Could the business closing affect my credit score?
As mentioned above, we will be discussing the consequences of closing a company, and how that may affect directors in the future.
As a director, you are bound by certain responsibilities and must always act for the good of the company. Directors of limited companies have little risk (or limited liability) of falling foul of company debts if the business fails. However, you must have acted properly – in accordance with the Companies Act 2006 along with the Insolvency Act 1986.
If you do not act appropriately, or fail to act reasonably and keep proper accounts and records, you may face director’s liabilities. Furthermore, if you continue to take credit knowing the company does not have the resources to make repayments, you are at huge risk of personal liabilities for the company debts. This action is regarded as wrongful trading and, if proven, can put you at very personal risk. More information can be found on wrongful trading here. In short to avoid being accused of wrongful trading you should take steps to deal with the company’s insolvency when it is clear there is no chance of recovery.
If you continue to rack up debt when you have already determined the company will be entering liquidation, it may be classed as fraudulent trading. If found guilty, you could even face imprisonment.
As mentioned above, a director of a limited company is generally protected from becoming personally liable for company debts unless they have acted improperly. However, for sole traders and individual members of a partnership, the same cannot often be said. The above are personally responsible for any debts and assets, such as your home, could potentially be put at risk. Ultimately, the business is not a separate legal entity, and any adverse financial issues will be placed against your personal credit report. This can then have a great impact on any future business ventures or when seeking additional credit.
As a sole trader, you are also more at risk of a bankruptcy petition. It’s important to note that a creditor must be owed £5,000 to submit the petition against you personally, thus affecting you later in the future. Bankruptcy can affect your professional status, with many professional industries unable to hire those who have entered the procedure.
A director personal guarantee is often demanded by a lender in support of a loan application. For instance, the terms of a director personal guarantee, typically, makes clear that the director must pay back the debt should the business enter company liquidation. If the company does become insolvent, you will inevitably be left paying the debts as outlined in the personal guarantee.
Failure to make repayments or contact the company creditors regarding your financial situation may make it worse. They will, likely, personally pursue you for the debt. This will also be placed against your personal credit report, affecting you in any future business.
As some additional advice, we suggest you ensure you are keeping proper records for the business. For example, making sure all tax returns, VAT returns and annual returns are complete and on time to show that you acted properly during your time as director. Beyond a director personal guarantee, another reason you may suffer directors liabilities for the debts is that it is proven you didn’t act correctly. All directors have ‘fiduciary duties’, stating you must ask in the interest of your creditors and not yourself.
Examples of improper actions include:
- Using company money for purposes that do not benefit or work in the interest of the business
- Selling company assets at lower than market value (this sale can later be challenged by the liquidator)
- Falsifying company accounts and not revealing finances to creditors
- Continuing to take credit without the ability to pay back
Overdrawn directors loan account
Similar to the above, an overdrawn directors loan account means you are also personally liable for that particular loan. The licensed insolvency practitioner (IP) who will oversee the company liquidation procedure can demand repayment for the debt to help repay the creditors. The IP also has the power to take legal action against you personally for the repayment. This action could could even result in bankruptcy.
If you are aware you have an overdrawn loan account, yet the company simply cannot continue to trade solvently, you should seek to engage the appointed liquidator early in the process. This can help reduce the overall costs in the liquidation. Therefore, more funds are available for creditors, avoiding personal liability for legal costs. An overdrawn loan directors loan account will only show on your personal credit file if your liquidator has to take legal action. Similarly, if they obtain a judgement in default of repayment.
Business and personal credit reports
You have separate credit reports with agencies – one as a consumer and another as a company. The information in your business credit file, however, does not, generally, affect your personal credit report. The finances are kept separate. If the company has not yet built up a credit rating, the lender may take a look at your personal report. In the case of sole traders, the lenders may use software to integrate personal and business credit scores when making lending decisions. This enables them to find the likelihood of repayment of the debt. If you have previously entered an IVA or bankruptcy, that is likely to affect your ability to gain credit.
For limited companies, the information regarding your business credit file is obtained through a number of sources: Companies House and the Registry Trust (detailing County Court Judgements). If your company has successfully obtained business credit, the file will detail if the business met the terms and repaid in full. The file is designed to provide an overall picture of your company’s finances and practices.
What can affect personal credit?
As mentioned above, sole traders who have failed to repay loans are likely to suffer from an adverse credit report. A limited company is completely separate. Therefore, entering liquidation will not appear on your personal credit file. However, a defaulted personal guarantee will mark against your report.
Applying for a business loan can also affect personal credit where you are a new startup, as with insufficient information they are likely to check your own report. They may carry out a ‘soft’ or ‘hard’ inquiry and, if the business loan is rejected, it can reduce your personal credit score.
It’s also important to note that an IVA will be marked against your credit report for the entire period, and three months after. You may also struggle to obtain credit afterwards.
Liquidation is different to bankruptcy
While we have touched on bankruptcy, it’s important to note that being a director of a limited company does afford you protection. As a director, you will not be responsible for the debt without a director personal guarantee, and if you have acted properly and in the interest of the creditors throughout your role.
Personal bankruptcy is a serious black mark against your credit. However, being the director of a company entering liquidation is will not leave a mark against the same.
Liquidation is different to bankruptcy and directors are not, generally, liable for company debts. The best thing you can do is seek advice at the earliest possible opportunity to ensure you do not suffer any liabilities or affect your personal credit rating in the future. Our business rescue experts can provide advice on the most suitable solution for your business, and what that means for you personally.