Many small and medium-sized businesses struggled, nationwide, throughout the coronavirus pandemic. The Government’s bounce back loan scheme was made available in a bid to help the masses to continue trading. Sadly, some have found that the cash injection was not sufficient in itself to help keep their business from reaching insolvency.
In instances where your business has become insolvent there are steps to consider and we aim to address some of them in this article.
As insolvency practitioners, we offer support to company directors in situations like this. We also offer clear and accurate advice, as well as careful and regulated solutions to challenges such as being unable to repay creditors; either on time, or at all.
If you are considering liquidation as an option as a direct result of being unable to service a bounce back loan then please reach out to one of our experts who will be happy to help you.
The Bounce Back Loan Scheme
Principally aimed at small and medium-sized enterprises (SMEs), the scheme was one of the primary measures by which the UK Government attempted to support businesses in financial difficulty during the coronavirus pandemic.
In addition to furlough, VAT and rent deferrals, plus restrictions on statutory demands and winding up petitions; this form of funding meant that the following was applicable:
- Businesses could borrow up to 25% of their turnover, or a maximum of £50,000.
- The length of terms were up to 6 years.
- No credit checks were taken for eligible businesses.
- No interest of any kind is due for the first 12 months. Then, rates as low as 2.5% pa applied.
- No personal guarantee was required as the government backed the funds for the banks.
Can the monthly instalments be reduced?
There is an option to pay interest-only instalments for brief periods with the Pay as you Grow Scheme, below.
Pay as Your Grow Scheme
As of February 2021, there has been an option to use the ‘Pay As You Grow’ scheme which means the following:
- Businesses could extend the term of borrowing up to 10 years at the same rate of 2.5%.
- Up to three instances of 6-monthly periods of interest-only repayments are available.
- A request for a single 6 month repayment holiday is also available.
Defaulting on the loan
If your business has defaulted here’s what you should expect to happen:
- You will receive a letter from the bank, as per their normal processes.
- Over time, the bank may escalate towards debt collection and/or court action if the amounts are not paid, although finance providers may differ in their policies.
- Banks have suggested that businesses refrain from seeking other finance from them in the future.
Current recommendations are for the approved lenders/creditors to follow ‘appropriate recovery processes’, using the Court where necessary.
As per the terms of the BBLS itself, lenders are required to offer a 12-month period after they have issued a formal demand to the borrower, when pursuing the outstanding amounts.
What if my company cannot repay any of the loan?
If your company is unable to repay the loan then it is likely in a state of insolvency. When your company reaches this stage it is very important that you take a great deal of care, as your duties as a director change. Your priorities shift from the shareholders to the creditors and you should consider seeking professional insolvency advice immediately.
Directors may have the option to enter the company into voluntary liquidation without the risk of personal liability, assuming that the funds were used as intended.
The Directors’ personal implications
If you are certain that your company cannot afford to pay any of the instalments going forward you won’t lose any of your personal assets, such as your house. This is because the funds are technically unsecured.
The exception to this would be with CBILS (Coronavirus Business Interruption Loan Schemes), for which, certain lenders did insist on a guarantee for up to 100% of the loan value. No BBLS lenders required this, which makes it far simpler and risk adverse for the directors.
However, insolvency practitioners have a requirement to investigate the company’s position prior to insolvency. Where evidence is discovered that the directors made false claims on their application, and knew that the company was already insolvent, the liquidator will be required to declare this to HMRC.
It is not yet clear what repercussions HMRC have in mind for those directors who have misused these funds. However, HMRC have allocated staff within a specific department to focus on investigating bounce back loan fraud. As of the date of writing this article, there have been examples made, where directors have been jailed due to proven deliberate misuse of the funds.
This situation will also not affect your personal credit score.
How to minimise personal liability
Directors were asked to confirm that their limited companies were not insolvent at the point of the initial loan application. Assuming this was true, and the funds were used legitimately, there should be no issues over personal liability when facing liquidation, or closing your business.
Once a company becomes insolvent, however, the directors’ duties become more onerous and seeking the professional counsel of a licensed insolvency practice, such as ourselves, is wise. We will be able to assess whether there are any other debts that you may be personally liable for within the company, outside of the bounce back loan.
Clear and transparent communication with all of the creditors is key, throughout this period. It is also critically important that you take care when considering which creditors to pay first and potentially showing preference, as this can lead to wrongful trading and can affect directors personally.
Restructuring and liquidation options
For many company directors facing insolvency, the question of whether the bounce back loan can be written-off alongside the other business debts; is one that we get asked a lot.
The simple answer is yes. The process of liquidation brings an end to all unsecured business debts, as well as the company itself.
Liquidations must be carried out by a licensed insolvency practitioner. All creditors, including the finance provider of the BBL, will be paid in the order of priority. Funds made available to the creditors are realised by the Liquidator after selling any available assets that the company may have.
Please seek guidance from a licensed insolvency practitioner such as ourselves if you are considering liquidation and would like to know more about this process.
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