With almost four decades of experience in business, Mike Smith is one of the founders of Company Debt and one of the UK’s most experienced mediators with HMRC.
Having previously owned several of his own successful companies and occupied senior roles as a director within both Legal and General and Sun Alliance during separate periods of his career, Mike founded Company Debt with a genuine desire to help stressed directors in challenging circumstances. He is also an expert in the alternative finance sector.
As a director of a UK limited company with an outstanding Bounce Back Loan (BBL), you face significant decisions regarding the closure of your business. This guide provides clarity on whether you can legally dissolve your company while still owing a BBL. We explore crucial closure methods, such as Creditors’ Voluntary Liquidation (CVL) and compulsory liquidation, and highlight potential liabilities. Ensuring legal compliance is crucial to avoid severe penalties.
Can I Dissolve My Company to Avoid a Bounce Back Loan?
Dissolving your company through a voluntary strike-off (DS01) when you have an unpaid Bounce Back Loan is not feasible. The Insolvency Service may step in to investigate and potentially reverse the dissolution if debts are still owed. Attempting to evade the loan via this route can lead to severe repercussions, such as misconduct investigations and personal liability for directors.
Why Is Voluntary Strike-Off (DS01) Blocked When a Bounce Back Loan Exists?
Companies with outstanding Bounce Back Loans (BBLs) face rejection of voluntary strike-off (DS01) applications due to legal safeguards designed to prevent the misuse of government-backed funds. The Rating (Coronavirus) & Dissolved Companies Act 2021 empowers the Insolvency Service to reinstate companies dissolved under suspicion of COVID-loan misuse. This legislation requires addressing BBL debts through formal insolvency procedures, such as Creditors’ Voluntary Liquidation (CVL) or compulsory liquidation, rather than casual dissolution.
The DS01 process is unsuitable for insolvent companies, particularly those with unresolved debts like BBLs. Attempting to dissolve a company with outstanding BBLs without using proper insolvency channels can lead to severe consequences for directors, including fines, imprisonment, and disqualification. The government’s increased scrutiny ensures directors cannot evade financial responsibilities through strike-off. Instead, formal procedures with thorough investigation and creditor oversight are required.
Exploring Formal Closure Routes: CVL, Compulsory Liquidation, and Administration
When dealing with an unpaid Bounce Back Loan (BBL), formal insolvency procedures offer structured closure options for limited companies. Creditors’ Voluntary Liquidation (CVL) allows directors to initiate the process with the assistance of an insolvency practitioner (IP), who oversees the winding-up. This route provides directors with some control and typically involves less court involvement, concluding within three to six months. However, costs can vary depending on the complexity of the company.
Compulsory liquidation is initiated by creditors through a court order due to unpaid debts. This process is more time-consuming and costly due to the legal proceedings involved. It includes a thorough investigation into the company’s operations and the conduct of its directors.
Administration aims to rescue or restructure the business, potentially offering better outcomes for creditors than liquidation. An administrator is appointed to manage the company, focusing on maximising returns for creditors. Although potentially more expensive, administration can help preserve parts of the business.
In all these routes, Bounce Back Loans are treated as unsecured debts and are often written off after IP fees and preferential claims are settled.
What Are the Risks and Personal Liabilities for Directors?
Directors of UK limited companies with outstanding Bounce Back Loans (BBLs) face significant risks, including personal liability and potential disqualification, if they engage in wrongful or fraudulent trading. Wrongful trading occurs when directors continue operations despite knowing insolvency is unavoidable, while fraudulent trading involves deliberate deceit to defraud creditors. Both scenarios can result in directors being personally liable for company debts.
Misusing BBL funds, such as using them for personal expenses instead of business purposes, constitutes a serious offence. These loans must be utilised strictly for the business’s economic benefit, as specified in the loan terms. An overdrawn director loan account, particularly if funded by a BBL without proper documentation or a repayment plan, can trigger investigations.
The government guarantee on BBLs does not shield directors from scrutiny over fund usage. Authorities can investigate and take action against directors who fail to maintain accurate financial records or act irresponsibly. Directors must uphold fiduciary duties, keep detailed records, and seek professional advice to mitigate risks and avoid severe penalties, including fines and disqualification from directorship roles.
