The Bounce Back Loan scheme was a great help to many small business owners during the pandemic, allowing them to trade and recover from the strains that were placed upon them.
However, despite the support, many businesses still struggled to stay open and faced a position of Liquidation. At The Insolvency Experts, we can help you through the process of liquidating your business whilst still having a Bounce Back Loan.
What is a Bounce Back Loan (BBL)?
A Bounce Back Loan (BBL) is a UK government scheme that provided financial support to struggling businesses that were losing revenue as a result of the COVID-19 pandemic.
The scheme predominantly targeted businesses, mainly SMEs, who would see benefit from a smaller influx of cash as opposed to taking out a large outright loan.
If you are struggling to pay back your BBL, read our blog on repaying CBILS or BBLs.
How do Bounce Back Loans work?
Under the BBL scheme, small businesses could access 25% of turnover of up to a maximum of £50,000 to help them get through the financial strain that the pandemic caused.
No interest was charged for the first 12 months, and the loan was 100% government backed, meaning there was no need for assets or personal guarantees to be provided as a security.
What happens if you don’t pay back a Bounce Back Loan?
Technically, as there are no assets or personal guarantees attached to the BBL, you won’t lose anything and it will not directly affect your credit score either.
Some banks have stated that they will take the failed loan repayments into consideration for standard loan applications in the future. Other banks have stated that they will chase unrepaid BBLs in the same way that they would try to recoup any other unsecured loan.
This could potentially involve dealing with debt collection agencies, court action and bailiffs.
If you cannot repay the loan, it is likely that your company has reached a state of insolvency. If you choose to prioritise paying back a loan which has a personal guarantee attached to it using the BBL, without the consent of creditors or shareholders, you may be held liable for wrongful trading.
This is a serious civil offence and could make you as a director personally liable.
What happens when a company with a Bounce Back Loan goes into liquidation?
In the event that your company goes into liquidation, the BBL is turned into unsecured debt due to the lack of personal guarantees associated with the loan.
In this case, the BBL is secured by the government and the lender will pursue the government for it to be repaid back in full. This unsecured debt is written off once the company is liquidated, so directors will not be held personally liable.
Responsibility to repay the loan remains with the company and so liability will not be transferred to you as a director, provided you have complied with director duties.
However, if during the liquidation process a liquidator finds evidence that you have used your BBL improperly, they could make you personally liable for the debt.
Can I liquidate my company with a bounce back loan?
Yes, even if your company has taken a BBL, it can still be liquidated.
Some businesses can find it hard to recover from the effects of the pandemic even with the additional support of government funds. The recovery of your business may not be realistic, especially if it has become insolvent.
If you have taken out a BBL, you can use a Creditors Voluntary Liquidation (CVL) to liquidate your insolvent business.
Can directors be made personally liable for a Bounce Back Loan during company liquidation?
There are two situations in which you may be held personally liable for a BBL during formal liquidation:
Funds are not used for the benefit of the company:
As long as the funds are used in the broad aim of benefiting the company financially, the directors can choose to use the funds as they wish. This can include paying bills, buying supplies and paying wages.
However, it has been recognised that some directors have taken advantage of the BBL scheme by using the funds to buy themselves personal assets and invest in property.
When a company enters insolvency or liquidations, a formal insolvency practitioner must be appointed. In their role as liquidator or administrator, they are required to investigate the reasons behind the company’s financial downfall.
If they find the loan has been used incorrectly, the act known as misfeasance, the company director could be held personally liable for the full repayment of the loan which can put personal assets such as property, vehicles and savings at risk.
Directors choose to repay certain creditors ahead of others:
Under the terms of a BBL, the funds can be used to refinance existing company debt, but directors must be cautious if this is the route they plan to take.
If the company is insolvent, directors are legally obliged to act in the best interests of the creditors. If repayments are made to certain creditors before others, directors may be at risk of making preferential payments which could result in them being held personally liable for the company’s debts.
For example, a preferential payment would be repaying a loan to a connected party member of the company before repaying HMRC.
Transactions will be heavily scrutinised by insolvency practitioners, and they will determine whether or not you should be disqualified from being an operating director in the future.
How to close a company with an outstanding Bounce Back Loan
You can close a company with a BBL by using a CVL, which means your company will cease trading and operating. Once your company’s assets have been dealt with, it will then be formally struck off the Companies House Register, known as striking off.
A CVL is a good option for businesses which are insolvent and do not have the funds to repay their debts, but wish to avoid being forced into company liquidation.
If your company has an outstanding BBL and is struggling to meet its debt obligations, it is best to get in touch with our team and act quickly before things escalate.
Outstanding BBLs can be treated as any other debt, and we can help you through the process of dealing with this.
Our friendly team of experienced insolvency practitioners will work with you closely to get you on the right path. Get in touch with us today for a free no obligation consultation.