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Bounce Back Loans and Personal Guarantees

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Bounce Back Loans, Liquidation and Guarantees

Having Bounce Back Loans, Liquidation and Guarantees. Understand Your Liability?

The UK government provided 100% security to the banks for loans taken out under the BBLS. Nevertheless, the company remains responsible for commencing repayment of the loan one year after receipt of the money. 

The first twelve months however require no capital or interest repayment.

Unique feature of a BBL allowed borrowers not to provide any guarantee for the loan. Should the company fails, directors therefore remain not liable for repayment.

Here, the company becomes insolvent and then initiates formal insolvency proceedings, including creditors voluntary liquidation. Then liability for repaying the bounce back loan rests solely with the company, and liability cannot and will not be transferred to directors or other shareholders, unless they fulfil their legal and fiduciary duties as directors. Consequently, there exists no risk to the director’s assets or individual creditworthiness if his company cannot repay the loan.

What is a Bounce Bank Loan?

The government introduced the Bounce Back Loan Scheme (BBLS) to criticism that the Coronavirus Business Interruption Loan Scheme (CBILS) wasn’t providing funds for small businesses quickly enough.

The scheme allowed companies to access loans faster, allowing 25% of turnover, up to a maximum of £50,000 to be borrowed. Once received, the loans remain interest-free for 12 months, while underwritten by the UK government. Above all, this means that personal guarantees do not have to be given by company directors to secure the funds. Bounce back loans ceased March 31st, 2021.

What can directors use a bounce-back loan for?

  • Directors must use the loan to provide an economic benefit to their business, including bolstering the working capital of the business while promoting the cash flow of the company. Company Directors can use the loan to
    • pay salaries; though, not to add to nor pay dividends unless there remains sufficient profit showing on the balance sheet.

For further reading, please view the following webpages on our website:

An ‘Undertaking in Difficulty’

One of the critical clauses in the agreement for applying for a bounce-back loan remains for the companies directors to confirm that their company is not an undertaking in difficulty. The Insolvency Act 1986 defines this as:

  • A limited company (The Business) remains unable to pay its debts (Creditors Loans and other obligations) as and when they fall due;
  • Assets of the company;
  • The company’s assets remain less than its liabilities.

The loan document requests that company directors confirm their business remains a viable concern. Directors must not apply if they have prior knowledge of the company’s insolvency. If the latter remains the case, then:

Refer to the British Business Bank website, which details ‘The borrower remains 100% liable for repaying the loan and any interest.’

Quote from the British Bank:

The definition of ‘undertaking in difficulty’ includes businesses that: had accumulated losses greater than half of their subscribed share capital (for limited liability companies) or capital (for unlimited liability companies).

What Steps Should You Consider Avoiding Personal Liability for Bounce Back Loans?

The Bounce Back Loan Scheme. Designed to support small businesses financially affected by the coronavirus Covid19 pandemic and struggle to repay their debts. However, some companies will still fail even with this additional funding, and company directors may be concerned about the loan’s potential implications.

Notably, a Bounce Back Loan will not prevent you from liquidating your company as usual. Subject to the loan use, the liquidator will repay its debts from the sale of assets, and any remaining debt, written off. The insolvency practitioner appointed must examine how directors manage the business? However, as long as you have performed your director’s duties, not misused the bounce back loan, then as a director, you should have no issues.

Comprehending Preference Payments

Directors of Limited Companies can also use the loan to refinance existing borrowing. Be careful, though, if you plan to do so. Paying off debt personally guaranteed is treating that payment as a preference. 

For example, a company owing various debts decides to use the Bounce Back Loan only to repay debt guaranteed personally by the director, ignoring the debt they have not secured. Therefore, preference has occurred.

A director opts to repay personally guaranteed debt, i.e. the debt for which the director remains personally liable in the case of liquidation of a company. Therefore, unsecured creditors remain unpaid, so they are then considered an act of’misfeasance’.

My business needs funding, but I don’t want a loan.

When obtaining borrowing for your business, you should be clear about how the company will use the money. However, this will not only ensure you receive the appropriate amount of funding; it will also assist you selecting a proper type of budget. 

