Many companies who’ve taken out Bounce Back Loans to support them throughout the COVID-19 pandemic may now be left in the unfortunate position where they’re unable to pay it back.
In this article, we’ll look at what will happen to your Bounce Back Loan should you decide to liquidate your company.
Am I even able to liquidate my company if I have a Bounce Back Loan?
Yes. Even if you have a Bounce Back Loan in place, you’re still able to liquidate your company.
If the company cannot pay the loan back then it is, in effect, insolvent. You can either instigate a Creditor’s Voluntary Liquidation or wait for the bank or another creditor to petition the court to wind up the company.
What happens to the Bounce Back loan?
Bounce Back Loans are a company debt and will be treated the same as any other company debt.
However, Bounce Back Loans differ from other typical business bank loans because they don’t require a personal guarantee from a company director, making them an unsecured debt rather than a secured one.
This means that the bank or financial provider that issued the Bounce Back Loan is classed as an unsecured creditor and won’t have any substantial claim over company assets in the event of a liquidation. This means in a liquidation scenario many insolvencies will end with the bank getting very little or no money back in respect of the Bounce Back Loan.
Therefore, it’s highly likely that the Bounce Back Loan would be written off if the company goes into liquidation. However, as the Bounce Back Loan scheme is secured 100% by the government, the lender will be able to claim from the government in the event of insolvency. Remember that the bank can only make a claim on their guarantee once a business has gone through an insolvency process. You will not be able to strike your company off in an attempt to avoid paying back the Bounce Back Loan.
Could I be held personally responsible for repaying the Bounce Back Loan if I liquidate my company?
By way of the limited liability structure, a limited company is classed as a separate entity to its directors and shareholders. Therefore, in most circumstances, a director cannot be held personally liable for company debts. So, initially, the answer is no – you can’t be held personally responsible for repaying the Bounce Back Loan.
Furthermore, as the government has personally secured the loan themselves, there will not be any personal liability on the directors. When the debt crystallises, the bank that has provided the loan will request the repayment from the government, not from the company.
However, there are some exceptions to this rule and situations where you could be personally liable:
• If you have used the loan funds for anything not financially beneficial for the company. For example, if you’ve used the money to pay off personal debts or make personal investments such a crypto, stocks and shares, new cars, home extensions or as a deposit to purchase a property.
• If the business was already in financial difficulty prior to the loan being taken out. All applications for Bounce Back Loans contained a clause asking directors to confirm whether ‘on 31st December 2019’ their business was already in financial difficulty. This clause was included to make directors aware that these loans were not merely free money but were there to offer genuine support for businesses struggling due to the COVID-19 pandemic.
If you are found to have made a fraudulent Bounce Back Loan application by inflating the company’s turnover figures to secure a larger Bounce Back Loan. In the application process it was highlighted that you could only use a projected turnover if your business started after January 2019. If your company was formed before you had to only apply for up to 25% of 2019’s turnover, this figure was capped at £50,000. If it’s found that you took more than your company was entitled to , you will be asked to pay the money back.
When the company becomes insolvent, a licensed insolvency practitioner will carry out a full investigation and review the company’s financial history. This will include looking at how the Bounce Back Loan funds were used. If the review uncovers that the Bounce Back Loan has been misused, there will most likely be ramifications were the director becomes personally liable for some or all of the Bounce Back Loan.
Need more advice?
If you are worried about how your business will pay back the Bounce Back Loan or you want to understand your position and options in more detail, then reach out today for some advice. We are not here to judge; our aim is to help you understand what you can and can’t do going forward. Our clear advice is to speak to someone early, the earlier you make contact the more options that will be available.