A limited company is a separate legal entity from its directors, so when it is liquidated, it will not usually affect personal credit ratings. There are, however, some situations which allow the ‘veil of incorporation’ to be lifted, and you could then be pursued for the company’s debts. This will have an impact on your access to financial products such as mortgages or loans.
Fraudulent and wrongful trading
The Companies Act requires directors to exercise care, skill and diligence in running a company. You could be found guilty of wrongful trading if you fail to do so, and if your company becomes insolvent, you may be made personally liable for the company’s debts. Directors of insolvent companies have a legal duty to act in their creditors’ best interests. If you carry on taking money from customers and placing orders with suppliers when you know that you won’t be able to fulfil these commitments, you could then be made personally liable for the debts.
The liquidator could take recovery action if you can’t pay, and this will have a negative impact on your credit rating. There are many other acts which would be classed as fraudulent or wrongful trading. Some examples include spending company money on things that do not benefit the business, falsifying the company accounts or hiding your insolvency from creditors.
Directors’ loan accounts
If the directors’ loan account is overdrawn when a business goes into liquidation, the liquidator can ask you to repay the loan and if you are unable to do this, they may decide to take recovery action against you. This will be added to your personal credit file and will adversely affect your credit rating.
Directors’ Personal guarantees
A directors personal guarantee is often used to support a company loan application. However, if the company is liquidated and can’t repay the loan, the lender can require the director to pay the loan off. If you find yourself in this position and are unable to make the repayments, the lender could take legal action to recover the debt and this would be damaging to your credit rating. It would be advisable to seek some legal advice from specialists such as Parachute Law.
If either a liquidator or a lender takes recovery action against you by obtaining a County Court Judgement, for example, this will remain on your credit file for six years. You can read more about CCJs on the government website This will make it harder for you to get personal credit and it will also be more expensive.
An insolvency event on your credit report could even limit future employment opportunities as certain sectors, such as finance, are regulated. If you go on to become the director of another company, it will be more difficult to obtain finance with an insolvency event on your file. A single business failure will usually only have a small impact, but multiple insolvency events on your file will make lenders extremely cautious.