Does Liquidation Affect My Credit Rating?

Could Company Liquidation Impact Your Personal Credit Rating?

A company liquidation will not usually affect your personal credit rating because a company is a separate legal entity benefiting from limited liability protection.

However, it could impact your personal credit rating under specific circumstances, such as if you are indebted to the insolvent company. If the liquidator takes recovery action against you via a County Court Judgement (CCJ), this would negatively appear on your credit rating for six years, potentially influencing your ability to obtain credit in the future.

There is also the possibility of the insolvency event appearing if you apply for finance as the director of a future company. In this instance, the credit rating agency is likely to flag your name as having been associated with a previous business failure. If it’s a single occurrence, it likely wouldn’t prevent you from borrowing again but, where multiple insolvency events show up, lenders will understandably be cautious.

Personal credit ratings of directors are typically looked into where the new company doesn’t have established credit of its own.

The typical response from the credit agency would go something like: ‘You should use caution as this director has been involved in previous company failures.’ This could, for example, cause you to pay a higher price for business insurance, as the insurance industry is particularly vigilant with credit checking.

In What Situations Could Company Liquidation Affect a Personal Credit Rating?

This section outlines those instances, such as wrongful trading and overdrawn directors’ loan accounts, where directors might find their personal credit rating at risk due to actions taken within the business.

Wrongful Trading

If a director continues to operate a company despite knowing it cannot avoid going into liquidation, they may be guilty of wrongful trading. This is a term that essentially means failing to act in the creditors’ best interests when the company is insolvent. Such actions can lead to directors being personally liable for the company’s debt.

In some cases, directors who cannot cover these debts from their assets face personal insolvency proceedings such as bankruptcy. Bankruptcy dramatically lowers a person’s credit score, making it difficult to obtain mortgages, personal loans, or other forms of credit.

Overdrawn Directors’ Loan Accounts

Directors may face personal financial implications if they have overdrawn loan accounts with their company at the time of liquidation. An overdrawn account occurs when directors withdraw more money than they’ve put in, beyond their salary or dividends.

Similar to the implications of wrongful trading, if the director cannot fulfil the repayment and faces personal insolvency proceedings, this will directly impact their credit rating.

Personal Guarantees

When directors provide personal guarantees for business loans or credit, they agree to repay these debts personally if the company cannot. Liquidation of the company triggers these guarantees, making the director responsible for the debt, which can significantly impact their personal credit rating.

While it’s possible to take a loan to clear the personal guarantee in some cases, the presence of personal guarantees on a director’s credit file will make lenders cautious. This increased scrutiny can manifest as higher interest rates on loans, lower credit limits, or denial of credit applications altogether.

Protecting Your Credit Rating During Liquidation

To mitigate risks to personal credit ratings during liquidation, directors should ensure they are fully aware of their financial responsibilities and avoid practices that could lead to wrongful trading accusations.

Regularly reviewing the company’s financial position, avoiding personal guarantees where possible, and seeking professional advice early can help protect personal finances through the liquidation process.

FAQs on How Company Liquidation Affects Personal Credit Ratings