What Are the Costs and Timeline for a Creditors’ Voluntary Liquidation?
Engaging an insolvency practitioner for a Creditors’ Voluntary Liquidation (CVL) typically incurs costs ranging from £3,000 to £7,000, depending on the complexity of the case and the size of the company. This fee encompasses services such as asset realisation, creditor communication, and statutory reporting. The CVL process generally concludes within three to six months, ensuring the proper winding up of the company, settlement of debts, and distribution of assets to creditors.
It’s important to note that the government guarantee for a Bounce Back Loan (BBL) is only activated once insolvency is fully completed. Directors must ensure the closure is managed correctly, as any breaches, such as wrongful trading, can result in personal liability for company debts.
Exploring PAYG and Liquidation Alternatives
Before opting for liquidation, consider exploring repayment or rescue strategies if your company has an outstanding Bounce Back Loan (BBL). The Pay As You Grow (PAYG) scheme offers businesses the flexibility to adjust instalments, delay repayments, or extend loan terms. This can provide essential cash-flow relief without the immediate financial pressure that liquidation might entail.
Additionally, HMRC’s Time-to-Pay arrangements can help ease tax liabilities by negotiating extended payment terms, thereby reducing immediate tax burdens. For potentially better terms, consider refinancing through the Coronavirus Business Interruption Loan Scheme (CBILS) or the Recovery Loan Scheme (RLS).
Engaging in informal negotiations with creditors can also lead to revised repayment schedules or temporary relief. It’s important to note that timing is crucial; options like PAYG and refinancing are no longer available once liquidation begins.
Example of Bounce Back Loan Misuse in the Restaurant Industry
A restaurant director was sentenced to 2.5 years in prison and ordered to pay compensation after misappropriating a £30,000 Bounce Back Loan (BBL). The director attempted to dissolve the company using a DS01 form to evade repayment. However, investigations uncovered that the funds were redirected for personal use. This case underscores the vital importance of utilising BBL funds exclusively for business purposes. Directors are personally accountable for financial misconduct, even with unsecured debt, and such actions can result in severe legal repercussions.
FAQs
Will a CVL write off the BBL?
Yes, a Creditors’ Voluntary Liquidation (CVL) can lead to the Bounce Back Loan (BBL) being written off. This happens after the company’s assets are liquidated and distributed according to insolvency rules. Any remaining balance is covered by the government guarantee to the lender.
Can HMRC block a strike-off?
Yes, HMRC can halt a company’s voluntary strike-off if there are unpaid tax liabilities. This objection can suspend the dissolution process until debts are cleared or formal insolvency measures are taken.
Does a BBL affect personal credit after liquidation?
A BBL does not directly impact personal credit ratings, as it is a corporate debt. However, directors may face personal financial repercussions if found guilty of misconduct related to the loan, which could affect their future financial activities.
What happens if BBL funds were misused?
Misuse of BBL funds can lead to severe consequences for directors, including disqualification and personal liability. The Insolvency Service may investigate and take action if funds were used improperly, such as for personal benefit instead of business purposes.
Are there alternatives to liquidation for handling a BBL?
Yes, alternatives include using Pay As You Grow (PAYG) options to adjust repayments or negotiating Time-to-Pay arrangements with HMRC. These strategies can offer breathing space and potentially help avoid formal insolvency if addressed promptly.
What Are the Next Steps and How Can the Director Helpline Assist?
If you’re a director contemplating the closure of your limited company with an outstanding Bounce Back Loan, obtaining expert advice is crucial. The 24/7 director helpline offers confidential and tailored guidance to assist you in navigating this complex process. For a comprehensive understanding of your options, download the “CVL vs DS01 Decision Tree” PDF, which provides a clear overview of the available routes. It’s essential to maintain a detailed decision-making timeline and keep all financial records organised. Taking proactive measures will help minimise risks and ensure compliance, safeguarding you against potential liabilities during the closure process.
