How Does a Company Liquidation Affect You Personally?
During the liquidation of a company, a licensed insolvency practitioner is tasked with realising and liquidating company assets to repay creditors. If your limited company becomes insolvent, you will likely be wondering what effect this will have on both your personal credit rating and any future endeavours. So, how does a company liquidation affect you personally?
Although a limited company is considered to be a separate legal entity to its directors, during liquidation there are a number of circumstances under which the directors of the company may become liable for the company debts. These include any instances of wrongful trading, outstanding Bounce Back Loan repayments, a personal guarantee or overdrawn loan accounts. The liquidation of a company may also make it more difficult to obtain new employment especially in the financial industry, acquire financial products, or start a new limited company.
Keep reading to find out more about what effect a company liquidation can have on your personal credit rating, and other impacts company insolvency may have.
How a Company Liquidation Can Affect Personal Credit Rating
While a limited company is classed as a separate legal entity and so directors should not under normal circumstances suffer any of the company debt in the event of insolvency, there are a number of circumstances that could result in an impact to personal credit rating.
Wrongful Trading
Under the Companies Act (2006), the directors of a company are required to carry out their duties with ‘reasonable care, skill and diligence’ while running the company. If this guidance has not been followed and a company becomes insolvent, the directors may be found guilty of fraudulent or wrongful trading. The director/s may then become personally liable for the company’s debt.
Bounce Back Loan Repayments
When a business received a Bounce Back Loan (BBL), it was under the guidance that the loan must be put to use for the benefit of the business. The loan could then be repaid over a series of months, often taking years to repay.
Directors of limited companies are generally not personally liable for repaying a Bounce Back Loan. The loan is secured by the government, and personal guarantees are not required. However, if the loan was misused or obtained fraudulently, directors could face personal liability.
Personal Guarantees
When a director is applying for a business loan, it is fairly common that a personal guarantee will be provided, so that creditors are assured of the director’s intentions to cover the cost of the loan. During liquidation, a personal guarantee may result in the lender pursuing the director personally for repayment, which would negatively impact personal credit rating.
Overdrawn Loan Accounts
The director of a company is able to use a business account to take out loans, which does not present any issues as long as the company remains profitable. The loans must also be repaid if required.. The overdrawn amount is considered an asset on the company’s balance sheet until it is repaid and its important that directors should aim to repay the loan promptly to avoid potential legal and financial complications
If the loan exceeds £10,000 at any time during the tax year, it may be subject to tax as a benefit in kind. The company might also face additional tax liabilities.
Mismanagement or failure to repay can lead to serious consequences, including personal liability if not properly recorded or managed.
How Else Can a Company Liquidation Affect Me?
If your company goes into liquidation or a lender is forced to take recovery action against you with a County Court Judgement, this will likely remain on record for six years, but can remain for even longer. During this time, there may be certain other challenges that you face, such as the following.
Future Career Prospects
If you apply for a new job, especially in the financial industry, your prospective employer may make a note of your previous activity with liquidation. Some companies will not accept applicants with previous liquidation involvement.
Financial Products
With a previous insolvency event against your personal credit file, it may prove difficult to obtain financial products such as a mortgage or other personal loans. This will be due to the damaged personal credit rating that may arise during liquidation.
New Companies
Once a company becomes liquidated, the director is able to become a director of another company. The only restriction to this is under Sections 216 and 217 of the Insolvency Act of 1986, which relate to certain rules that a new company must follow, such as the name and trading styles. If these rules are not followed, the director may become personally liable for the new company’s debts and lose limited liability protection.
Receive Expert Insolvency Advice
If you are facing company liquidation or are still concerned how insolvency may impact your personal credit rating, speak to one of our expert financial advisors today. We provide confidential advice which can put your mind at ease, and give you the help you need to protect your assets.
Established in 2018, the directors at Restart BTi have over 50 years of experience to assist companies, business owners and individuals with expert advice and tailored solutions when facing financial difficulties.
