Will Liquidation Affect My Credit Rating?

A liquidation of your company will not affect your personal credit rating, as the company is a separate legal entity.

However, if you subsequently apply for credit in the capacity of a director of a limited company, the credit reference agency will likely identify that a company you were the director of has previously entered into liquidation and will alert the credit provider to this, which may impact on their ability to advance funds to the new company.

What is liquidation?

Liquidation is a process used either by insolvent companies to wind up their affairs, or solvent companies to wind up their affairs and seek the benefits of BADR and similar. View our guide to liquidations for more information.

How long does liquidation stay on credit file?

Credit defaults are usually kept on credit files for a period of 6 years, so it is likely that the liquidation will remain “on record” until six years has passed from the date of the company entering into liquidation. There may be also defaults recorded by creditors following the liquidation, which could extend this period.

How would my credit rating be affected by company liquidation?

Your personal credit rating should not be affected by company liquidation, unless you are indebted to the insolvent company and the liquidator is obliged to recovery action against you, such as obtaining at County Court Judgement. Such action would appear on your creditor file for approximately six years.

This can be avoided by engaging promptly with the liquidator regarding any monies you owe, and agreeing repayment proposals.

Additionally, if you have provided any personal guaranties in respect of the company’s debts, and do not agree repayment proposals with these creditors, any enforcement action they take may also show up on your credit file.

As noted above, it may impact on a future company’s application for credit, as you will be noted as the director of an insolvent company.

Will Liquidation affect me getting a new job?

This will depend on the type of employment you are seeking. Certain sectors may, such as the financial services, as part of their job criteria not accept applicants who have previously been involved in insolvency.

Whilst you will have significantly less restrictions than if you have become personally insolvent, it will be necessary to make enquiries regarding any future role to establish if the liquidation precludes you from taking the opportunity. Again this is most likely to be relevant in regulated industries, and in those industries as the liquidation is a matter of public record, your prospective employer will be able to see you were involved in an insolvent company, should they choose to investigate your work history.

Whilst consideration to the foregoing is sensible, in the majority of circumstances, being a director of an insolvent company will not impact on your ability to obtain future work, and the insolvency practitioner advising you should be able to give you guidance, or refer you to an appropriate expert for advice.

What are the consequences of liquidation?

In liquidation a licensed insolvency practitioner will be appointed as liquidator of the company. The company’s activities will cease and the liquidator will look to realise all assets of the company from debts, including loan accounts, to physical assets, such as a stock. What is an insolvency practitioner?

The liquidator will also investigate the directors and company’s conduct and look to see if any antecedent transactions, such as preferential payments to certain creditors, have occurred. If so, the liquidator will look to over turn these transactions.

Additionally, if the director has committed any offences under the Companies Act 2006 or Insolvency Act 1986 these will be reported to the Insolvency Service by the liquidator as part of their conduct report. If sufficient evidence is available that the directors have committed misconduct, the Insolvency Service may conclude that it is in the public interest to disqualify the directors from acting as directors and bring proceedings in this regard.

In addition to the foregoing, all personal guarantees will crystallise and creditors will look to payment from the guarantors.

This work should ultimately result in realisations into the liquidation wherever possible, and, after settling the agreed costs of the liquidation, a distribution being made to the company’s creditors. Thereafter, the liquidator would look to close the liquidation, resulting in the company being dissolved.

Can I liquidate my company and start again?

You can liquidate your company and establish a new company operating in the same or similar field.

However, it is important to distinguish between both companies, in particular in the use of the insolvent company’s name and /or trading style. Whilst you may acquire the trading name of the company from the liquidator, you must take steps to notify creditors of your intention to use this style. If you fail to take appropriate steps, under section 216 and section 217 of the Insolvency Act 1986, should the new company enter into liquidation, you will become personally liable for its debts and lose the limited liability protection.

It is therefore imperative that you seek advice should you wish to trade in the same style as you did previously, to insure the correct procedures are followed.

What happens to debt when a company goes into liquidation?

Any money owed by the Company to its creditors will rank for payment as appropriate in the liquidation proceedings. Secured creditors will be paid in respect of their fixed charge security before any proceeds are released into the estate, as the secured assets cannot be sold without their consent. Where no surplus funds are available, or the assets’ value is less than the secured debt, in most scenarios no proceeds will be paid to the liquidator (unless the secured creditor has agreed to release funds to cover certain costs) and secured creditors claim will become either a floating charge or unsecured claim, depending on their security.

