Are you a director who is finding it difficult to repay a Bounce Back Loan? With many lenders now demanding repayments after the 12 month payment holiday has ended, you may be wondering what the implications would be if you were to close your limited company while owing the loan.
Making the decision to close a limited company is often difficult and the extreme conditions resulting from the pandemic can make this even harder. Businesses have been forced to navigate lockdowns to perhaps experiencing signs of economic recovery to the arrival of a new variant and further restrictions.
There remains a huge amount of uncertainty and there are plenty of companies that are struggling – and many of these will have taken out a Bounce Back Loan. In total around 1.5 million Bounce Back Loans were issued from lenders accredited by the British Business Bank – SOURCE: “British Business Bank” . These were worth some £47 billion and around a quarter of UK firms successfully applied. Perhaps this is just one debt of many you are trying to deal with?
Bounce Back Loans are Unsecured – What Does This Mean?
A Bounce Back Loan is an unsecured loan, which means the lender was not required to ask the borrower for security, such as their home or another asset. This means that in many cases, if your business is closed and even after the sale of assets there is little left over for the unsecured creditor, then the loan, along with other unsecured debts will be written off.
Can I Strike off my Company with a Bounce Back Loan?
The quickest and cheapest way to close a business down is dissolution, also known as striking off – GOV.UK “Striking off a Company” . This was subject to the agreement of creditors, you can have your company struck off the Companies House register. But, there is a crucial issue here – you can only dissolve a business if it is solvent. If you cannot repay your Bounce Back Loan and other debts, then it is likely you have more serious financial problems, and so the only route to company closure is through a formal liquidation.
You should be aware that if you strike off the company and creditors have not agreed to the measure, then you could be brewing up serious problems for the future. Creditors such as HMRC will scan dissolutions and will be quick to take action if they believe one has occurred incorrectly. Your company could then be reinstated and directors may face prosecution – this could include being disqualified and being pursued for the debts personally.
Is a Creditors’ Voluntary Liquidation Suitable if I Can’t pay a Bounce Back Loan?
A CVL is likely to be the most appropriate solution if you choose to close your business. This is because liquidation can either be compulsory or voluntary. A compulsory liquidation, also known as winding-up by the court, takes place when a creditor presents a petition to the court, requesting the business is closed down because debts have gone unpaid. If this is proven to be the case, then court action will ensue and a liquidator known as the Official Receiver will proceed to liquidate the company and investigate what has gone wrong, including the behaviour of directors.
In almost all cases, the alternative, known as a Creditors’ Voluntary Liquidation, will be the preferred option for most company directors. This is where directors are able to choose a liquidator who will oversee the process. Although they will be subject to investigation, directors will retain more control over the proceedings, compared to compulsory liquidation.
You will need to pay for a Creditors’ Voluntary Liquidation and the fees for this may be secured via the sale of assets. Or, some directors will opt to make the payment from their redundancy pay, which they are entitled to from the government, subject to them having traded for two years.
Where do I Find Advice if I Can’t Repay a Bounce Back Loan?
If you are unable to repay your Bounce Back Loan and have concerns that your financial company’s financial position is vulnerable and that you may be close to insolvency, then don’t delay seeking advice. The earlier you do this, the more likely you are to better manage this challenging situation.
A licensed insolvency practitioner will be able to give you expert guidance – they specialise in advising directors, including those who need assistance as a matter of urgency, such as if you have already been threatened with court winding up by a creditor like HMRC. They will be able to assess your situation and recommend the most appropriate course of action. This is not just about closure, they are also highly experienced in company rescue options such as a Company’s Voluntary Arrangement, if this is feasible, and this is the solution you are seeking.
Meanwhile, should you choose to liquidate, they will take charge of the procedure and handle communications with your creditors – including those where there is a personal guarantee, HMRC and employees if necessary.
Will Being Unable to Repay a Bounce Back Loan Stop me Starting a New Business?
The decision to close a limited company can be a difficult one and many companies expected to be well on the road to recovery now. However, the damaging effects of Covid-19 remain. The fallout is already being seen, with increasing numbers of insolvencies and an inability to repay Bounce Back Loans, along with other debts, which will be contributing to these.
However, many directors who needed to close a former business do start again. Providing your liquidation is managed by a licensed insolvency practitioner and is seen through to a correct conclusion, you will be discharged from your former responsibilities and outstanding debt with the business closed once and for all. The insolvency practitioner will settle debts with creditors where possible and others may well be written off – in the case of Bounce Back Loans, the government is required to reimburse the lender.
The exception will be if there was wrongdoing by directors within the company and this could include fraud or wrongful trading – this is where directors continued to trade, knowing they were insolvent. In these cases, you may face investigation by the Insolvency Service and you could be prevented from acting as director.
However, in the majority of cases, you will be released from the burden of insolvency, outstanding debt, and trying to keep a failing business afloat and can instead look forward to a fresh start with a new venture.