Many SME directors assume that dissolving a limited company brings everything to a clean end, including any outstanding loans or liabilities. However, while dissolution formally closes the business, it does not automatically wipe away debt. For directors who have signed a personal guarantee, the financial responsibility can continue long after the company has ceased trading.
This misunderstanding leaves many directors exposed at an already stressful time. If a company with outstanding loans or supplier debt is dissolved, lenders can still pursue payment - personal guarantees don’t just vanish because the business no longer exists.
This blog explains what happens to loans, debts, and personal guarantees when a company is dissolved, the risks directors need to be aware of, and how Personal Guarantee Insurance (PGI) can protect personal assets from the financial impact of a default.
What happens to a company’s debts when it’s dissolved?
Dissolution formally removes a company from the Companies House register, but it doesn’t wipe the slate clean.
If a dissolved company still owes money, creditors can:
- Pursue repayment from the company’s remaining assets
- Apply to have the company restored to the register, allowing them to take legal action
- Seek repayment through any enforceable agreements, including personal guarantees
Many directors see dissolution as a simple tidy-up exercise for a company that is no longer trading, but from a lender’s perspective, unpaid debt is still unpaid debt. Attempting to dissolve a company with outstanding liabilities can also trigger closer scrutiny.
Ultimately, the company may close, but the debt stays very much alive.
For more guidance on director responsibilities, see our Director Guidance page.
Loans and personal guarantees - what directors need to know
A personal guarantee is a legally binding commitment that makes a director personally responsible for repaying a business loan if the company cannot. Lenders commonly require personal guarantees for business/commercial loans, invoice finance, asset finance, and other unsecured borrowing.
When a business fails, lenders can pursue the guarantor for up to 100% of the outstanding liability. Once a loan backed by a personal guarantee goes into default, the lender can:
- Demand repayment directly from the director
- Add interest, fees, or legal costs
- Place pressure on personal assets such as savings, investments, or property
Dissolving the company does not remove this obligation. If a personal guarantee has been signed, the liability follows the individual, not the company.
Key risks for directors when a company is dissolved with debt
Directors can come under huge financial and emotional strain when a lender calls in a personal guarantee, which only intensifies if the company has already been dissolved. Here are the risks:
- Personal asset exposure
Directors who have signed a personal guarantee may find their personal finances at risk. This can include family savings, investments, property, and other personal assets.
Without protection, a director may have to use personal funds to settle a business debt.
- Direct pressure from lenders
If a dissolved company cannot repay what it owes, the lender will pursue the guarantor. Many directors report intense pressure when repayment demands begin, particularly when they are unexpected.
- Legal and financial stress
Lenders may escalate matters through debt collection, legal proceedings, or enforcement measures. This can create significant stress for directors and their families.
- Lack of awareness about what was signed
Purbeck’s data shows that many directors are unsure whether they have signed a personal guarantee, only discovering the implications when lenders contact them.
Scenario example
A director dissolves a company, believing the debts “die with the business”. Months later, they receive a demand from the lender for the remaining balance on a loan they personally guaranteed. With no company assets left and no protection in place, the director must settle the debt personally.
How personal guarantee insurance (PGI) protects directors
Purbeck is the UK’s leading specialist provider of Personal Guarantee Insurance. Our policies cover up to 80% of the guarantee amount, which helps soften the impact on personal finances and protects assets like savings and property if the business can’t repay what it owes.
We understand how overwhelming financial pressure can feel, which is why we offer early proactive support for directors who are starting to struggle. Through our Business Support Service, we help with debt management, guide conversations with lenders, and offer steps that may prevent issues from escalating.
Every policy is backed by Markel International, an A-rated global insurer, and is fully regulated by the FCA. The cover is built specifically for directors of SMEs, with flexible options that fit around different types of borrowing.
What directors should do before dissolving a company
If you are considering dissolving a company, or you have previously traded with loan agreements in place, now is the time to review your position.
- Review all outstanding loans and contracts
Identify any business loans, finance agreements, or credit facilities still active.
- Check whether you signed a personal guarantee
Many directors are unsure whether personal guarantees were included in past finance agreements. It’s essential to check.
- Assess your personal exposure
Look at what percentage of the loan is covered under your name and what you could potentially owe if the lender takes action.
- Secure protection before any pressure begins
PGI is most valuable when taken out before financial difficulty starts. Treat PGI as part of responsible financial planning, whether you are continuing to trade, restructuring, or planning to close a company.
Protecting your personal finances, whatever comes next
For SME directors, understanding the risks and taking proactive steps to protect personal assets is crucial. PGI offers a vital safety net, reducing the financial impact if a lender calls in a guarantee and providing expert support during challenging times.
If you’d like tailored guidance on protecting your personal assets, don’t hesitate to get in touch with our team today to explore the options available to you.
