If a limited company goes bust, the liability for its debts and obligations typically falls on the company itself, rather than on its directors or shareholders, due to the principle of limited liability.
Additionally, we will consider other potential liabilities, such as the liability of auditors, accountants, and other professionals, as well as the liability of shadow directors.
By the end of this article, readers will have a better understanding of the legal and financial responsibilities associated with running a limited company, and what they can do to mitigate their risks in case of business failure
A limited company is a popular form of business structure that allows individuals to set up and run a company with limited liability. This means that the company is a separate legal entity from its owners and directors, and its financial liabilities are limited to the amount of capital invested in the company.
While limited liability provides protection to company directors and shareholders in case of business failure, it does not mean they are completely free from legal or financial responsibilities. In the event that a limited company goes bust, the question of who is liable for its debts and obligations becomes a critical issue.
What is a Limited Company Structure
The structure of a limited company is comprised of several key elements, including directors, shareholders, and company officers. Directors are appointed by the shareholders to manage the company and make decisions on its behalf. They have a fiduciary duty to act in the best interests of the company and its shareholders, and must comply with a range of legal and regulatory requirements.
Shareholders, on the other hand, own a portion of the company and have a say in how it is run. They can vote on important decisions, such as the appointment of directors, and are entitled to a share of the company’s profits.
One of the key benefits of a limited company is limited liability, which means that the company’s financial liabilities are separate from those of its owners and directors. In other words, the company can be sued or held liable for debts or obligations, but the personal assets of the owners and directors are generally protected.
However, there are some exceptions to this rule, and directors and shareholders may still be held liable in certain circumstances. For example, if a director breaches their duties, they may be held personally liable for any resulting losses. Similarly, if a shareholder acts improperly or unlawfully, they may be held liable for damages or losses incurred by the company.
Directors have a range of duties and responsibilities to the company, its shareholders, and its stakeholders. These include a duty to act in good faith and in the best interests of the company, a duty to exercise care, skill, and diligence, and a duty to avoid conflicts of interest. Directors who breach their duties may be held personally liable for any resulting losses or damages.
There are several types of wrongful actions that may lead to directors being held liable. For example, if a director engages in fraudulent or dishonest conduct, they may be held liable for any resulting losses suffered by the company. Similarly, if a director fails to exercise proper care and diligence in managing the company’s affairs, they may be held liable for any resulting losses.
Directors may also be held liable if they breach their fiduciary duties, such as by using company assets for personal gain or by engaging in self-dealing transactions.
If a director is found to have breached their duties and is held personally liable, there are several legal consequences they may face. For example, they may be required to pay damages to the company or its stakeholders, and they may be disqualified from serving as a director in the future.
In some cases, they may also face criminal charges or other legal penalties. To avoid liability, directors must ensure they are aware of their legal obligations and take steps to comply with them, such as by seeking professional advice or conducting regular reviews of the company’s operations.
Shareholders in a limited company have limited liability, which means that their personal assets are generally protected in case of business failure. This means that the financial liabilities of the company are separate from those of its shareholders, and the extent of their liability is typically limited to the amount of their investment in the company. However, there are some circumstances in which shareholders may be held personally liable for the company’s debts or obligations.
One situation in which shareholders may be held liable is if they have given personal guarantees or security for the company’s debts. This may occur, for example, if a shareholder has provided a personal guarantee for a bank loan or has given security over their personal assets to secure a loan for the company. In such cases, the shareholder’s personal assets may be at risk if the company is unable to repay the loan.
Another situation in which shareholders may be held liable is if they have engaged in improper conduct that has resulted in losses for the company or its stakeholders. For example, if a shareholder has acted fraudulently or in bad faith, they may be held personally liable for any resulting losses. Similarly, if a shareholder has breached their duties, such as by engaging in self-dealing transactions, they may be held liable for any resulting losses.
To avoid liability, shareholders must ensure they act in good faith and comply with their legal obligations under the law. Overall, while limited liability provides some protection to shareholders in a limited company context, it is important to note that it is not absolute.
Shareholders must be aware of their legal obligations and potential risks, and take steps to minimise their exposure to liability. This may include seeking professional advice, ensuring the company’s operations are conducted in a proper and transparent manner, and avoiding conduct that may result in legal or financial consequences.
When a limited company goes bust, its creditors may have claims against the company for unpaid debts or obligations. Creditors may include suppliers, lenders, employees, and other stakeholders who are owed money by the company. In general, creditors are entitled to payment from the company’s assets in order of priority, with secured creditors being paid first, followed by unsecured creditors.
Secured creditors have a priority claim to the company’s assets because they have taken security over specific assets of the company as collateral for their loan or debt. For example, a bank that has provided a loan to the company may have taken security over the company’s property or other assets. If the company goes bust, the bank may be entitled to seize and sell the secured assets to recover the outstanding debt.
Unsecured creditors, on the other hand, do not have security over the company’s assets and are therefore considered to have a lower priority claim. They may include suppliers, trade creditors, and other stakeholders who are owed money by the company. Unsecured creditors are generally paid from the remaining assets of the company after secured creditors have been paid. However, in some cases, unsecured creditors may not receive full payment for their claims, particularly if the company’s assets are insufficient to cover all of its debts and obligations.
Other Potential Liabilities
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.