Can business troubles affect my personal finances and credit rating?

Will liquidation affect my credit rating?

Education

does liquidation affect credit rating ukIf you are the director of a company that is going into liquidation, you are likely to have a lot of questions racing through your mind, one maybe what will happen to your personal credit rating after your company has been placed into liquidation.

If your company is facing financial issues and is likely looking at the early signs of insolvency, it’s understandable you will be thinking about the personal consequences. One of your concerns may be your individual credit score.

The question regarding directors liabilities for their company debts is a pressing concern for those entering liquidation. In this article will explain the reasons you may be personally liable for the debts and when they can affect your personal credit rating.

Company Liquidation and Your Credit Score

As a company director, you are bound by certain responsibilities and must always act for the good of the company. Directors of limited companies have little risk (or limited liability) of falling foul of company debts if the business fails. However, you must have acted properly – in accordance with the Companies Act 2006 along with the Insolvency Act 1986.

If you do not act appropriately, or fail to act reasonably and keep proper accounts and records, you may face director’s liabilities. Furthermore, if you continue to take credit knowing the company does not have the resources to make repayments, you are at huge risk of personal liabilities for the company debts. This action is regarded as wrongful trading and, if proven, can put you at very personal risk. More information can be found on wrongful trading here. In short to avoid being accused of wrongful trading you should take steps to deal with the company’s insolvency when it is clear there is no chance of recovery.

If you continue to rack up debt when you have already determined the company will be entering liquidation, it may be classed as fraudulent trading. If found guilty, you could even face imprisonment. 

If you have any personal guarantees on anything obtained for the company, for example on a business loan or property lease, and the business is unable to meet the agreed payment terms, then as a director you will be personally responsible. If you don’t meet the payment schedule, then the creditor, whether it’s the landlord or the bank, will pursue you personally for the debt. Make sure you look at all your agreements to see exactly what your situation is.

How would my credit rating be affected by a company liquidation?

Once a company goes into voluntary liquidation, the company ceases to exist and the directors duties cease.  The insolvency of your limited company business does not appear on your personal credit rating as this is a separate legal entity. Should you try and raise credit for a different company of which you are a director it will be flagged. 

Credit reference agencies will pull information about possible matches from companies house, your name, home address and date of birth against your credit profile, this is more of a reference though and not classed as a negative, the credit rating agency will state something like “exercise caution as the director has had previous company failures”. 

It is simply a case of once bitten twice shy.  Normally, this does not cause a problem if it happened just once but if you have had multiple failures it will be difficult for your company to raise credit, no matter how well it is doing.  Insurance companies are particularly picky on this point so you will probably pay a higher premium for business insurance.

Your personal credit rating

Your credit rating is linked to your credit file, which logs your personal borrowing and repayment activities. You keep your credit rating healthy by repaying your debts on time and not taking out more lines of credit than you can afford.

Taking out multiple lines of credit and falling behind on payments can damage your credit rating, making it harder to secure loans and mortgages.

Limited liability

An advantage of a limited company is it provides limited liability protection. So, if the business encounters financial difficulties or debts, it stays confined to the company and shouldn’t affect your personal finances or credit rating.

If you’re a sole trader or a member of a partnership, you don’t have limited liability protection. Consequently, your business assets and your personal assets are legally the same (unless you’re in a limited liability partnership).

However, Directors and Shareholders need to ensure that they seek the correct professional advice as there are issues which may impact on them personally even if it does not directly affect their credit rating when placing a Company into a formal insolvency process.  These issues include but are not limited to:

  • Personal guarantee that may have been given to banks or suppliers
  • Illegal dividends where dividends have been drawn over and above the Company’s distributable reserves. As these are classed as illegal dividends then these are repayable
  • Overdrawn Directors loan account – where the Director has loan monies from the Company instead of taking a salary or dividends
  • Excessive remuneration – if an insolvency practitioner considers that the Directors have been drawing a salary that is above what is considered reasonable
  • Claims that an Insolvency Practitioner may have against the Directors such as Preferences, Transactions at an Undervalue insolvency act 1986, Wrongful Trading and Fraudulent Trading.

Liquidation Is Different From Bankruptcy

It is worth noting that liquidation is different from bankruptcy. Bankruptcy is a insolvency procedure for individuals (not companies).In bankruptcy a court can take charge of your assets and use them to pay off your creditors (people you owe money to).

Entering personal bankruptcy can have a serious affect on your credit rating.

If you thinking about liquidation, it is important you get the correct advice as early as possible to limit any possible adverse effect on your personal credit history.

Director’s Personal Name Search after a Corporate Insolvency?

For directors, whose company has been through a CVL (or any form of liquidation) a personal name search run by a credit rating agency will list your involvement in an insolvency. That’s not to say, however, that it will necessarily affect credit, which will be up to the lender to decide. But the information will certainly be in the public domain.

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