How Liquidation Impacts Your Credit Rating and What You Need to Know
A company liquidation doesn’t usually affect your personal credit rating because a company is a separate legal entity benefiting from limited liability protection.
It is possible under certain rare circumstances but not something most directors need to worry about.
For a liquidator to take recovery action against a director that could impact their credit score, there would need to be strong evidence of serious misconduct, such as fraudulent trading, wrongful trading, or misfeasance. Even then, the liquidator would only pursue this if it were financially viable and in the best interests of the creditors.
In the vast majority of cases, where directors have acted in good faith and fulfilled their legal duties, a liquidation will not impact their personal credit rating. The legal separation between a company and its directors protects directors from the company’s financial liabilities in most circumstances.
Insolvency Events are Registered by Credit Rating Agencies
Although the liquidation won’t affect your personal credit, there is the possibility of an insolvency event appearing if a director applies for finance with 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[1]Trusted Source – Experian – Find out why you might have a poor business credit score. If it’s a single occurrence, it likely won’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?
Where directorial misconduct is found, business liabilities can spill over into a director’s personal financial life, but only if the situation pushes you into personal bankruptcy. Some of the most common instances of that are as follows:
Wrongful Trading
If a director continues to manage 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 pay. 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 Does Liquidation Affect My Personal Credit Rating?
Does the reason for company liquidation matter for my personal credit?
The reason for liquidation itself doesn’t directly impact your personal credit rating. However, if liquidation results from activities like fraudulent trading, and you’re personally implicated, this could have legal repercussions that affect your creditworthiness.
How can I protect my credit rating during my company’s liquidation process?
To protect your credit rating, avoid giving personal guarantees where possible, manage your director’s loan account responsibly, and seek professional advice early to navigate the liquidation process without incurring personal financial liabilities.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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