In life and in business, the first step to moving on is learning how to cut your losses and let go. For businesses struggling to make ends meet, liquidation can be the only clear path forward. Usually, companies go into liquidation when they cannot pay their bills due to cash flow insolvency. It can also happen when the value of their business assets is less than their liabilities.
When a company is liquidated, its assets are sold or distributed to creditors. This process brings a business to an end. But what happens if a company’s money has been loaned by the UK government through a special scheme such as the Bounce Back loan scheme? Are the company directors personally liable for this money during liquidation?
To answer these questions, we’ll start by throwing some light on the Bounce Back loan scheme.
What is a Bounce Back loan?
During the spring of 2020, the UK government introduced a number of measures to help businesses affected by the pandemic. One of these measures was the Bounce Back loan scheme, which was designed to help small and medium businesses. This scheme aimed to provide small businesses with a form of finance that prioritises speed and affordability.
As the name suggests, this loan’s main objective was to provide small businesses with capital under manageable terms. This enabled said businesses to recover from periods of financial difficulty – such as the COVID-19 pandemic. Successful applicants to the scheme were able to borrow between £2,000 and £50,000 at a low-interest rate set by the UK government.
The Bounce Back loan scheme allowed small businesses to apply for 25% of their overall turnover. However, there was a cap of £50,000, restricting businesses with a larger income. Though the cap could be a negative depending on a company’s situation, there are plenty of other benefits to counteract. The loan will not charge interest for the first twelve months, and as the loan is government-backed, it would not require any collateral on your part. This allows small businesses fast access to capital with very low risk.
Despite their novelty, having only been implemented in May 2020, Bounce Back Loans saw a large number of applications and approvals. Small businesses, in particular, benefited greatly from this new type of loan, with over £30 billion supporting these companies nationwide.
What was the effect of the Bounce Back loan scheme?
Though this funding was no doubt beneficial to many small businesses, it has ultimately left the general lifecycle unchanged. It has always been the case that many small businesses will be fated to close, due to financial problems or otherwise. Sadly, Bounce Back Loans have done little to change this fact. However, although the loan won’t necessarily save a business from closing, it will change how the process must be carried out.
It is estimated that almost 1 million loans were approved in the first six weeks of the scheme. However, there is an important caveat. The Bounce Back loans were awarded on one condition – they were to be used for company purposes, not personal purposes. For example, purchases such as buying a car could only be made if there was any evidence that this would provide a benefit to a company.
In some cases, Bounce Back loans are not enough to save a company from entering a formal insolvency procedure. As the loan is government-backed, defaulting is not as detrimental to directors as private loans. The loan doesn’t require security, either in the form of assets or a personal guarantee. This means that you don’t stand to lose your personally owned assets should your company default on the loan.
However, this doesn’t mean the government will allow any lack of repayment to go uncontested. Lenders of Bounce Back loans will likely follow the usual course of action, involving the sending of letters demanding repayment, and possibly the sending of bailiffs to enforce debt collection.
But dissolving a business with debts is never an easy process – particularly when your creditor is the government. Let’s break down what happens in this situation…
Can you liquidate a company with a Bounce Back loan?
The short answer to this question is yes – you can liquidate a company with a Bounce Back loan. However, things aren’t quite as straightforward as normal. When a company with a Bounce Back loan enters liquidation, an insolvency practitioner is appointed. One of the main tasks of the insolvency practitioner will be to investigate why the company applied for a Bounce Back loan. They will also have to elucidate how the company used the money it was awarded.
We’ll start with the good news. If you cannot repay a Bounce Back loan and your company is liquidated, you will not be personally liable. It is secured by the government, rather than by you or your assets, taking personal liability off the table. Your lender will pursue the government for repayment, in the event the sale of your company’s assets could not cover the debt.
That being said, there are two exceptions to the rule. If the insolvency practitioner finds that you have acted unlawfully or in bad faith, you can face disastrous legal and financial consequences. There are two different scenarios where this can happen:
- The Bounce Back loan has been used for personal benefit: If your appointed insolvency practitioner (IP) finds out that you have misused the Bounce Back loan, you’re in serious trouble. If you use a loan for purposes not agreed to in the terms and conditions, you could be charged with misfeasance. Under the Companies Act 2006, company directors can be held liable for losses caused to creditors where misfeasance has taken place. This means that your personal assets – such as savings, property or vehicles – could be at risk.
- You have paid certain creditors ahead of others: The other instance that could see liability shift to you is showing preference to certain creditors. When a company becomes insolvent, you have an obligation to treat all creditors equally, as we mentioned. Failure to do so can see you held liable for debt repayments, amongst other consequences.
An insolvency practitioner must ensure that a company acts in the best interests of the public when winding down. In some cases, the IP finds out that a preferential payment has been made to a connected party of the company (such as a relative or friend). When this happens, you could be made personally liable for the payment to the creditors. You could also be disqualified from operating as a company director for life.
Is there any risk in liquidating a company with a Bounce Back loan?
