What a company director is personally liable for

Almost everyone who forms a limited company is told the same reassuring thing: the company is a separate legal person, so if it goes wrong, you lose what you put in and no more. That is broadly true, and it is the entire point of the structure. What nobody explains is the list of exceptions — the specific circumstances in which a UK director stops being protected and starts being personally on the hook.

None of them are obscure. Most of them are things ordinary, well-meaning owners of small companies do without realising there is a line to cross.

What limited liability actually means

The protection is on the company's debts. If the company owes a supplier £30,000 and cannot pay, the supplier's claim is against the company, and if the company has nothing, the supplier gets nothing. Your house is not part of that conversation.

The protection is not on your own conduct. Where you personally promised something, took money you were not entitled to, or carried on trading past a point where you should have stopped, the claim is against you as an individual, and limited liability has nothing to say about it. That distinction — company debts versus your conduct — is the whole of it.

1. Personal guarantees, the one you signed on purpose

This is the most common route by far, and the least surprising, because you actively agreed to it. Business loans, asset finance, commercial leases, invoice finance facilities and trade accounts with larger suppliers all routinely come with a personal guarantee from the director. The company borrows; you promise to pay if it doesn't.

A guarantee typically survives things owners assume would end it. Resigning as a director does not release you. Selling the business does not release you unless the lender formally agrees to it in writing. And a guarantee given to support a £40,000 facility five years ago may well cover the £120,000 that facility grew into since, depending on how it is drafted. The full picture is in what a personal guarantee really commits you to.

Limited liability protects you from the company's debts. It does not protect you from your own promises, your own conduct, or money you took that was never lawfully yours.

2. Unlawful dividends, the one nearly everyone gets wrong

This is the quiet one, and it catches more owner-managed companies than everything else combined. Under the Companies Act 2006, a dividend can only be paid out of distributable profits — accumulated realised profits, after tax, less accumulated losses. Not out of cash in the bank. Not out of what the year is expected to make. Out of profits the company has actually got.

The pattern is familiar: the director draws a small salary and tops it up with regular monthly dividends, because that is what the accountant set up years ago and it has worked ever since. Then a bad year arrives, the dividends carry on at the same rate out of habit, and the year-end accounts show reserves that never supported them.

Where a dividend was unlawful, section 847 requires a shareholder who knew or had reasonable grounds to believe it was unlawful to repay it — and in a small company where the shareholder and the director are the same person, that knowledge is not hard to establish. The directors who approved it can also be required to make good the company's loss.

A worked example

Take an illustrative one-person company. The director draws £4,000 a month in dividends across the year, so £48,000 in total. The year-end accounts come back showing distributable reserves of £22,000.

That makes £26,000 of what was drawn an unlawful distribution. It is repayable to the company. In practice the usual treatment is to reclassify it as a director's loan, at which point a second problem appears: if the loan is still outstanding nine months and one day after the year end, the company pays a section 455 charge on the balance — 35.75% for loans made on or after 6 April 2026. On £26,000 that is £9,295 of tax the company has to fund, refundable only once the loan is repaid.

So a habit that felt like normal drawings produced a £26,000 debt to the company and a five-figure tax charge that has to be paid in cash. The mechanics of the loan account side are in what taking money out of your own company really costs.

3. Wrongful trading

Under section 214 of the Insolvency Act 1986, if a company goes into insolvent liquidation and a director carried on trading from a point when they knew, or ought to have concluded, that there was no reasonable prospect of avoiding it, the court can order that director to contribute personally to the company's assets.

The defence is not optimism. It is evidence that from the moment you realised, you took every step you reasonably could to minimise the loss to creditors — took advice, wrote things down, stopped taking new deposits, stopped ordering stock you could not pay for. Directors who kept minutes and got professional advice early are in a completely different position from directors who hoped it would turn around and said nothing.

The practical takeaway is unglamorous: the moment solvency becomes a real question, the duty shifts from the shareholders to the creditors, and the record you keep from that day onwards is what you will eventually be judged on.

4. Unpaid tax

HMRC has specific powers to move a company's tax debt onto a director personally. A personal liability notice can transfer unpaid National Insurance where the failure to pay was attributable to a director's neglect or fraud. Separately, joint and several liability notices can be issued in cases involving insolvency, repeated non-payment across a series of companies, or tax avoidance and evasion.

