Could your personal credit rating be impacted by company liquidation?

Generally, when your company goes into liquidation, your personal credit rating remains unaffected. This is because a limited company is seen as a distinct legal entity from its owners, which means that personal and business finances are separate.

Beyond that, in certain situations, it’s not straightforward. Sometimes, the liquidation of your limited company can indeed affect your personal credit rating. This might make it harder for you to get personal loans or mortgages.


When does a company liquidation affect my personal credit rating?

Creating a limited company offers directors limited liability protection. This means they can take risks without fearing that the business’s failure will harm their personal finances. Limited liability confines directors’ losses to the money they invest in the company. 

If your company collapses, your personal belongings like your house, car, and bank savings remain secure.

However, despite the shield of limited liability, there are times when the ‘veil of incorporation’ can be lifted. In these cases, you might be held personally accountable for your company’s debts, which could affect your credit score. 

Here are a few examples: 


1. Overdrawn directors’ loan accounts

When you withdraw more money from the business than you’ve invested, your directors’ loan account may become overdrawn. While it’s a valid method to extract funds from the business, it becomes problematic if the business isn’t profitable or if you can’t repay the money when needed. If the business enters liquidation, the issue arises. 

The liquidator might request repayment of the money for the benefit of the company’s creditors. If you can’t comply, the liquidator might initiate recovery proceedings against you. This can adversely affect your credit rating as it appears on your personal credit file.


2. Personal guarantees

It’s common for directors to offer a personal guarantee to back a loan application for the company. If the company can’t repay the loan due to insolvency, the lender can pursue the director personally for the outstanding amount.

If you can’t make these repayments personally, the lender may take legal action to recover the debt. This action will be noted on your credit report and will have a detrimental effect on your rating.


3. Improper trading

As per the Companies Act, directors are required to “exercise reasonable care, skill and diligence” in managing the company. If they fail to do so and the company becomes insolvent, they could face charges of fraudulent or wrongful trading. This could lead to personal liability for some of the company’s debts.

Directors of insolvent companies have a specific duty to prioritise the interests of their creditors. If you keep accepting money from customers and making orders from suppliers, knowing you can’t fulfil the orders or pay for the goods, you might be held personally responsible for the losses suffered by your creditors. 

Failure to settle your debts may lead the liquidator to pursue recovery actions against you, negatively affecting your credit rating.

Examples of wrongful or fraudulent trading that can harm your credit rating include:

  • Misusing company funds for personal gain rather than benefiting the business.
  • Selling company assets below their market value.
  • Manipulating company accounts and concealing insolvency from creditors.

4. Repaying Bounce Back Loans

We’ve mentioned how using company funds for non-business purposes can lead to issues during liquidation. One instance is the improper use of Bounce Back Loans.

Businesses facing difficulty in repaying a Bounce Back Loan should anticipate scrutiny regarding the loan’s usage if the company goes into liquidation later on. If it’s discovered that the loan wasn’t used to aid the business’s recovery as intended and the business becomes insolvent, you might be held personally accountable for repaying the loan. 

Consequently, actions might be taken against you that could have a negative impact on your credit rating.


How does a company liquidation affect my personal credit rating?

If a liquidator or lender resorts to recovery actions against you, like securing a County Court Judgment, it remains on your credit file for about six years. 

During this period, acquiring personal credit may become more challenging and costly for you. An insolvency event recorded on your credit report could potentially limit your job prospects, especially in regulated sectors such as finance.

As a director of another company, securing finance might prove challenging if you have a prior insolvency event on your credit file. While the effect is typically minimal for a single business failure, multiple insolvency events may lead lenders to exercise greater caution.



Seek Professional Help?

At Vanguard Insolvency, our insolvency experts can assist you in liquidating your company properly and addressing any issues that might harm your credit rating. Contact our team to schedule a complimentary, same-day consultation at one of our offices across the UK.

David Jackson MD
Senior Partner at Vanguard Insolvency Practitioners | Website

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.