Does company liquidation affect my personal credit rating?

Could your personal credit rating be impacted by company liquidation?

The good news, generally speaking, is that the liquidation of your company will not affect your personal credit rating. That’s because a limited company is classed as its own separate legal entity from the people who run it, meaning your personal finances and the finances of the business are separate. 

However, there are some cases where it’s not quite so clear-cut. In certain instances, the liquidation of your limited company can impact your personal credit rating and potentially make it more difficult for you to access financial products such as personal loans and mortgages.

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When might a company liquidation affect my credit rating?

Setting up a limited company gives the directors the protection of limited liability, which allows them to take risks without having to worry about the failure of the business impacting their personal finances. Limited liability limits the losses of the directors to the amount they invest in the company. So, if your company fails, your personal assets, such as your home, car and the money you have in the bank, will be safe.

Despite the protection provided by limited liability, there are some instances when the ‘veil of incorporation’ can be lifted and you can be pursued personally for the debts of your company, which could impact your credit rating. Here are some examples.  

Wrongful trading

According to the Companies Act, company directors must “exercise reasonable care, skill and diligence” in their running of the company. If you fail to do so and the company subsequently becomes insolvent, you may be found guilty of fraudulent or wrongful trading, and risk being made personally liable for some of the company debts. 

A specific duty placed on the directors of insolvent companies is to act in the best interests of their creditors. If you continue to take money from customers and place orders with suppliers despite knowing you won’t be able to fulfil the orders or pay for the goods, you could be made personally liable for those losses incurred by your creditors. If you’re unable to pay the money you owe, the liquidator may take recovery action against you, which will adversely impact your credit rating. 

Other examples of wrongful or fraudulent trading that could affect your personal credit rating include:

• Using company money for purposes that do not benefit the business
• Selling company assets for less than their market value 
• Falsifying company accounts and hiding your insolvent position from your creditors

Overdrawn directors’ loan accounts

If you take more money out of the business than you put in, your directors’ loan account will become overdrawn. This is a legitimate way to take money out of the business and is no problem as long as the business is profitable and you are able to repay this money when required.

The problem comes if the business goes into liquidation, at which point, the liquidator may ask you to pay the money back for the benefit of the company’s creditors. If you’re unable to do so, the liquidator may decide to take recovery action against you which will appear on your personal credit file and damage your credit rating.

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The repayment of Bounce Back Loans

We’ve already touched on how using company money for purposes that do not benefit the business will cause you problems in liquidation. One example of this is the misuse of Bounce Back Loans. 

Businesses that are struggling to repay a Bounce Back Loan can expect to come under scrutiny as to how the funds were used if the company subsequently goes into liquidation. If the business becomes insolvent and it’s found that you used a Bounce Back Loan for purposes other than to help the business’s recovery, you could be made personally liable for the repayments. Action could then be taken against you that could adversely affect your credit rating.

Personal guarantees

It’s not unusual for directors to provide a personal guarantee in order to support a loan application for the company. If the company becomes insolvent and is unable to repay the loan as agreed, the lender can then pursue the director personally for repayment of the remaining amount.

If you’re unable to make these repayments personally then the lender may take legal action to recover the debt. This will be placed on your personal credit report and will negatively affect your rating.

How might liquidation affect my personal credit rating?

If a liquidator or a lender is forced to take recovery action against you, such as obtaining a County Court Judgment, it will stay on your credit file for approximately six years. During this time, you may find it more difficult and expensive to obtain personal credit. There’s also the possibility that an insolvency event on your credit report could restrict your future employment opportunities in certain regulated sectors, including finance. 

If you become a director of another company, you may also find it more difficult to raise finance with a previous insolvency event on your credit file. The impact is usually small for a single business failure, but if you have multiple insolvency events on your file then you may find that lenders are more cautious.  

Need help?

At Real Business Rescue, our insolvency professionals can help you liquidate your company in the right way and resolve any issues that could potentially damage your credit rating. Please contact our team to arrange a free, same-day consultation at one of our network of offices around the UK.