liquidating a business owing a bounce back loan

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Can I Liquidate with an unpaid Bounce Back Loan?



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Written by

John A Waller


Reviewed: September 12th 2021

Can I liquidate with an Unpaid Bounce Back Loan?

Can I liquidate with an unpaid Bounce Back Loan? Legally, no repercussions put at risk borrowers of this type of loan. However, should you default, paying back your bounce back loan? Then your assets are not at risk. Moreover, your credit score is not personally affected. 

However, Bounce Loans are not grants and require repayment unless insolvent.

Rishi Sunak, Chancellor of the UK Exchequer, introduced the loan scheme in May 2020. The uptake was considerable, and more than 1.5 million Bounce Back Loans were approved, totalling £46bn approved until its closure on 31st March 2021 (Source: HM Gov).

Many UK companies affected by the Coronavirus (COVID-19) pandemic remain in financial difficulties.

As borrowers, directors must however understand the impact of default on the loan, repayment, voluntary liquidation and closure of the business by a creditor.

Support for you and your business is still easy to find at the moment. 

Ensure you understand the warning signs of company insolvency as a company director?

Create a confidential, no-obligation meeting in person or via the Internet. HBG Advisory continue to help many directors obtain robust solutions to your limited company debt. The team at HBG Advisory will explain clearly the advantages & disadvantages of liquidation together with business restart options available.

Realising your limited company is insolvent.

If you consider your limited company is insolvent. Then consider carrying out the following as a responsible director:

  • Seek urgent insolvency advice from a licensed insolvency practitioner;
  • Stop making payments to creditors of any sort;
  • Freeze the company’s bank accounts;
  • Ensure you record your actions in a daily log;
  • Don’t panic or ignore your situation.

The Bounce Back Loan Scheme?

The Bounce Back Loan Scheme (BBLS) provides useful terms for UK businesses introduced by the government for affordable financing. 

BBLS allowed businesses to borrow 25% of their turnover, but capped at £50,000, to help businesses stay afloat during the pandemic.

Lenders charge 0% interest in the first twelve months. Further, the loan remains government-backed, providing a 100% guarantee without any security or guarantee by the borrower—an unprecedented scheme by the UK government to support UK business. 

Consequences of defaulting on a Bounce Back Loan (BBL)?

However, the consequences of default on a Bounce Back Loan differ from a traditional, guaranteed loan:

The British Government advised lenders to maintain existing protocols for collecting defaults on bounce back loans.

The government’s manner and pressure that created the Bounce Back Scheme has exposed the terms on its issue. One concern for borrowers is what lenders can do to pursue borrowers through the courts for unpaid loans.

Lenders expect credit defaults across the spectrum of companies that can no longer survive. Therefore, it raises collection issues on a volume unprecedented in the UK.

The crucial point remains it is unlikely that the lending institution you have used will take decisive and immediate action. It will happen eventually. Debt does not dissolve away; it requires handling correctly.

In addition, if your company remains insolvent, it comes with its legal responsibilities.

What happens if you don’t pay back a bounce back the loan?

If you can’t repay the bounce back loan? Your company is then likely to be insolvent on a cash flow basis.

Any insolvency risks company directors., therefore essential, you as a director understand directors duties and responsibilities, and what you are required to do facing insolvency of your limited company.

Insolvency means that the principal responsibility of a director remains to protect and repay the creditors of the company, not the owners (shareholders), as they are usually paid last. This means you can’t pay anyone (employees, yourself and creditors) without the risk of showing preference. Demonstration of any preference can contribute to illegal trading, a serious offence that exposes directors personally, in particular, by using the loan to repay personal guarantees.

Company directors need to be aware of the consequences of using a bounce back loan to repay a loan they have personally guaranteed. Doing so is deemed showing preference, and directors will have to repay the loan back.

What happens to a Bounce Back Loan in Liquidation?

If the outbreak has financially affected your business and your business cannot afford to repay creditors, please contact HBG Advisory for FREE initial advice on your next step.

Why is it essential to contact HBG ADvisory?

By contacting the HBG advisory team and talking to our licensed insolvency experts. You can compare it to taking out an insurance policy, to protect the interests of:

  • Creditors;
  • Your Company;
  • You as a Director;
  • The shareholders of the company.