While loans are advantageous in many instances, some companies may benefit from exploring alternative funding avenues. Companies with an account book of unpaid invoices may be better suited to discount or factoring, allowing access to a percentage of the money invoiced but not yet paid (Debtors). So this can help lower money concerns, contribute an inevitability to directors, and better cash flow management. This type of funding is hugely flexible, and unlike a Bounce Back Loan, it can be turned off once the need for it has passed, rather than the company being subject to a loan agreement for six years.

Can a Bounceback Loan Be Written Off?

Bounceback loans remain paid to a limited company, and not you as an individual. Therefore, if your company enters any form of insolvency, including:

Then the loan shall be written off.

However, using the loan for other purposes, other than what it was lent for, then exposes the directors to having to repay the loan. Any form of fraudulent use of the money will require the appointed Liquidator or Administrator to investigate the transaction further.

If proven, then the veil of incorporation no longer protects directors, and you then remain liable personally. Once proven, disqualification may be prompted to stop you from acting as a company director. The misuse may be considered THEFT!

So when worried about your situation. Ensure you approach a firm who may deal with your company’s issues, ensuring the best results for the company’s creditors, while protecting you by that action as a director.

Please act swiftly when your company is no longer viable. Time does not heal with a failed company.

Can I Dissolve a Company with an unpaid Bounce Back Loan?

Bounce back loans have now ceased with effect Midnight March 31st,2021.

The result is companies are now becoming insolvent as cash dries up with no revenue stream to support fixed operational costs. Therefore, what are directors to do? Can they dissolve their company with a bounce-back loan still not repaid?

PLEASE CONTACT HBG ADVISORY FOR IMMEDIATE ADVICE & SUPPORT ON 0800 612 5448.

HBG Advisory is open seven days a week, available to meet online in confidence to answer questions you may have about bounce-back loans. 

Can You Close a Company with a Bounce Back Loan?

YES.

Though closure must be carried out legally.

As for bounce back loans, they are no different from any other debt, except that they are not personally guaranteed. This therefore means neither you are at final risk nor importantly your FAMILY HOME. 

So when realising your business is insolvent, you should seek immediate advice without the fear of personal issues before trading on insolvent.

To consider dissolving your companies requires your company to be solvent (able to pay all its debts). Simply striking your company off when insolvent at the company house is illegal, and it can be reinstated at any time. An insolvent company requires liquidation by a licensed Insolvency Practitioner.

What happens if you dissolve a Limited Company with a Bounce Back Loan?

Attempting to strike off your company, while insolvent or debts still owed, will usually prompt an objection to the Company Strike Off Notice.

This shows Companies House has noted your company has debts unpaid. Usually, the debt relates to those owed to HMRC.

However, the lenders did reject the loan, even though it is HMRC that guarantees the loan.

The lender though has the ultimate duty to chase the loan if unpaid.

So directors wishing to strike off their company requires a statutory requirement to notify any other creditors as well.

Can HMRC Restore a Dissolved Limited Company?

YES.

HMRC often reinstates limited companies.

UK company law per Section 1003 (6) of the Companies Act specifies an insolvent struck off company may be reinstated, and the liability of every director, managing officer and member of the company remains, and may be enforced as if the company had remained on the registrar at the company house. 

What’s the Right Way to Terminate a Limited Company with a Bounce Back Loan Debt?

Via a voluntary liquidation if insolvent. A licensed Insolvency Practitioner is appointed and deals with the creditors of the company, along with realising the company’s assets.

In summary

The Bounce Back Loan Scheme (BBLS) was designed to support UK businesses struggling with debt sustained by the current COVID19 pandemic. Due to the prolonged pandemic, companies with bounce-back loans face insolvency and need liquidating. Many directors remain concerned about their future and the effects of liquidating a company.

A bounce back loan does not prevent you from liquidating your business. The loan is considered unsecured by the directors of the company. The directors of the company will not be personally held liable for the loan, unless your liquidator finds you have fraudulently traded or abused the scheme.

For further information, please read ‘What are the consequences of not repaying a bounce back loan.


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