Since they were introduced in May of this year (2020), more than one million Bounce Back Loans have been approved, with more than £30bn of funding landing in the accounts of the UK’s small businesses.
However, for some businesses, even these attractive loans will not be enough to save them. That’s why it’s so important that you understand the potential implications if you default on the loan and your business enters liquidation.
Read on to learn more about closing a company with a bounce back loan.
What is the Bounce Back Loan Scheme?
The Bounce Back Loan Scheme (BBLS) is a loan with very favourable terms that was introduced by the UK government to give small businesses a quick source of affordable funds.
Under the BBLS, small businesses can access 25% of turnover up to a maximum of £50,000 to help them ride out the Covid storm.
No interest is charged for the first 12 months, and importantly, the loan is 100% government-backed. That means there’s no need for assets to be provided as security or personal guarantees to be given by company directors.
What Happens if you Default on a Bounce Back Loan?
Defaulting on a BBL is not as significant as defaulting on a loan with a personal guarantee attached since the lenders have no security over any of your assets.
That said, the government has advised lenders to follow their usual protocols for chasing and enforcing loan defaults. This will mean threatening letters, court action and potentially baliffs if you don’t pay, within what timeframe remaining unclear at this point.
As with many aspects of the response to COVID-19, the speed of the Bounce Back Scheme Rollout has left gaps in the official legislation, one of these being exactly what recourse the lenders have to chase borrowers for unpaid loans through the courts.
Many lenders fear that the sheer volume of loan defaults will make it impractical for them to chase everyone. In addition they fear the public relations implications of chasing businesses already belaguered by COVID-19 related debts.
The key point here is that while simply not paying back the loan is unlikely to yield decisive and immediate action from which lending institution you used, it will happen eventually. As with any debt, ignoring them doesn’t mean that the problem will simply go away.
In addition, if your company is actually insolvent, that comes with its own statutory responsibilities.
What Happens if you Don’t pay Back a Bounce Back Loan?
If you cannot pay back the Bounce Back Loan, your company has likely reached a state of insolvency, one of the definitions of which is an inability to pay bills when due.
The state of insolvency puts directors at risk unless you understand what it means and how it changes your responsibilities.
Insolvency means a directors key responsibilities lie with creditors and not shareholders. This means you cannot pay anyone (employees, yourself, any creditor etc) without risk of showing preference. Showing preference of any kind can contribute to a director being help liable for wrongful trading, a serious civil offence which can make directors personally liable.
This includes using the bounce back loan to pay back a loan which does have a personal guarantee, as that would be showing preference.
What Happens to a Bounce Back Loan in Liquidation?
If your company has been hit hard by the outbreak and cannot afford to repay its debts, you will need to decide on the best course of action. If the business cannot be rescued, you will be left with little choice but to close the company down.
A creditors’ voluntary liquidation is the process of closing down a company with debts voluntarily. A licensed insolvency practitioner must be appointed to sell the business’s assets, repay the creditors in a prescribed order and close the company down.
If your company does go into liquidation, banks are usually secured creditors, as their debts are secured against company assets. That means they would be among the first creditors to be repaid from the funds generated by the sale of the company’s assets. However, this is not the case with a Bounce Back Loan.
When you enter liquidation, the Bounce Back Loan becomes an unsecured debt, as the loan is not secured against company assets. Unsecured debts are rarely paid in full on liquidation. In that case, as the Bounce Back Loan is secured by the government, the lender will pursue the government for repayment in full.
Can you be Made Personally Liable for Bounce Back Loans during a Company Liquidation?
So far then, the situation seems clear cut. If you cannot repay a Bounce Back Loan, whether the company is liquidated or otherwise, then you will not be personally liable for its repayment.
However, there are two scenarios when personal liability issues may arise.
1. When the funds are not used for the benefit of the company
There are relatively few rules that dictate how Bounce Back Loans can be used. As long as the funds meet the broad goal of benefiting the company economically, then the directors can choose to use them as they please. That includes paying company bills, buying supplies and paying staff wages. However, there are rumours that some directors are taking advantage of the scheme by using the funds to buy personal assets, invest in property and pay off personal loans.
If the company fails and enters into a formal insolvency procedure such as administration or liquidation, an insolvency practitioner must be appointed. As part of their role as the administrator or liquidator, they will investigate the reasons for the company’s insolvency, including how a Bounce Back Loan has been used. If they find the loan has not been in accordance with the terms, an act known as misfeasance, the company directors could be made personally liable for the repayment of the loan. That could put personal assets such as savings, vehicles and property at risk.
2. When you pay certain creditors ahead of others
Under the terms of the Bounce Back Loan Scheme, the funds can be used to refinance existing company debt. However, you must be extremely cautious if this is a route you plan to take. If the company is or becomes insolvent, you are legally obliged to act in the best interests of the creditors as a whole. If repayments are made to certain creditors and not others, then as a company director, you risk making preferential payments that could lead to you being made personally liable for the company’s debts.
An example of a preferential payment could be a loan that’s repaid to a connected party of the company such as a board member, relative or friend, while other unsecured creditors such as HMRC go unpaid. A preferential payment is often a payment made in physical cash, but it could equally be the transfer of an asset in part or full settlement of a liability.
When a business enters into a formal insolvency procedure, any transactions made during and in the period leading up to the insolvency will be scrutinised by the insolvency practitioner. If they find that the Bounce Back Loan was used to make payments to certain creditors and not others, you could be made personally liable to the value of the payment. The transaction will also be scrutinised by the Insolvency Service to determine whether you should be disqualified from operating as a director in the future.
What Steps can you Take to Avoid Personal Liability for Bounce Back Loans?
The Bounce Back Loan Scheme is intended to help small businesses that have been financially impacted by the coronavirus outbreak and are struggling to repay their debts. However, even with this additional funding, some companies will still fail and company directors may be concerned about the potential implications of the loan.
Importantly, a Bounce Back Loan will not prevent you liquidating your company as normal. As long as the loan has been used correctly, the company’s debts will be repaid from the sale of assets and any remaining debt will be written off. The insolvency practitioner will commence an investigation, but as long as you have fulfilled your director’s duties and the Bounce Back Loan has not been misused, you should not have any issues.
Expert Advice is a Click Away
If you intend to refinance existing company debts using a Bounce Bank Loan or your business has received funds from a Bounce Back Loan but is still struggling, contact our team of licensed insolvency practitioners immediately. We will provide a free, no-obligation initial consultation to discuss your circumstances and explain your options.