Bounce Back Loans, Liquidation and Guarantees
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 the lone one year after receipt of the money.
The first twelve months however require no capital or interest repayment.
A unique feature of a BBL allowed borrowers to not provide any guarantee for the loan. Should the company fails, directors remain therefore not liable for repayment.
The government 100% guarantees Bounce Back Loans, not you, the borrower.
Here, the company becomes insolvent and then initiates formal insolvency proceedings, including creditors voluntary liquidation. Then liability for repaying the bounce back loan lies 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 is 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 quick enough for small businesses.
The scheme therefore allowed companies to access loans faster, allowing 25% of turnover, up to £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 company directors do not have to be given personal guarantees 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 and promoting the company’s cash flow. Company Directors can use the loan to:
- pay salaries, though, not to add to nor pay dividends unless there is sufficient profit showing on the balance sheet.
For further reading, please view the following web pages on our website:
Bounce Back Loans, Liquidation and Guarantees – 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.
Potential for Company Director Personal Liability for a Bounce Back Loan?
Company directors remain personally liable for ensuring a Bounce Back Loan repayment if their limited company enters liquidation.
One of two scenarios exits:
Company directors risk liability personally when the funds are used, not as per the loan agreement.
Suppose use of the Bounce Back Loan was for:
- Personal debts;
- Purchase of holiday home, Caravan, Motorhome or other personal property;
- Repay a director’s loan account.
All three above have no economic benefit to the company.
Therefore, it was considered an act of misfeasance, exposing the directors to personal liability of repayment of the outstanding loan.
- Payments to company creditors ‘in preference.’
Company directors managing and operating a limited company must ensure creditors are protected when the company has cash flow difficulties, and their position does not worsen.
Directors who have used the Bounce Bank Loan as a preferential payment to company creditors, leaving other creditors unpaid, remain at risk.
Additionally, repaying any debts owed to family or other connected creditors, like family members knowing HMRC remain unpaid, is also at risk.
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 the 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, 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, but also help you select a proper type of budget.
While loans remain 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 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 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, 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, exposes the directors to having to repay the loan. Any 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 that may deal with your company’s issues, ensuring the best results for the company’s creditors while protecting you 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.
Companies now become insolvent as cash dries up without a revenue stream to support fixed operational costs. So what should directors 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?
Though closure must be carried out legally.
You may allow an unpaid creditor, like HMRC, to issue a winding up order, and if approved by the courts, have your company closed by compulsory liquidation.
As for bounce back loans, they are no different from any other debt, except 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 fear of personal issues before trading on insolvent.
To consider dissolving your companies requires your company to be solvent (paying 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 unpaid debts. Usually, the debt relates to those owed to HMRC.
However, the lenders rejected the loan, even though HMRC guarantees the loan.
The lender, though, has the ultimate duty to chase the loan if unpaid.
So directors wishing to strike off their company also require a statutory requirement to notify any other creditors.
Can HMRC Restore a Dissolved Limited Company?
HMRC often reinstates limited companies.
UK company law per Section 1003 (6) of the Companies Act specifies that an insolvent struck off a 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 company’s creditors, along with realising the company’s assets.
Bounce Back Loans, Liquidation and Guarantees – 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 directors of the company consider the loan unsecured. The company’s directors will not be personally held liable for the loan, unless your liquidator finds you have fraudulently traded or abused the scheme.
Please read ‘What are the consequences of not repaying a bounce back loan‘ for further information.