Concerned about whether it’s possible to liquidate your struggling business, or enter insolvency, with a Bounce Back Loan (BBLS) in place?
Over £21bn was borrowed by UK businesses during 2020 as part of the Bounce Back Loan Scheme. This specialist type of COVID-19 funding was intended to prevent mass insolvencies during one of the toughest times in British economic history.
But what happens if you need to liquidate your company, despite having taken a bounce back loan from HMRC.
In this article, we’ll explain your options.
Can I Liquidate my Company if I’ve Taken a Bounce Back Loan?
The short answer is yes you can still liquidate your company.
Bounce Back Loans are classed as ‘unsecured debt’ in insolvency, which means the financial provider has to wait in line to be paid by the insolvency practitioner who is running the liquidation.
In a usual case, banks and other financial providers have a ‘first lien’ or secured charge over particular assets when it comes to lending significant sums of money. One of the USP’s of the Bounce Back Loan is that this wasn’t the case: lenders were guaranteed their money by the British government meaning they didn’t need to enforce their usual security.
As a company director this means you won’t risk losing personal assets, as would be the case by a typical bank loan secured with a personal guarantee.
What Happens to Bounce Back Loan if Company Goes Bust?
When a company goes insolvent, the insolvency practitioner has the job of selling what assets remain and diving the money between creditors in order of priority.
If there is money from the realisation of assets the financial provider who made the Bounce Back Loan will therefore be repaid. If not, HMRC will repay the lender, as per the terms of the BBLS.
From the company perspective, all debts come to the end at the point of liquidation and you’re free to start another company, look for another job, or assume a future directorship, assuming no corporate misfeasance has been discovered.
Close an Insolvent Limited Company With a Bounce Back Loan
As the director of an insolvent company, you need to take decisive action the moment you recognise your company’s position.
Failure to put the interests of creditors first in insolvency (as opposed to shareholders) could place you at risk of wrongful trading or fraudulent trading charges.
If you believe you are insolvent you need to do the following:
- Take professional advice from a licensed insolvency practitioner like ourselves immediately
- Don’t pay anyone or touch the company bank accounts
- Record your actions carefully
- Don’t panic or put your head in the sand, simply take clear decisive action and we’ll help you through it as best we can
Could I be Held Personally Liable if I Don’t Pay Back the Bounce Back Loan?
For directors working under the limited company structure you are protected, by the nature of the company structure, from corporate insolvency.
This means you have ‘limited liabiliy’ from any debt, unless you have signed what is called a ‘personal guarantee.’
In the case of Bounce Back Loans the same rules apply. One of the key factors of this type of finance was that the Government did not enforce personal guarantees or any form of security. As such, the government simply becomes an unsecured creditor when it comes to the pecking order of creditors waiting to be paid from an insolvent company.
If Your Business was Already in Difficulty
There is one important caveat to this which is that all of the bounce back applications contained a clause asking directors to confirm whether or not ‘on 31 December 2019’ the business was already in difficulty.
This clause was added to make directors aware that bounce back loans were not simply free money which could be used by companies already insolvent, but there to offer genuine support for struggling businesses.
Insolvency practitioners are asked to investigate, while putting a company into liquidation, whether the bounce back loan has been used for the reasons it was intended, or the money has been simply siphoned off for personal gain.
While HMRC have not made clear what consequences will come of this behaviour, they ask that liquidators report suspicious cases to them and they have provided a specific web address for doing so.
Directors should therefore be aware and, if you’re concerned about this, we recommend you make contact with us as soon as possible for an informal discussion about your situation. We can explain your options and whether we feel your actions fall outside the intended use of the bounce back loan.