For further in-depth reading on Bounce back loans and liquidation, please read:

Please then do not bury your head and ignore your company’s situation. Robust support is at hand at HBG Advisory.

A creditors’ voluntary liquidation is an insolvency process that formally closes a limited company legally voluntarily when it cannot pay creditors in full.

A Limited company must appoint a licensed insolvency practitioner to realise the business’s assets to enable the liquidator to attempt to pay the company’s creditors. This is a legally prescribed order, allowing closure of the company, and removal from the registrar at the company’s house. 

Usually, in a liquidation, banks remain as secured creditors due to their debt, having a charge on the company’s assets. Therefore, being inline as a creditor to be repaid from their security from realisations of that charged asset. However, not applicable with an unsecured Bounce Back Loan. 

A Bounce Back Loan is an unsecured debt, as the bank has no security from the liquidated company. 

However, the UK government guarantees the Bounce Back Loan repayment should the borrower default.

Can you personally be liable for bounce back loans during a company liquidation?

If unable to commence repaying a Bounce Back Loan? Then note you will not be personally liable for its repayment, whether you liquidate the company or otherwise.

However, situations exist which risk personal liability:

  • Failing to use the loan for the benefit of the company.

There are relatively few rules that dictate using Bounce Back Loans. Primarily, the funds need to benefit the company economically. Then, after that, the directors can choose to use them. 

Bounce Back loans could be used for paying:

  • Supplies for the operation of the company;
  • Salaries and wages on business staff;
  • Company bills.

Company directors borrowing money using a Bounce Back loan must not use the loans for personal use purchasing:

  • Cars;
  • Boats;
  • Personal debt:
  • Villas.

So, should your limited company fail and be considered insolvent, the directors or a charge holder must appoint a licensed insolvency practitioner to commence an administration or liquidation. Once appointed, a liquidator or administrator remains required to examine the companies affairs leading up to their appointment and why the company is insolvent. This examination will examine the reasons for applying for a BBL and its use. 

Those who have failed to use the loan correctly may be accused of misfeasance. The company directors risk personal liability for the repayment of the loan. That could risk borrowers personal assets like savings, vehicles and property at risk. 

  • Treating certain creditors in preference to others

Terms of the Bounce Back Loan Scheme allow borrowers to replace existing finance the company may have. However, care is required, especially if your business becomes insolvent. As a company director, you are legally obligated as per the Companies Act 1986. Acting in the best interests of the company’s creditors. For example, as a director, you repay specific creditors, not others? Then as a company director, you’re exposed to accusations of paying preferential payments, risking personal liability for the company’s debts.

A preferential payment therefore may be a loan repaid to a connected party of the company, including:-

  • a board member; 
  • Relative or 
  • Friend.

While unsecured creditors of the business, like HMRC, remain unpaid. 

A preferential payment can be considered a transaction in:

  • Cash;
  • Bank Transfer;
  • Exchange of stock.

Transfer of ownership of an asset of the company to pay a debt off.

Once a limited is in the insolvency process of liquidation, all transactions made during and in the period before the licensed insolvency practitioner examines insolvency. For example, if borrowers used the Bounce Back Loan to pay preferred creditors, you could personally be liable for the value of the payment. The Insolvency Service scrutinises the company’s transactions to determine if the directors should be disqualified. 

Compulsory Liquidation and Bounce Back Loans?

As with a creditor voluntary liquidation, the same applies to a Compulsory Liquidation on how a bounce back loan is treated.

Actions to help avoid Personal Liability for Bounce Back Loans?

Rishi Sunak introduced the Bounce Back Loan Scheme. The BBL was primarily designed to support those businesses impacted financially directly through the ongoing coronavirus COVID-19 pandemic. Coronavirus outbreak and struggle to repay their debts. However, even with this increased funding, some companies will still fail, and company directors may be concerned about the possible consequences of the loan.

Notably, however, a bounce back loan will not prevent you from liquidating your business. However, provided you have used the loan correctly, the company’s debts remain repaid from the realisation of the company’s assets by legal preference and any shortfall written off. 

The appointed licensed insolvency practitioner will initiate an investigation. However, as long as you have satisfied your director’s duties and have not misused the Bounce Back Loan, you should not have any issues.

Regarding HMRC debt, please read ‘can HMRC hold directors liable for tax?‘.

Further reading on Can I Liquidate a Limited Company with an unpaid bounce-back loan?

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