What Can Directors Be Held Personally Liable For in the UK? (2026 Guide)

Most directors incorporate for one reason: limited liability. The company owns its debts, not you. But that protection has real limits — and many directors discover them at the worst possible moment.

The Default Position: Limited Liability

When you incorporate a company, the company becomes a separate legal entity. It can own property, enter contracts, borrow money and incur debts entirely independently of its shareholders and directors. If the company cannot pay its debts, creditors pursue the company — not you personally. This principle of separate corporate personality was established in Salomon v Salomon & Co Ltd [1897] AC 22 and remains the foundation of UK company law.

When the Corporate Veil Lifts

The protection of limited liability is not unlimited. Courts and statute have established clear circumstances in which directors face personal exposure. These are not obscure edge cases — they arise regularly in insolvency, HMRC enforcement and commercial dispute contexts.

1. Wrongful Trading

Wrongful trading is defined in section 214 of the Insolvency Act 1986. It applies where a director allowed the company to continue incurring liabilities at a point when they knew — or ought reasonably to have known — that there was no reasonable prospect of the company avoiding insolvent liquidation.

The test is partly objective: the court applies the standard of a reasonably diligent person with the general knowledge, skill and experience that the director's role requires. It is also partly subjective: if a director has specific relevant expertise (say, as a finance professional), they are held to the higher standard.

Crucially, wrongful trading does not require dishonest intent. A director who kept the company going out of optimism, without monitoring the financial position carefully enough, is just as exposed as one who knew exactly what they were doing.

2. Fraudulent Trading

Fraudulent trading under section 213 of the Insolvency Act 1986 (civil) and section 993 of the Companies Act 2006 (criminal) requires proof of dishonest intent — that the business was carried on with intent to defraud creditors or for any fraudulent purpose. Criminal conviction carries up to ten years' imprisonment and an unlimited fine.

3. Personal Guarantees

This is the most common route to personal liability for directors in practice. If you signed a personal guarantee — to secure a business overdraft, commercial lease, supplier credit line or invoice finance facility — the creditor can enforce that guarantee against you personally if the company cannot pay. Directors who signed guarantees in the early years of a business and have not reviewed them since are often unaware of the full extent of their exposure.

4. Overdrawn Director's Loan Account

A director's loan account records the running balance of money borrowed by a director from their company. In insolvency, an overdrawn DLA is a company asset. The liquidator will demand repayment from the director personally.

5. Unlawful Dividends

Dividends can only lawfully be paid out of distributable profits. Where dividends are declared when there are insufficient profits, the director can be required to repay them personally.

6. HMRC Personal Liability Notices

HMRC holds statutory powers to bypass limited liability. A Personal Liability Notice (PLN) under section 121C of the Social Security Administration Act 1992 transfers unpaid National Insurance liabilities directly onto a named director where HMRC can show the failure was due to that director's fraud or neglect.

In 2026, HMRC has significantly expanded use of Joint and Several Liability Notices (JLNs) under the Finance Act 2020, targeting directors with a pattern of repeated insolvencies. From 6 April 2026, CIS reform has also extended personal exposure for directors of contracting companies.

7. Misfeasance

Misfeasance covers misapplication of company assets — using company money for personal purposes or causing the company to enter transactions that benefit the director at the company's expense. A liquidator can bring proceedings under section 212 of the Insolvency Act 1986.

Practical Protection

• Monitor the company's financial position regularly — management accounts, not just annual filings
• Seek professional advice early when there is genuine financial concern
• Document decisions — board minutes that demonstrate you understood the position and acted reasonably
• Review personal guarantees — understand what you have signed and whether terms can be released
• Keep the director's loan account clean — ensure drawings are properly authorised as salary or dividend

Bonsai Law advises directors, founders and owner-managers on personal liability risk, directors' duties, and insolvency exposure. Contact us for an initial conversation.