Are you a director who is finding it difficult to repay a Bounce Back Loan? Repayments on every Bounce Back Loan began 12 months after the money was drawn down, so if you are struggling with the instalments, you may be wondering what the implications would be if you were to close your limited company while owing the loan.
Deciding to close a limited company is rarely straightforward, and a Bounce Back Loan on the balance sheet adds a question most directors are unsure about: does the loan change how the company can be closed, and does it follow you afterwards?
Around 1.56 million Bounce Back Loans were issued through lenders accredited by the British Business Bank, worth roughly £47 billion. For many of the companies now closing, it is one debt among several rather than the whole problem.
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 – (see the GOV.UK guidance on striking off a company). You can apply to have your company struck off the Companies House register. Creditors do not have to agree first. You cannot apply if, in the last three months, the company has changed its name, traded or carried on business, sold property or rights held for sale in the normal course of business, or engaged in any other activity, apart from what is necessary or expedient to make the application, decide whether to make it, conclude its affairs or comply with a legal requirement. You also cannot apply while a winding-up petition, a CVA proposal or an administration is under way. The law does not require the company to be solvent, but you must send a copy of the application to every creditor, including the Bounce Back lender, and any of them can object. A director who uses strike-off to avoid repaying a Bounce Back Loan risks the company being restored, an Insolvency Service investigation, disqualification and a compensation order. If you cannot repay your Bounce Back Loan and other debts, then it is likely you have more serious financial problems, and so the company should normally be closed through a formal liquidation.
If you strike the company off without telling creditors, or to avoid paying them, you could be storing up serious problems for the future. Creditors such as HMRC and Bounce Back lenders watch for strike-off applications and can object, or apply later to have the company restored. Failing to send a copy of the application to a creditor is a criminal offence, unless you took all reasonable steps to send it. The Insolvency Service can also seek to have you disqualified and ask the court for a compensation order, which makes you personally pay towards creditors’ losses.
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 the shareholders nominate a liquidator to oversee the process and the directors must invite the creditors to nominate one. If the creditors choose someone else, their choice is normally appointed. Directors are still investigated, but they decide when to start the process and which insolvency practitioner to propose, which gives them more say than in a compulsory liquidation. Once the liquidator is appointed, the directors’ powers cease, except so far as the liquidation committee (or the creditors, if there is no committee) sanction their continuance.
The cost of a Creditors’ Voluntary Liquidation is paid out of the assets available to the liquidator, ahead of the preferential creditors and any floating charge holder. A lender with a fixed charge over an asset is still paid from that asset first. Where the assets are not enough, some directors choose to fund the fees, sometimes from their own redundancy pay. That is not automatic. You have to be able to show that you were genuinely an employee of the company, and a statutory redundancy payment needs at least two years’ continuous employment with the company. That requirement is about your employment, not about how long the company traded.
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, the liquidator will take charge of the procedure and deal with the company’s creditors, HMRC and employees on the company’s behalf. The liquidator does not act for you on any personal guarantee. Whoever holds the guarantee can still claim from you personally, so take separate advice on it.
Will Being Unable to Repay a Bounce Back Loan Stop me Starting a New Business?
Closing a limited company is a hard decision, and a Bounce Back Loan rarely sits on its own. By the time a director asks this question the loan is usually one of several debts, alongside HMRC arrears and trade creditors, and the loan is not what decides whether the company can carry on.
However, many directors who needed to close a former business do start again. When a liquidation run by a licensed insolvency practitioner ends, the company is dissolved, and creditors cannot pursue it for its unpaid debts while it stays dissolved. The debts are not extinguished, though: a creditor can apply to the court to restore the company to the register, normally within six years of dissolution, and then claim. You remain personally liable for any debt you personally guaranteed, for any money you owe the company (for example an overdrawn director’s loan account), and for any court order arising from misconduct such as wrongful trading or misfeasance. 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. Wrongful trading is where a director carried on after they knew, or ought to have concluded, that there was no reasonable prospect of the company avoiding insolvent liquidation or administration, and did not take every step to minimise the potential loss to creditors. The court may then order the director to make a personal contribution. 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.