If you are looking to a company liquidation of a business of which you are a director you may be concerned as to whether it will affect you personally and more specifically your credit rating.
Whilst we’d like to give you a definitive answer to the fact is that we can say for definite ‘it depends!’
The first place to start is the act of liquidation itself. Remember that liquidation happens to a company and not the individual directors so in many ways it is isolated from your personal credit history.
Your credit history is a listing of all the financial dealings that you’ve had personally and in general, won’t include any debts or legal judgements that attach to a company you are a director of. By extension, this also means that your family won’t be affected. Of course, as with most things in life, reality can be a little more complex.
It’s important to bear in mind that liquidation – the act of actually winding down the company and formally ending its life – is completely different from going into administration or agreeing on a Creditors Voluntary Arrangement. In fact, a liquidation can happen to a company just because it has reached the end of its life and not necessarily because it has found itself in financial difficulties.
An example of this would be a business that has sold off any trademarks or Intellectual property, has no assets or liabilities and no staff save for the directors. In this case, it makes sense to liquidate the company and have it removed from the Companies House register to avoid the administrative tasks that naturally go with a limited company.
In this case, the directors probably won’t have any guarantees active and in any case, as there are no liabilities outstanding they won’t be acted upon. By the same token if there are no upset creditors then there is likely to be little in the way of investigation as to conduct and hence no likelihood of an adverse finding against an individual. Consequently, there will be little or no impact on any single person’s credit rating.
The opposite can certainly be true if a company goes into liquidation due to creditor action.
Often as part of the normal process of raising money, agreeing on an overdraft or taking on leases, directors will give personal guarantees and this is where it can get a bit tricky.
A personal guarantee means that if the business can’t pay its debts then the creditor can legally call on the person granting the guarantee to make good their loss. Admittedly this is not necessarily a problem where the debt is small or a director is a wealthy person but it is a regular occurrence that the finances of director’s mirror that of their company and it can prove difficult to pay back money that will allow a guarantee to be released.
If the director can’t pay then the creditor can take legal action and in this instance, the credit history of the director will certainly receive a black mark, something that should be avoided if at all possible.
Even if no guarantees exist it is also true to say that many directors run overdrawn director’s loan accounts with their companies, often in anticipation of future dividends.
In the good times this isn’t a problem but when a company goes into liquidation the loan account is an asset that the insolvency practitioner will expect to be repaid. Again, as with guarantees, this is no issue where the director has the personal resources to make good the shortfall but where they fail to pay, either willfully or because they simply can’t raise the cash then the practitioner may choose to take legal action to recover the debt.
In these cases, it’s clear that a liquidation, or more accurately the results of the liquidation can most definitely affect the director’s personal credit history and this can be a lasting effect of the unfortunate demise of the company.
As we can see there are some situations where liquidation may result in an entry in a personal credit file. In some cases, this won’t hinder the director, especially where the credit required is fairly minimal such as when buying a mobile phone. In other cases, it can prove a major blocker to arranging a mortgage or loan.
As we saw in our earlier case of the business that goes into liquidation without owing any debts, it is unlikely that there will be any official effect, however, there may be more ‘unofficial’ credit issues.
When arranging personal type credit it is highly unlikely that the lender would consider any information from sources such as Companies House however for directors that want to buy, finance or start another company there may be issues.
In these situations, lenders will likely do a background check on the business history of the applicant and in these instances, they will take into account any failed businesses in the recent past.
Directors will need to make sure they have a convincing and ideally evidenced case to show why the liquidation of a business wasn’t due to negligence or poor management.
As we can see whilst the received wisdom may be that directors of limited companies are shielded from any personal legacy of liquidations, in real life, there are a number of practical issues that may prove to be stumbling blocks.
If you are a director of a company that is considering its position then you need to make sure that you get experienced and qualified advice early on to ensure that a liquidation won’t affect your personal credit history.