Corporate · 4 min read · 17 August 2026

When directors become personally liable for company debts

Short answer: limited liability protects you until specific conduct removes the protection, and directors usually discover the exceptions after the fact. See also why the paperwork matters.

Wrongful trading

If you continue trading past the point where there was no reasonable prospect of avoiding insolvent liquidation, a court can order you to contribute personally. The defence is that you took every step to minimise loss to creditors, which is a documentary defence: board minutes, professional advice taken, decisions recorded.

Unlawful dividends

A dividend paid without sufficient distributable reserves is unlawful and repayable. This is the most common finding in small company insolvencies, and it usually stems from paying dividends monthly as if they were salary without checking the accounts.

Overdrawn director loan accounts

Money drawn beyond salary and lawful dividends is a debt owed to the company, recoverable by a liquidator, and it carries its own tax consequences under section 455 while outstanding.

Personal guarantees and misfeasance

Guarantees are the deliberate route to personal exposure, covered in this guide. Misfeasance is the involuntary one: breach of the statutory duties in sections 171 to 177, from taking a benefit to failing to declare an interest.

What protects you

Recorded decisions, taken with advice, at the time. A director who can show the board considered creditors, took professional input and minuted the reasoning is in a completely different position from one relying on memory.

Common questions