Preferential creditors are paid next after fixed charge secured creditors and the costs and expenses of the liquidation. There are two tiers of preferential creditors. The first is the Company’s employees and pension, which must be paid in full before the second tier is paid. The second tier is certain current HMRC liabilities such as VAT and PAYE (buy not Corporation Tax).

Any funds available after preferential creditors are paid in full, is thereafter distributed to the floating charge creditors. Where these funds are in excess of £10,000 the liquidator must create a fund known as the prescribed part (£5,000 of the first £10,000 distributed, 20% of the remaining balance to a maximum of £800,000) which must be put aside for the unsecured creditor. Where only a modest prescribed part exists, the liquidator may apply for this to be disapplied as the costs to distribute will outweigh the benefit to creditors.

The prescribed part would be distributed to the unsecured creditors. Should the floating charge creditor have been paid in full, and further funds remain, these funds would also be paid to the unsecured creditors. Finally, in extreme circumstances, where there is a surplus after all creditors are paid in full, together with statutory interest, and the costs and expenses of the liquidation are discharged in full, and a credit balance remains, these funds would be paid to the Company’s shareholders.

Is liquidation good or bad?

Liquidation is neither good nor bad, but a necessary legal process that is required in our society. In a civilised society where there is credit, there will inevitably be debt, and bad debt. The Insolvency Act 1986 is the legislation set up to provide a formal legal mechanism for the recovery of money, wherever possible, for the benefit of creditors and the work of the liquidator serves to ensure these funds are distributed in accordance with the law equally to all creditors.

To creditors liquidations are no doubt undesirable, but can also be learning opportunities resulting in reviews of their own business terms, credit control systems and similar to minimise future exposure, and prompting consideration as to whether there is insolvency insurance available to their sector to mitigate future losses from insolvent clients.

For directors, liquidation is a usually a difficult process at the commencement of the insolvency as staff are made redundant, and for owner managed businesses the company that they had built ceases to trade. However, it is often the case that directors find insolvency to be a significant learning experience, enabling them to have much more successful companies in the future that are more robustly structured and that the insolvency process itself provides a significant mental health benefit as it takes away the distress and sleepless nights worrying about the business.

How long do companies stay in liquidation?

The majority of liquidations take around 12 months to conclude. This period usually affords the liquidator sufficient time to dispose of the company’s assets, agree creditor claims and make a distribution to creditors, conclude the company’s tax affairs and fill the necessary closure paperwork.

Liquidations predominantly run beyond 12 months where there is complexity with the assets. Examples to be considered here are claims that the liquidator may wish to litigate, which can run for a number of years depending on the defences raised and the availability of the Courts to hear the claim.

Alternatively, if the company was in construction, it may be due to receive a number of retentions from customers, and the liquidation may have to remain open whilst the liquidators await the expiry of the retention period, as it is unusual for these debts to be repaid early.

Can you be a director of a company after liquidation?

You can be a director of a company after a liquidation. The only circumstances you cannot be a director are if you are disqualified from being a director, or have entered into bankruptcy. You should also consider the provisions of Section 216 and 217 of the Insolvency Act 1986 which relate to the reuse of company names / trading styles, as detailed above.

Is Voluntary liquidation bad?

Whilst voluntary liquidation is inevitably a difficult process for all stakeholders, it is not inherently bad, and indeed under the Companies Act 2006 directors are obligated to take steps to deal with the company’s affairs where they perceive the company is, or may about to be, insolvent.

By placing a company into voluntary liquidation, the directors are therefore meeting their fiduciary duties / legal obligations and whilst it is not a desirable process, it is a necessary one.

What is Generally Contained in a Credit file?

The following are items that are usually registered on credit files:

Notably, undertaking too many credit searches in a short period of time can be a red flag to lenders, as this indicates that you may be seeking to simultaneously take several lines of finance.

What are the differences between Liquidation and Bankruptcy?

Liquidation is an insolvency event that relates to the cessation of the activities of a company or limited liability partnership, which is registered at Companies House.

A bankruptcy is an insolvency event that happens to an individual, including sole traders, as opposed to a company.

A Compulsory Liquidation is similar to a Bankruptcy in that they are both Court led insolvency processes, with the key distinction between the two being that companies are liquidated and individuals are made bankrupt (but not vice Versa).

For further information and impartial advice, feel free to give us a call on 0113 242 0808 or e-mail advice@chamberlain-co.co.uk