The Coronavirus Business Interruption Loan Scheme or CBILS as it is also know has offered a valuable source of emergency finance for businesses during the coronavirus pandemic.
Backed 80% by the government, the funding is provided by accredited lenders to businesses with a turnover of less than £45 million.
Are directors liable to repay a CBILS loan if the company has to enter administration or liquidation? With so many businesses experiencing continued trading and financial disruption due to Covid-19, is it still repayable or can it be written off with other unpaid debts.
What is the Coronavirus Business Interruption Loan Scheme?
The Coronavirus Business Interruption Loan Scheme – or CBILS for short is part of the UK’s government’s response to the coronavirus pandemic was to offer state-backed loans to support business cash flow.
The two scheme which have been introduced are – The Bounce Back Loan Scheme (BBLS) and the Coronavirus Business Interruption Loan Scheme (CBILS) provides a source of emergency funding to help businesses stay afloat in these unprecedented circumstances.
Some businesses may find that cash flow doesn’t improve over the longer-term, however, so what happens if you can’t repay a COVID-19 loan? There are various aspects to consider if you’re in this situation, including accessing further funding, but also the possibility of being held personally liable for repaying the loan.
Terms and conditions of a CBILS loan
CBILS loans are backed 80% by the government, who also pay the loan interest for the first 12 months. When the scheme was first launched by the Chancellor, it did receive some criticism due to the length of time it took to sanction a loan, and the fact that some lenders demanded personal guarantees from directors.
Security and/or personal guarantees are not required for loans under £250,000. For loans over £250,000, lenders may demand a guarantee but it cannot be secured on a director’s Principal Private Residence, and is limited to 20% of the debt.
For the largest loans, it’s likely the lender would require a debenture being granted – this would provide the bank with the ability to appoint an administrator if they were concerned regarding the viability of the business.
Although CBILS loans have been instrumental in helping small and medium sized businesses survive the economic shock of coronavirus, the pandemic has created such financial difficulty for many businesses that administration or liquidation have been their only option.
So what happens to a CBILS loan if a company enters insolvency and has to go into administration or liquidation?
What are the risks when your company can’t repay a CBILS loan?
If your company is carrying serious debt and can’t afford to repay, your risk of personal liability for a CBILS loan depends on whether you’ve provided a personal guarantee. When the government first introduced the loan scheme, it was announced that CBILS loans under £250,000 wouldn’t require a personal guarantee.
Some lenders, however, did demand them from directors. If your business was in desperate financial circumstances, you may have provided a guarantee to personally repay the loan in the event of default by your company.
If you took a CBILS loan over £250,000 the lender may well have demanded a personal guarantee, but the government did offer a little protection in this regard:
- The lender is unable to use your Principle Private Residence (PPR) as security
- Up to 20% only of the outstanding CBILS loan (after the proceeds of asset sale) can be recovered by the lender
There are other instances where personal liability could become a factor if your company is unable to repay a CBILS loan, and these include where director misconduct or wrongdoing has taken place in some form.
So what can you do if your company can’t keep up repayments on a CBILS loan?
If you have a CBILS Loan and enter liquidation
The economic consequences of coronavirus have been devastating, with businesses that were previously in excellent financial health taking drastic steps simply to survive. So if your company has entered liquidation, what happens to your Coronavirus Business Interruption Loan?
Any debts that remain unpaid after the sale of assets and distribution of funds in liquidation are written off prior to the company closing down. What happens to a CBILS loan during liquidation largely depends on whether security or a personal guarantee was provided when the loan was taken out.
As we mentioned earlier, CBILS loans under £250,000 don’t require security or a guarantee, but some lenders still seek guarantees despite the government amendments to the loan scheme as a whole.
If you’ve provided security or a personal guarantee for a CBILS loan, you need to carefully check the terms agreed. Your lender may have made a demand that’s not in line with government guidelines for the loan scheme, in which case you could potentially be personally liable for part of the loan.
If so, the lender is likely to call in the guarantee, and if you can’t afford to pay they may pursue you through the courts to enforce it. This could lead to significant financial problems on a personal level, alongside the loss of your company.
The CBILS Loan is an unsecured loan, and so the lender becomes an unsecured creditor in the liquidation procedure. Liquidation is a terminal process that means the end for a company, and any unsecured debts that cannot be repaid are written off.
What happens to a CBILS loan during administration?
Entering company administration may offer other alternatives, and doesn’t necessarily end in liquidation. It’s essentially a rescue process that facilitates formation of a defined plan for the future of a company.
Once a company enters administration the remaining balance owed on the CBILS is crystallise. This will become a provable debt in the administration and any security/personal guarantees in place will be activated accordingly.
For example, administration could result in a restructure of the company’s debts within a Company Voluntary Arrangement (CVA). This is a formal agreement that benefits the company, allowing them to pay a single affordable monthly repayment that’s negotiated by the administrator. The Bounce Back Loan can form part of this new agreement, and the business may then return to trading as normal.
Get further professional help
If you have taken out a CBILS Loan and your company is still struggling to make repayments, you maybe forced to consider liquidation or administration to crystallise the debt, as this is still an option and the loan will be classed as an unsecured debt.
Directors should be wary that although they will not be personally liable for the loan, if you are found guilty of abusing the scheme you could be found guilty of fraudulent trading.
If you are struggling with debts caused by the Coronavirus pandemic, then contact the expert business insolvency team. We can advise you on rescue and recovery solutions and give you the best help and support on taking the next steps.