Worried about whether it’s possible to liquidate your struggling business, or enter insolvency, with a Bounce Back Loan (BBLS) in place
UK companies borrow £21bn through ‘bounce back’ loans 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
Can I Liquidate my Company if I’ve Taken a Bounce Back Loan?
The short answer is yes it is possible 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 the Loan if I close my company?
Although banks are often considered secured creditors, with the owed debts fixed over company assets. However, this is not the case with a Bounce Back Loan. If your company does go into liquidation, your Bounce Back Loan becomes an unsecured debt. Unsecured debts are different from secured debts, where creditors such as banks and factoring companies hold charges over company assets to secure their funding. Unlike secured debts, unsecured debts, and their creditors don’t have substantial claims over company assets.
Understanding Preference Payments
The loan can also be used to refinance existing borrowing, although caution needs to be exercised if you are planning on doing this. Take for example a company which has a significant amount of existing debt which is owed to a variety of creditors. Some of this debt is personally guaranteed, the rest is unsecured.
In this example, if the director chooses to pay off only that debt which is personally guaranteed – and therefore that for which he or she would be personally liable for if the company was to be liquidated – leaving unsecured creditors unpaid, then this is likely to be seen as an act of misfeasance through the making of a ‘preference.’
Are Directors Personally Liable for a Bounce Back Loan?
No. As long as the funds have been used correctly i.e. no acts of misfeasance, wrongful or fraudulent trading or paying creditors in preference are discovered, then you will not be liable to repay the loan personally on liquidation. That’s because the loans are 100% guaranteed by the government and no personal guarantees need to be given by company directors.
When the company enters liquidation, the Bounce Back Loan will become an unsecured debt and the secured debts of the company will be repaid first. In reality, that means the unsecured debts are rarely repaid in full. In that case, as the loan was 100% guaranteed by the government, the bank that provided the loan will demand repayment from the government and not from the company director, as would be the case if personal guarantees had been signed.
My Companies Bounce Back Loan was used for Personal Use?
The use of a bounceback for reasons other than the companies ongoing survival may be viewed as fraudulent when paying off personal debt. Failing to pay the loan back, may trigger the appointed insolvency practitioner to examine the use of the money received. If it falls outside the parameters of its permitted usage, therefore opens directors up to being personally liable for its repayment and open to prosecution.
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
Make Contact Today
Directors should therefore be aware that if they are concerned about the implications of this, they should 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.