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19 April 2022

Despite their novelty, having only been implemented in May 2020,  Bounce Back Loans have seen a large number of applications and approvals. Small businesses, in particular, have benefited greatly from this new type of loan, with over £30 billion supporting these businesses nationwide.

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.

In this article, we will be breaking down what changes Bounce Back Loans make to the process of liquidating a business, its implications, and ensuring you know how to move forward.

What is a Bounce Back Loan?

Bounce Back Loans were introduced by the UK government in May 2020, under the Bounce Back Loan Scheme (BBLS). This scheme aims to provide small businesses with a form of finance that prioritises speed and affordability. As the name suggests, this loan aims to provide small businesses with capital under manageable terms, enabling said businesses to recover from periods of financial difficulty.

The BBLS allows small businesses to apply for 25% of their overall turnover. However, there is a cap of £50,000, restricting businesses with a larger income. Though the cap can be a negative depending on your 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 will not require any collateral on your part. This allows small businesses fast access to capital with very low risk.

Defaulting on a Bounce Back Loan

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, and so 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.

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 in dire financial straits, as a result of COVID-19, repay their loan would cost more than they would likely recover.

Low risk

Though the risk posed by 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.

But 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.

Entering insolvency with a Bounce Back Loan

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. Which, if not met, could cause serious problems for company directors, even including legal action. As such, it is a scenario best navigated by a professional insolvency practitioner.

One of the main obligations company directors have 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, nor can you pay 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 any others, 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.

Closing 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.

The sale of company assets will go to 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.

Liability

Generally, you will not be held personally liable for a Bounce Back Loan. 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. However, there are two instances where you could be pursued.

If you did not use the funds you gained from your Bounce Back Loan for business use, you could be held liable. For example, the purchase of assets for personal use would fall into this category.

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.

As a CVL can cost from £1,995 + 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. Forcing 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.

Conclusion

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.

If you are considering liquidating your company, help is close at hand. Clarke Bell has over 27 years of experience helping companies in your situation. We can do the same for you! To find out what we can do for you, contact us today.

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If you are worried about your business or just want a (free) no obligation chat, contact Clarke Bell on 0161 907 4044 or [email protected] today. Our Licensed Insolvency Practitioners will provide you with the best professional advice for your situation.

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