In addition to the lack of personal liability directors have, there is another factor that reduces the risk of Bounce Back loans – quantity. As a result of COVID-19, many Bounce Back loans were issued in quick succession. So quickly, in fact, that the actions lenders could take to recover their money in the event a business defaulted was unclear.
This was further compounded by the sheer number of Bounce Back Loans given. Even if lenders were to attempt to recover their money, the number of loans given would make the process borderline impossible. Moreover, the likely public backlash from demanding a company repay their loan would cost more than they would likely recover, given that their dire financial straits are a result of COVID-19
Though the risk posed of defaulting on a Bounce Back loan is low, it isn’t zero. Action may not be taken immediately, but you will face the consequences for not repaying your loan eventually. The circumstances for this loan may make it unique compared to others, but it is still a loan. Ignoring your debt won’t write it off – it will only create problems for the future.
Can I avoid paying back my Bounce Back loan?
Not repaying a loan is not usually a choice. Most often, it is out of necessity, as the company has no money with which to repay its loans. This is known as insolvency – a problem best dealt with quickly. If your company is insolvent, you should act quickly, with or without a Bounce Back loan.
Insolvency comes with its own series of rules and obligations. If they aren’t met, they could cause serious problems for company directors, including legal action. As such, it is a scenario best navigated by a professional insolvency practitioner.
One of the main obligations facing company directors is to address the needs of creditors, rather than shareholders. In short, this means that you must ensure you act to repay creditors fairly – without giving preferential treatment to any single creditor or paying anyone other than a creditor. This includes your shareholders, employees, and even yourself. If you fail to uphold this obligation, you could be held liable for wrongful trading. A serious offence that will likely see you stripped of your director’s license, amongst other penalties.
If your company has an outstanding Bounce Back Loan, it must be treated as any other. You must not pay it back before other debts or loans, nor can you use the loan to fund the repayment of another – regardless of whether the loan threatens your personally owned assets. Doing so would be an example of preferential treatment, leading to serious penalties.
How do you liquidate a company with a Bounce Back loan?
As is often the case with insolvent companies, closing the company is likely the best option. To do so with minimal risk to yourself, you should appoint a professional insolvency practitioner to manage the sale of assets, repayment of creditors, and closing of the company. This process is known as a Creditors’ Voluntary Liquidation (CVL), occurring when a company with outstanding creditors takes the decision to close voluntarily.
As a CVL can cost from £2,995 + VAT, some directors have opted to try to dissolve their companies (costing just £12) and avoid liquidation. Unfortunately, in the event that a Bounce Back loan is outstanding, the issuing bank will have the opportunity to object to the dissolution. That would force the company to remain open. While dissolution is a legitimate route for company closure, the protection offered through formal liquidation means that you are much more likely to be able to successfully close your company through a CVL.
The sale of company assets will go towards repaying your outstanding creditors. Secured loans are typically the first to be repaid, as their loans are secured against company assets. Bounce Back Loans are not, often meaning they will be amongst the last to be repaid. This may mean the debt cannot be repaid in full, as is often the case for unsecured loans.
To liquidate a company with a Bounce Back loan, your first step is to get expert advice. A licensed insolvency practitioner will work alongside you to decide on the best course of action. If you have no choice but to shut operations down, you will enter a creditors’ voluntary liquidation.
With privately awarded loans – such as the ones given by a bank – the debts are secured against company assets. This means that they need to be repaid. However, this works differently with Bounce Back loans. Upon entering liquidation, Bounce Back loans become unsecured debts. This kind of debt is rarely paid in full during a liquidation process. This is because in this case the loan has been secured by the government. With a Bounce Back loan, a company’s lenders will have to pursue the government for repayment – not the directors.
So, if you haven’t acted in bad faith, you’ve got nothing to fear. Still, liquidating a company with a Bounce Back loan can be a complicated process that requires expert help. It’s not as easy as erasing a company off the Companies House register and hoping that HMRC turns a blind eye. In fact, the UK government has recently awarded extra powers to the Insolvency Service to clamp down on the misuse of Bounce Back loans.
Helping you to turn the page
In general, the process of liquidating a company with a Bounce Back Loan is much the same as usual. The loan is treated like any other, and you have the same obligations to meet. If the loan cannot be repaid, it will be written off. However, if you do not meet these obligations, you could be held liable for its repayment. To avoid this, we recommend getting help from a licensed insolvency practitioner before you start the liquidation process.
A professional insolvency practitioner will draw up the best possible course of action for your company – ensuring that your reputation remains intact. This is the rare chance in life where you can start all over again. And all you need to do is ask for help. So, if your business is not doing well, don’t despair. There are still options available – even if you applied for a Bounce Back Loan.
Clarke Bell has over 28 years of experience helping companies in your situation – and we can do the same for you! Our experienced team of insolvency advice consultants and business re-start specialists can provide the support you need. If your Bounce Back loan has not been enough help to save your company from liquidation, don’t worry. We’ll work alongside you and we’ll soon have you back on your feet again.
If you want a free, no-obligation chat, contact Clarke Bell on 0161 907 4044 or email [email protected] today. We will provide you with professional and confidential advice to get you back on track.