantee should be clearly set out in the loan agreement. It is important to review this agreement carefully and seek professional advice if necessary.
   
   

4. Limiting the liability: If possible, it may be worth negotiating with the lender to limit the extent of the liability under the personal guarantee. This could include a cap on the amount of the guarantee or a time limit for the guarantee to remain in place.
   
   

5. Keeping records: It is important to keep records of all communications with the lender and to have a clear understanding of the terms of the personal guarantee.
   
   

6. Seeking professional advice: If in doubt, it is advisable to seek professional advice from a solicitor or insolvency practitioner.
   
   

It is important to note that personal guarantees can have serious financial consequences, and it is important to fully understand the terms of the guarantee and the extent of the liability before agreeing to provide one. If a company is unable to repay a loan, the individual providing the guarantee may be liable to repay the debt, and their personal assets may be at risk.

Wrongful Trading

Wrongful trading applies to directors only and is covered in section 172(3) of the companies act 2006.

Wrongful trading is a type of director misconduct. It refers to a situation where a director of a company continues to trade even though they knew, or ought to have known, that there was no reasonable prospect of the company avoiding insolvent liquidation. 

This means that the director continued to trade even though they knew or should have known that the company was likely to become insolvent. A director may face personal liability for any losses that have occurred because of the continued trading past the point of insolvency. 

If it is found that a director allowed the company to trade while insolvent, they can be held personally liable for any losses incurred by the company's creditors as a result. This liability can be in the form of unlimited fines, compensation orders, or even disqualification from acting as a director in the future.

Insolvent Trading

Insolvent trading refers to a situation where a company continues to trade even though it is unable to pay its debts as they fall due. Sole traders and partnerships can be found accountable for insolvent trading but they are already personally liable for business debts and may be subject to a bankruptcy restriction order instead.

This can occur when your business is in financial distress and is struggling to meet its obligations, but continues to trade in the hope of improving its financial situation.

Even if a director believed that the company would recover, this does not necessarily relieve them of their duty to act in the best interests of your company and its creditors. The courts will consider all the circumstances of the case, including the director's knowledge and expertise, in determining whether they have acted appropriately.

Fraudulent Trading

Fraudulent trading is a type of criminal offence in the UK that involves the deliberate and deceitful carrying on of business with the intention of defrauding creditors or other third parties. The key elements of fraudulent trading are dishonesty and a deliberate intention to deceive.

Companies Act 2006: Under the Companies Act 2006, if a director is found to have been involved in fraudulent trading, they may be subject to criminal penalties, including a fine or imprisonment. They may also be disqualified from acting as a director for a specified period of time.

Prosecution: In order for a prosecution for fraudulent trading to be successful, it must be established that the director knew that the company was trading in a manner that was likely to defraud its creditors or other third parties. It is not sufficient to simply prove that the company was trading while insolvent.

It is important to note that fraudulent trading is a serious offence, and any director who is concerned that they may have engaged in fraudulent trading should seek legal advice as soon as possible.

Statute Barred Debt

A statute-barred debt is a debt that is too old to be legally enforced. This means that the creditor cannot take legal action to recover the debt.

Here is a simple guide to statute-barred debts:

1. Understanding the limitation period: The limitation period for a debt is the amount of time that a creditor has to take legal action to recover the debt. In the UK, the limitation period for most types of debt is six years.
   
   

2. Commencement of the limitation period: The limitation period begins from the date that the debtor last made a payment or acknowledged the debt in writing.
   
   

3. Suspension of the limitation period: The limitation period can be suspended in certain circumstances, such as if the debtor enters into a repayment agreement with the creditor or if the debtor makes a payment towards the debt.
   
   

4. Re-starting the limitation period: If the limitation period has expired, it cannot be re-started unless the debtor acknowledges the debt in writing or makes a payment towards the debt.
   
   

5. Debt collectors: Even if a debt is statute-barred, debt collectors may still try to recover the debt by contacting the debtor and requesting payment.
   
   

6. Statute-barred debts and credit files: Statute-barred debts may still appear on a debtor's credit file and may have a negative impact on their credit score.
   
   

7. Seeking professional advice: If in doubt, it is advisable to seek professional advice from a solicitor or financial advisor.
   
   

It is important to note that the rules regarding statute-barred debts can be complex, and it is important to fully understand the terms of the limitation period before making any decisions about the debt. If a debt is statute-barred, the creditor cannot take legal action to recover the debt, but the debt may still appear on the debtor's credit file.

Challenge a Statute Barred Business Debt

If you believe that a debt is statute-barred, you can challenge it by taking the following steps:

1. Review the limitation period: Check the date that the limitation period began and calculate whether the six-year limitation period has expired.
   
   

2. Gather evidence: Collect any evidence that you have regarding the debt, such as letters or statements from the creditor, payment records, and correspondence with the debt collector.
   
   

3. Write to the creditor: Write a letter to the creditor explaining that you believe the debt is statute-barred and enclosing any relevant evidence.
   
   

4. Negotiate a resolution: If the creditor agrees that the debt is statute-barred, they may agree to write off the debt or to enter into a repayment agreement.
   
   

5. Seek legal advice: If the creditor does not agree that the debt is statute-barred, or if you are unsure about your rights, it may be advisable to seek legal advice from a solicitor.
   
   

6. Consider court action: In some cases, it may be necessary to take court action to challenge a statute-barred debt. This should only be done with the advice of a legal professional.
   
   

It is important to note that the process of challenging a statute-barred debt can be complex, and it is advisable to seek professional advice if you are unsure about your rights or if the creditor is refusing to accept that the debt is statute-barred.