Being served a winding-up petition is a real possibility for insolvent companies. This petition is the typical route to initiating a compulsory liquidation. A process that can be forced upon a company by any creditor owed at least £750. This will bring the issue of repayment to the courts, with a view to determining whether the company is truly insolvent. If it is determined to be so, the company will be forced into a compulsory liquidation, with the courts appointing an Official Receiver to execute the procedure.

In the wake of the Coronavirus pandemic, many companies received a Bounce Back Loan to stave off the worst of the financial repercussions. Small businesses were able to claim up to £50,000, giving many a much-needed life ring. However, even with this financial aid, not every company could remain solvent due to the disastrous economic consequences wrought by the pandemic. It is directors of such companies that are wondering whether a winding up petition can be served for a Bounce Back Loan.

In this article, Clarke Bell will answer this question, breaking down the Bounce Back Loan Scheme, and discussing what you can do to alleviate your company’s financial issues.

Related: Is It Possible To Write Off a Bounce Back Loan?

What is the Bounce Back Loan Scheme?

Bounce Back Loans were implemented as part of the Bounce Back Loan Scheme (BBLS). The purpose of these loans was to support companies through the worst of the pandemic, lessening the impact felt by the sharp loss in traffic and sales. These loans were offered to small businesses, with a value of 25% of their annual turnover up to a maximum of £50,000. The government fully guarantees Bounce Back Loans, meaning directors are not required to offer any assets as collateral or sign a personal guarantee. As such, company directors are not held personally liable for the loan in most cases, allowing any company access to the loan without assuming additional risk.

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What is a winding-up petition?

Winding up petitions are served by creditors to insolvent companies as a means to initiate the compulsory liquidation process. They require a company’s directors to appear before the courts, who will determine whether the company is insolvent and if a compulsory liquidation is acceptable. Once served, the recipient company has little time in which to act, with only seven days before the procedure begins. Due to the effects of a winding up petition, and the significantly short window of opportunity, it is vital you know the details before one is served to your company.

Also Read: What Is a Validation Order?

Who can serve a winding-up petition for a Bounce Back Loan?

While any creditor owed more than £750 can initiate a winding-up petition, it is the banks that will serve one for a Bounce Back Loan. They were the primary lender for Bounce Back Loans, and although both they and many borrowers thought the pandemic would be brief, they were quite wrong. This led to plenty of prospective borrowers declaring optimistic turnovers in their applications, and banks approving loans that may, in hindsight, have been risky endeavours. This has led to a considerable amount of Bounce Back Loans going unpaid, to the tune of £20bn by the government’s estimations.

Naturally, this sum will not simply be written off, and banks will make every effort they can to recover their capital. In fact, they are obliged to do everything in their power to recover their capital, if they want the government guarantee to take effect. If any lender of Bounce Back Loans does not take every action available, the government will refuse to step in.

This caveat has forced banks to serve winding-up petitions to companies that cannot repay their Bounce Back Loan. It constitutes a reasonable action that can be taken to recover the loan, and can stop companies from attempting to write off the loan. Plenty have tried to dissolve without first repaying their Bounce Back Loan, which has not been successful in many cases. The banks have usually contested the dissolution, forcing the company to remain open. Winding-up petitions have then subsequently been served, resulting in the liquidation of the company and the debt being repaid.

What can you do if you can’t repay your Bounce Back Loan?

If your company cannot repay its Bounce Back Loan, you have a few factors to consider. First and most importantly, you need to consider how you have used the funds. If you have used the funds to support the company, providing economic benefit to it, you have nothing to worry about. In this case, the funds will have been used in accordance with the loan agreement, so defaulting will not have a major impact on your personal finances. However, if you have used the funds in another way, such as to pay dividends to directors or shareholders, this will be viewed as a violation of the loan agreement, likely carrying some form of penalty if your company defaults. With this in mind, you have a couple of options to consider if your company cannot repay its Bounce Back Loan.

If your company is insolvent, lacking any ability to repay its loans and liabilities, A Creditors’ Voluntary Liquidation (CVL) is the best solution to your predicament. This procedure is a method of liquidation, closing your company and realising any money held in assets and accounts. This will be distributed amongst creditors by an appointed insolvency practitioner, who will ensure the process is carried out efficiently and within the bounds of the law.

This procedure will also provide both you and your company with certain legal protections; creditors will not be able to take legal action against your company, and your personal finances will be safe. The only exception to this rule is in cases where you have signed a personal guarantee as part of the loan agreement. As Bounce Back Loans do not require this guarantee, this is not an issue. This is in contrast to the other most popular method of closing a company, dissolution, which cannot take place if a company has an outstanding Bounce Back Loan.

Let Clarke Bell help

If your company is facing financial trouble and is unable to repay its Bounce Back Loan, let Clarke Bell assist you. We have over 28 years of experience in helping companies find solutions to their debt issues, and we can do the same for you. Whether you need a CVL or a business rescue plan, our specialist team will make sure your company finds the best solution for your situation. To find out exactly how we can help you, don’t hesitate to contact us today.