This is a question we get asked a lot. It is a legitimate concern for any director who may be finding that their business is not viable and they need to liquidate the company. The ability to carry on with ones life without the episode hanging over you in the form of a poor credit rating is important. Just because your company or business went into liquidation it doesn't mean you are a failure and it doesn't automatically change your credit score at the likes of Experian or Equifax.
Setting up a company to do business is a risky endeavour and that is why there is the system of limited liablity companies. A limited company allows an entrepreneur to take risks without it impacting their own personal finances.
However, it should be remembered that directors have duties to run a company in a fair and responsible manner. The Companies Act says they should "exercise reasonable care, skill and diligence" . If a director does not do these things and the company becomes insolvent then there is the possiblity of the "veil of incorporation" being lifted and exposing them to personal financial risk. This will effect their credit rating in that the debts of the company could be passed onto them. The Insolvency Act 1986 places a very specific duty on directors of insolvent companies to act in the best interests of creditors. The most obvious example here of trading that can have personal implications is wrongful or fraudulent trading. Wrongful trading is most characterised by taking money and deposits from customers knowing that you will be unable to repay them and you are just using that money to pay other creditors.
Following Covid-19 companies were able to draw on government support in the form of Bounce Back Loans (BBLs) and other help, but the use of these funds will come under increasing scrutiny as banks start to demand repayments. If you have used BBL for purposes other than for the company to "bounce back" then you could be at risk.
How would my credit rating be affected by a company liquidation?
Once a company goes into liquidation, the company ceases to exist and the directors duties cease. This does not appear on your personal credit rating. But if you try and raise credit for a different company of which you are a director it will be flagged. The credit rating agency will say something like "exercise caution as the director has had previous company failures". It is simply a case of once bitten twice shy. Normally, this does not cause a problem if it happened just once but if you have had multiple failures it will be difficult for your company to raise credit, no matter how well it is doing. Insurance companies are particularly picky on this point so you will probably pay a higher premium for business insurance.
Overdrawn Directors Loan Account
If you take money out of the business as dividends when the company is not making a profit you are in effect borrowing from the company. This is not a problem if you are confident that you can get back into profit and pay it back. However, if the business goes into liquidation then it is possible that the liquidator will demand that you pay the money back. If you cannot do this then the liquidator may take legal action against you which will appear on your credit file and in some cases may make you bankrupt.
What about getting a new job?
If you have been a director of a failed company and you are applying for a high profile job in national security or finance then it is likely that it will be flagged in what would be called an enhanced credit check or a "vetting procedure". Whether it would stop you getting work is impossible to say as it would be at the discretion of the employer.
Worried about poor cashflow? Feel you have got into a bit of a mess? Covid-19?, How to pay wages on pay day? For reassuring advice on a range of issues download our free Ultimate Guide For Worried Directors today. Or just call us on 0800 9700539
Please note that the guide includes updates due to Covid-19 For instance there have been some changes to insolvency legislation that limits creditors actions. A new 20 day moratorium for distressed businesses has also been introduced.