Can my Personal Credit Rating be Affected by my Company’s Financial Difficulties?

In short, yes. It is possible for your credit rating to be affected by your company’s financial difficulties, but it does depend a lot on your circumstances.

If you are either a sole trader or a member of a partnership, you are personally liable for all business debts.

Directors of limited companies, however, enjoy limited liability; the debts are the company’s, not the director’s. However, there are exceptions…

Personal guarantees

Any amount that has been guaranteed personally by yourself, whether it’s under the company name or not, will become your responsibility to repay if the company cannot do so.

The main examples we find of these are on bank overdrafts larger than £10,000, business loans and leases on equipment or property.

Unfortunately, we find that many directors were not aware at the point of signing on the dotted line that they were personally guaranteed on certain amounts; the main culprits of this tend to be bank overdrafts.

When it becomes clear to the creditor that they will not be repaid by the company, they will not hesitate to pursue the director for the debt personally.

There is nothing that can prevent this eventuality other than payment by the company.

Fraudulent trading

Trading is classed as fraudulent if the company is insolvent. If your company is unable to pay its debts as and when they’re due, or its liabilities are greater than its assets, the company is unfortunately insolvent.

In this case, action must be taken immediately to address the situation. If directors are found guilty of fraudulent trading they can become personally liable for limited company debts.

This is because adding to the existing debts in the knowledge that they will not be repaid is classed as fraudulent, even if you are acting through the company. Any losses suffered as a result may become the director’s personal responsibility, and damages can also be added on top of this fee.

Unfortunately, simply telling an investigator that you thought the company could turn around will not wash with them. As director it is your responsibility to be aware of your finances; if you should have taken action closer to the point of downturn, this will be seen as fraudulent action.

Misfeasance

Similarly to the above, if a director is found guilty of misfeasance, they will become liable for company debts. This is in cases where individuals are aware of the inappropriate action they have taken and, as a result of this, another party suffers.

One example of misfeasance is tax fraud. This may sound very far from your intentions; however, it can easily creep up on you.

If you find that smaller debts have been paid while a large VAT bill has been left for a later date, this could be seen as misfeasance because you have shown preference to all creditors other than HMRC. A large VAT bill could spark a compulsory liquidation, and if you are in a similar situation to this it will not be a comfortable one.

Directors’ loan accounts (DLAs)

An overdrawn Directors Loan Account must be paid back at the point of liquidation. This is of course because any amounts loaned from the company must be paid back at the point of insolvency, or in other words, when the company needs the money back to pay its bills.

The director(s) will be personally liable for repaying any amount borrowed. The Insolvency Practitioner (IP) or liquidator can demand that the amount is repaid immediately, as they have a responsibility to act on behalf of the creditors.

Legal action can also be taken to force directors to pay – if they are not able to, this could unfortunately lead to bankruptcy.

Need to talk to someone?

You may notice that all of these eventualities can be avoided by taking insolvency advice at the right time.

If you’re concerned about the financial position of your company and how it could affect you, don’t hesitate to get in touch, because letting things take their course will undoubtedly worsen your situation, give us a call now on 0800 975 0380