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Does Liquidation affect My Credit Rating

MANY company director worry about operating a business not viable and require liquidation. The ability to carry on personally without the episode hanging over you in a poor credit rating is essential. Just because your business has gone into liquidation does not mean you are a failure. It does not automatically change your credit rating at Equifax, Experian or Transunion.

Limited Liability 

Establishing a company that does business is a risky undertaking, and that is why there is a system of limited liability companies in the UK. A limited company enables an entrepreneur to take risks without impacting their finances. 

However, remember that directors have duties to run a company fairly and responsibly, according to the Companies Act. Company directors must “exercise reasonable care, skill and diligence” at all times. Suppose a director does not do these things and the company becomes insolvent. In that case, the “veil of incorporation” is possibly lifted, exposing them to personal financial risk. This will affect their credit rating, as the company could pass on its debts. The Insolvency Act 1986 requires directors of insolvent companies to act in the best interests of creditors. An example of trading that impacts you is wrongful or fraudulent trading. Wrongful trading is taking money and deposits from customers, knowing that you will not repay them. You are simply using that money to pay other creditors. 

As a company director, you should be aware of your directors duties & responsibilities, as ignorance is no defence.

After Covid-19, companies could use government support in Bounce Back Loans (BBLs) and other aid, but these loans now are scrutinised as banks seek repayment. If you used BBL for anything other than legitimate purposes, you are at risk of potential prosecution.

How can a company liquidation affect my credit rating?

A limited company in liquidation ceases to exist, and the director’s duties cease. This does not appear on your credit rating. But it will be reported if you attempt to raise credit for another business you are a director of. The credit rating agency will note, “exercise caution, the director has previous company failures”. Usually, this does not cause a problem if it happens only once, but if you have several failures, it will be difficult for your business to get credit, even with a well-performing business. 

Insurance companies are also particular on this point, and they may either refuse to insure or request a higher risk premium for business insurance.

Impact of an Overdrawn Directors Loan Account

If you take money out of business as dividends when the company is not making a profit, you borrow from the company and generate an overdrawn directors loan account.. Not an issue if you are sure to make a profit and repay. However, if the business goes into liquidation, the liquidator may demand you pay the money back. If you cannot do this, the liquidator may take legal action against you, which is possible bankruptcy on your credit file.

Searching for new employment?

Suppose you have been a director of a failed company and are applying for a high profile national security or finance job. In that case, it will likely be highlighted in an enhanced credit check or a “vetting procedure”. Whether this would stop you from getting another is down to the discretion of the prospective employer.

Further help on does liquidation affect my credit rating?

For further help on does liquidation affect my credit rating? Please contact John Waller on 0800 612 6448.

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