Am I Still Liable For Business Debts After Resigning As Company Director?

Am I liable for company debts after resigning as director? 

If you step down as the director of a limited company, you might still be personally responsible for business debts in some cases.

If you’ve personally promised to cover any company borrowing, like a loan or lease agreement, this commitment stays even if you quit as a director. Hence, if the company goes bankrupt and undergoes liquidation, you’ll still be accountable for repaying the personally guaranteed borrowing, even if you’ve already stepped down.

 

Am I still liable for business debts after resigning as a director of a Ltd company?

There are numerous reasons why a director might wish to step down from their role and transition away from their company. This may arise from retirement, relocation, or a simple aspiration to pursue a new venture. Resignation tends to be remarkably straightforward and often swift. Nevertheless, it is crucial to contemplate and weigh this decision before proceeding.

 

How to resign as a director of a limited company?

The initial step is to formally declare your intention to resign in writing and provide a copy of this notice to the other directors. You are not obligated to disclose a reason for your resignation, but it is essential to clearly state your departure from the company along with the effective date.

While not compulsory, you might consider informing customers and/or suppliers about your decision and advising them of their new point of contact after you leave. Once your resignation is accepted by your fellow directors, you should complete a TM01 form and send it to Companies House. They will then remove your name from the records they hold on the company.

At this stage, your liabilities concerning the company cease. You can only be held accountable for actions (or inactions) during your directorship. If you complied with the law during your tenure as director, you can leave the company without further obligation.

 

What do we mean by limited liability?

If the company is in debt at the time of your resignation or falls into debt afterwards, in most instances, the answer is straightforward: nothing happens. This is due to the concept of ‘limited liability’, which is considered one of the primary advantages of operating within the structure of a limited company.

Limited liability fundamentally implies that the company’s debts are the company’s responsibility, not that of the directors personally. 

If the company cannot fulfil its obligations, it can undergo an insolvency process like a Creditors’ Voluntary Liquidation (CVL) to wind up the company and settle any outstanding debts.

It’s important to understand that only current directors of the company have the authority to initiate such a process. Once you resign, you relinquish control over how the company is managed, and you cannot either prevent or instigate a liquidation procedure.

Understanding personal guarantees

Although limited liability provides directors of limited companies with a degree of protection, there are exceptions to this rule. The primary exception arises if you have signed a personal guarantee for a company loan, credit card, overdraft, or any other financial agreement.

By signing a personal guarantee, you waive the protection offered by limited liability. Any debt guaranteed personally falls under the responsibility of the guarantor until fully repaid. 

Consequently, if the company fails to meet the agreed repayments, the guarantor must use personal funds to settle the debt. Resigning as a director does not nullify a personal guarantee.

Therefore, it’s crucial to think thoroughly before resigning from a company if you’ve personally guaranteed any of its debts. After resigning, you lose influence over the company’s operations and cannot access its accounting information.

If the company experiences financial decline after your resignation, and it struggles to meet loan repayments and other financial commitments, you’re unable to intervene. You might not even be aware of any problems until you receive a demand for repayment of your personally guaranteed loan.

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What would be your next step? 

If you’re thinking about resigning from a company and seeking specialist advice, contact Vanguard Insolvency today. Our team of experts can elucidate your situation and outline the implications of resignation on a personal level. 

With over 100 offices spanning from Inverness to Exeter, Vanguard Insolvency provides unparalleled director advice across the UK.