These are not used against every company that falls behind. They are aimed at deliberate behaviour and at repeat patterns. But the message underneath is worth taking seriously: a company that has collected PAYE and VAT is holding money that was never its own, and treating that money as working capital is the behaviour these powers exist to punish.

5. Disqualification, and the sting in its tail

Under the Company Directors Disqualification Act 1986, a director whose conduct falls below the standard expected can be disqualified for up to 15 years. Being found liable for wrongful trading is itself a ground for it.

The part people miss is what happens next. Acting as a director while disqualified is a criminal offence, and it also makes you personally responsible for the debts the company runs up during that period. A disqualification is therefore not just a ban on a title — it is a standing personal liability for anyone who ignores it.

The seven duties nobody reads

Sitting behind all of this are the general duties in sections 171 to 177 of the Companies Act 2006: act within your powers, promote the success of the company, exercise independent judgement, exercise reasonable care and skill, avoid conflicts of interest, don't accept benefits from third parties, and declare any interest in a proposed transaction.

They read like boilerplate until a dispute happens, at which point they become the yardstick. The two that trip up small companies most often are the conflict rules — a director quietly owning the company that supplies them, or trading with a business their partner runs — and the duty of care, which is measured against both a general standard and against whatever expertise you personally happen to have. Where two directors fall out, this is the section the argument is fought on, which is one more reason to have settled what actually goes in a shareholders' agreement while everyone is still friendly.

The deadline running out this November

One live obligation is worth acting on now. Identity verification at Companies House became mandatory on 18 November 2025, with a 12-month transition for existing directors, LLP members and people with significant control that closes on 18 November 2026. Existing directors are required to confirm their identity within 14 days of their company's confirmation statement date.

Verification is free through GOV.UK One Login, or can be done through an authorised corporate service provider if the documents you hold do not fit the online route. It takes minutes. Leaving it until the transition closes is exactly the kind of administrative oversight that turns into an offence, in the same way as the Companies House letter directors keep ignoring.

What to do this week

Three jobs, none of which take long. List every personal guarantee you have ever signed, with the lender, the facility and whether there is a cap — most directors cannot do this from memory, which is itself the problem. Ask your accountant for the current distributable reserves figure, not the bank balance, and set your drawings against that number. And if your identity is not yet verified at Companies House, do it before the transition closes in November.

Common questions

Does a limited company really protect my house?

In the ordinary course, yes. Creditors of the company have a claim against the company, not against you, so if it fails owing money you lose your investment and your time rather than your home. The protection breaks where you have given a personal guarantee, where you have taken money out that was not lawfully distributable, or where your own conduct as a director is in question, such as wrongful trading. A director who has signed guarantees on a lease and a loan has effectively opted out of the protection for those specific debts, which is why keeping a list of them matters.

What happens to my personal guarantee if I sell the business?

Nothing, unless the lender formally releases you in writing. Selling shares or resigning as a director does not end a guarantee you have already given, and lenders are under no obligation to let you off simply because you have moved on. Release is something the buyer's solicitor should be negotiating as part of the deal, usually by the incoming owner giving a replacement guarantee. If it is not dealt with at completion you can remain personally exposed to the debts of a company you no longer own or control, sometimes for years afterwards.

Can I be liable for a decision another director made?

Potentially, yes. Directors' duties apply to each director individually, and a board decision you were present for or went along with is one you can be held to. Not knowing is a weak defence, because the duty to exercise reasonable care and skill includes keeping yourself sufficiently informed about what the company is doing. If you genuinely disagree with a decision, the protective step is to have your objection recorded in the minutes at the time rather than raised afterwards. Silence in the minutes tends to be read as agreement when it is examined later.

We think we have paid an unlawful dividend. What do we do?

Deal with it at the next set of accounts rather than hoping nobody notices. The usual route is to reclassify the excess as a director's loan and then repay it, either in cash or by voting a lawful dividend once reserves allow. Speed matters because of the nine-month deadline: if the loan is still outstanding nine months and one day after the year end, the company pays a section 455 charge on the balance at 35.75% for loans made on or after 6 April 2026. Your accountant will have handled this before, so raise it early.