fbpx

Call Us On:  0333 772 1808  | FREE from ANY phone

TRUSTED BUSINESS ADVICE

Will A Company Liquidation Affect My Credit Rating?

will-liquidation-affect-credit-rating

Being faced with liquidating a company that you worked hard to make a success is always a struggle and can often lead to you feeling like a failure. While of course, you’ll likely feel like that at first, it’s important to recognise that approximately 20% of new businesses fail within their first year of operating, so if you’re faced with the task of liquidating your company, you’re not the only one.

However, liquidating your company probably isn’t the only worry that’s hanging over your head; you’re probably also wondering what happens to your personal finances and how liquidating a company can have an effect on your credit rating.

If you’re in the position of liquidating your company, you need to know the rules surrounding company liquidation and how it can have an effect on your credit rating. Take a look at our advice below for more information.

What is liquidation?

Liquidation, also sometimes referred to as ‘winding down a company’ is the term used to describe insolvent companies that have ceased trading due to having large amounts of debts which means that they can no longer continue with the business.

The process of liquidating a company is never nice for anyone involved, but if the business can no longer continue trading, it is an inevitable decision that will have to be made.

There are three types of liquidation that a company may use (or be forced into due to financial reasons) which are Creditors Voluntary Liquidation, Company Voluntary Arrangement and Members Voluntary Liquidation.

What is limited liability?

If your business operates as a limited company, then you’ll be relieved to know that you’ll benefit from limited liability protection. This means if your company faces financial difficulties and issues due to debts, for example, the financial troubles are tied to the company itself and not to your own personal finances, meaning that your credit rating shouldn’t be affected.

However, if your business operates as a sole trader or partnership, you won’t benefit from limited liability protection which means your credit rating could be affected as your business and personal assets are effectively the same thing.

The Insolvency Act 1986

Even if your company has limited liability protection, that doesn’t mean to say that you can do whatever you want with regard to company finances.

As a director, you have a certain degree of responsibility and a duty of care to maintain to creditors, particularly during times of company liquidation.

If you’re found guilty of wrongful or fraudulent trading, such as if you’re found to have knowingly taken money from customers while being fully aware that you will be unable to repay them, then you may find yourself facing personal implications, which in turn could affect your credit rating.

What is my personal credit rating?

Your personal credit rating is linked to your credit file which keeps track of all your personal borrowing such as credit cards, loans and car finance. Keeping a healthy credit rating means that you must pay all your debts on time and ensure that you keep up with regular payments that you make to creditors such as credit card companies and mobile phone networks. If you fall behind on your repayments, this can damage your credit rating which in turn will make it more difficult for you to obtain lines of credit in the future such as a mortgage or secure loans.

When can my credit rating be affected by a company liquidation?

There are several instances when your credit rating can be negatively affected by a company liquidation.

For example, if you’re a director of another company as well as the one that has gone into liquidation and you try to obtain credit for the other company, you could be flagged as being involved in an insolvent company. While it’s not always the case that you’ll be affected by this, some credit reference agencies may flag your credit file with a warning along the lines of “this director has been involved with companies who have had previous financial failures” which could potentially affect your ability to obtain credit for a new company.

However, if your company goes into liquidation and your duties and roles as a director simply cease, then it will not affect your credit rating, providing that you don’t take any further action to try and raise credit for any other company that you’re a director of.

Another instance when your credit rating might be affected by a company liquidation is if you signed a personal guarantee when you took out a business loan or another type of finance to start your company. A personal guarantee means that if your business cannot pay its debts, as a director, you have agreed to pay them out of your own personal finances so that creditors and lenders are not at a loss. Of course, if you are then unable to cover these debts through your own finances, your credit rating could be negatively impacted.

Furthermore, if your company has an overdrawn directors’ loan account and you have borrowed money from the company, you effectively become a debtor which means you must pay the money back. A director’s loan account excludes transactions between a business and directors such as dividend payments and salary and only includes the money that you’ve borrowed from the company for personal reasons. During the liquidation process of a company, you will be required to pay the money back and in the event that you’re unable to, your credit rating could be affected.

Summary

  • Operating as a limited company means that you have limited liability protection which means your business and personal finances and assets aren’t linked.
  • In most cases, your credit rating shouldn’t be affected as a director of an insolvent company as long as you’ve acted in the company’s best interests.
  • If you have an overdrawn directors’ loan account, your credit rating could be affected if you’re unable to pay the money back.

We can talk you through all of your options and find you the right solution

Related Posts

We're always here to help.

Our friendly, experienced team are able to help you and your company, even if you are struggling with unmanageable debts.