Will a company liquidation affect my credit rating?

If you need to liquidate your company and close its doors, you might be concerned about what will happen to your personal assets, and whether they’ll be considered or sold during the liquidation. Additionally, you may be concerned about your personal credit file and how the liquidation could affect your credit rating.

What is liquidation?

Liquidation is a term commonly associated with insolvent companies, with debts so severe they don’t have an option but to close. Creditors Voluntary Liquidation (CVL) is the most common form of liquidation, used for dealing with those situations. Once the liquidation process begins, the company will cease trading, halting creditor pressure while the liquidators work.

Unlike other insolvency arrangements, like administration or a Company Voluntary Arrangement (CVA), a liquidation’s primary objective is to close a company and ensure creditors get the best return.

Liquidations aren’t just for insolvent companies, though. They can be used to close a solvent company once it reaches the end of its useful life via a Members Voluntary Liquidation (MVL).

Your personal credit rating

Your credit rating is linked to your credit file, which logs your personal borrowing and repayment activities. You keep your credit rating healthy by repaying your debts on time and not taking out more lines of credit than you can afford. Taking out multiple lines of credit and falling behind on payments can damage your credit rating, making it harder to secure loans and mortgages.

Limited liability

An advantage of a limited company is it provides limited liability protection. So, if the business encounters financial difficulties or debts, it stays confined to the company and shouldn’t affect your personal finances or credit rating.

If you’re a sole trader or a member of a partnership, you don’t have limited liability protection. Consequently, your business assets and your personal assets are legally the same (unless you’re in a limited liability partnership).

When a liquidation might affect your credit rating

Although limited liability covers most scenarios, there are exceptions where the protection isn’t absolute. When securing finance for your company, you might have signed a personal guarantee. These ensure that if a business is unable to pay its debts, you as director will pay out of your own finances. They provide security to lenders and minimise any losses.

The same can happen if your business has an overdrawn directors loan account. A director’s loan account is an account of transactions between you and your company, excluding a salary and any dividends. An overdrawn account (if you have borrowed money from the company) means you, as director, are a debtor, and you must pay the money back. In a liquidation, the insolvency practitioner may insist you repay these overdrawn accounts. If you don’t have the resources to repay in a liquidation, your credit rating could suffer if legal action follows.

In summary

Liquidations are often associated with debt-laden companies on the brink of collapse, but they can be used to close solvent companies at the end of their lives too. In most, but not all cases, if you’ve acted lawfully as a company director, and in the business’ best interests, your credit rating shouldn’t be affected by a liquidation. In many cases, limited liability protection separates a company from its directors’ personal finances, minimising any potential impact. However, issues can arise if you have an overdrawn directors’ loan account, or personal guarantees which you cannot afford to repay. If the liquidator deems you haven’t acted in the company’s best interests, you can be held liable for the debts.

If these circumstances apply, then a company liquidation could affect your personal credit rating.

How we can help

If your company is struggling from unmanageable amounts of debt, and feel a liquidation could be your best option, we can help. Our insolvency practitioners have years of experience in helping struggling businesses. Our initial advisors can offer free, impartial advice and a no-obligation quote for the arrangement best suited for your business.

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