By incurring additional trading losses and increasing the liabilities significantly (often to the Crown for PAYE/NIC/VAT -- who tend to take a dim view of such behaviour), the Directors are potentially exposed to personal liability for some of the debts. This personal exposure risk is due to the powers of the Liquidator to take action against a Director to make a personal contribution to the Liquidation, if there is evidence of insolvent trading and that the Director knew the company was insolvent, but instead of ceasing to trade, carried on and the situation got worse, not better. However, in reality, for directors of small companies, the risk of an insolvent trading action is low, as funds are often not available for the legal costs of an application to the High Court. In many cases, Directors can point out to reasons why they genuinely believed they could trade out of the insolvent position, such as the prospect of a cash injection from a new investor, or a profitable new contract in the pipeline. Only in extreme cases, where the Directors have clearly acted recklessly will action proceed.

Directors can often be faced with Personal Guarantees, usually to the banks and asset finance companies, landlords and certain types of trade creditors, such as building merchants. Basically if you have signed a guarantee you will be liable for whatever shortfall the creditor suffers in the Liquidation. Where guarantees have been given by more than one guarantor, on a joint and several basis, the guarantor with the most personal assets, is the one who stand to lose more, as any of the guarantors are potentially liable for the total debt. They may then be faced with trying to recover the shares of the other guarantors from them directly, which is not always possible if they have no personal assets left. Directors who are on the hook for potentially large guarantees can be motivated to keep trading in order to prevent these personal liabilities crystallizing and the subsequent debt enforcement action that would follow. This can lead to the company trading whilst insolvent.

Directors as a rule are not personally liable for the debts of the company. This is the main reason for setting up a limited company in the first place, in order that shareholders and directors liabilities are limited. The company is known in law as an artificial person, and is an entirely separate, distinct legal entity which owns the business assets and is liable for the business debts. Shareholders are only liable for any unpaid share capital, which is usually neither here nor there.