What Directors Need To Know About Bounce Back Loans

There is nothing to stop you closing your business if it has an unpaid Bounce Back Loan.  To write off the debt then it should be liquidated using a creditors voluntary liquidation.  However, if there is a very small debt left, say £3000, then it may be possible to seek a dissolution.  The bank or lender may object to the striking off but at that level of debt it is probably not worth their while.  Remember thought if the company has other debts, then the correct process is a liquidation done by an insolvency practitioner as the company is insolvent. So how does a dissolution work? This process is also known as a voluntary dissolution. It is a provision in the Companies Act to allow the removal of the company from the Companies Register, typically when the company is dormant.If the company serves no useful purpose, its dissolution removes the need for the filing of annual returns and accounts. However, bear in mind that dissolving the company (removed from the Companies House Register) can only happen if the following conditions apply:The company has not traded for three months. The company has no assets, property or cash at the bank. The creditors are informed, requesting their permission for the company dissolution. Creditors are given three months to consider the request to dissolve the company and can reject such a request. The company has not changed its name in this period. The company has not disposed of any property or assets (this may include land and buildings, plant and equipment, debtors and other assets).As stated earlier if the Bounce Back Loan is more than say £3000 then the bank may well object and seek to wind up the company via compulsory liquidation.  You should then consider a creditors’ voluntary liquidation How to close the company with a bounce back loan using liquidation.Board Meeting: The directors convene a board meeting to assess the company's financial position and determine if it is insolvent. If they agree that CVL is the appropriate course of action, they will pass a resolution to initiate the process. Appointing an Insolvency Practitioner: The directors must appoint a licensed insolvency practitioner (IP) to act as the liquidator. The IP's primary responsibility is to oversee the liquidation, realize the company's assets, and distribute the proceeds to the creditors. Shareholders Meeting: Usually just before the creditors’ meeting where the shareholders agree to place the company into liquidation. Using the deemed consent process there is no need for an actual creditors meeting.  Notices go out about the proposed liquidators and if no objections are raised within 14 days, then the liquidation process starts.  This is more suitable for smaller uncontentious liquidations which is more likely in the case of companies with small bounce back loan and associated debts. Creditors' Meeting: The IP will convene a creditors' meeting, typically within 14 days of the board meeting, to inform the creditors about the company's financial position, the proposed CVL process, and to seek their approval. Liquidation Commences: If the creditors approve the CVL, the liquidator will commence the process of realizing the company's assets, settling any legal disputes, and distributing the proceeds to the creditors. Finalization: Once all assets have been realized and the proceeds distributed, the liquidator will prepare a final report and hold a final creditors' meeting. After this, the company will be dissolved, and its name removed from the register at Companies House.What happens to the Bounce Back Loan in liquidation? On entering liquidation, any bounce back loan becomes an unsecured debt i.e. the loan is not secured against any company assets. As per our flowchart on who gets paid first when a company goes into liquidation or administration, unsecured creditors are just before last out of the seven overall categories. So, what this means is that the insolvency practitioner, secured & preferential creditors and floating chargeholders must all be satisfied before the settling unsecured creditors and shareholders with their amounts. Now that HMRC are preferential and, in most cases, are a large creditor by value they will take a large chunk of any distributed money.  Consequently, unsecured debts are rarely paid in full in liquidation. For this reason, the bounce back loan is secured 100% by the government allowing the lender to go to the government to get repayment for the loan in full.  The British Business Bank, that has overseen these loans, has made it very clear that they expect the banks to pursue these debts in the normal way.  Only if the business becomes insolvent will the bank be be able to claim from the government. Can I Be Made Personally Liable for The Bounce Back Loan Initially, the answer is no. But, there are some caveats to this.If you use the BBL funds for anything not financially beneficial for the company then you may be held personally liable. So, the funds can be used to pay wages, by supplies, settle bills BUT if you, as the director, are found to take advantage and use the funds to pay personal loans off or invest in property etc, then personal liability is expected. When the company becomes insolvent the licensed insolvency practitioner has the role of investigating the directors’ actions – which includes seeing how the BBL was used.  If it is deemed that the money has been “stolen” from the company, then they will pursue the director for this.BBL funds can be used to refinance existing company debt, but you must use it wisely. If you choose to favour some creditors over others, then this brings risk of making preferential payments which can be reversed by a liquidator for up to 20 years after the payment was made.

Bounce back loans are loans that are 100% backed by the government. If you can't pay back the loan then the company may be insolvent. However, the terms for repayment are generous and payments can be extended over 10 years.

Will the Bank Close My Account if I Cannot Pay My Bounce Back Loan or CBILS?

Bounce Back Loans were aimed at smaller businesses and directors would not be personally liable for the debt. However, if the loans were used inappropriately then they could be held liable.

What is a Bounce Back Loan? This is a government-backed loan for small businesses, introduced during the difficult trading times through COVID-19 and the numerous related lockdowns. Loans could be 25% of your turnover with the maximum loan being £50k.  The loans also and had low-interest rates. The availability to apply for this loan stopped on 31 March 2021. What is a default? Defaulting on a loan means missing a scheduled repayment. Your account will therefore fall into arrears. When this occurs, your lender will have a number of options, as outlined in the agreement you signed when taking on the loan.When companies took out the Bounce Back Loans the total length of the pandemic was underestimated. So, some businesses have struggled for longer than anticipated.  In response the terms of repaying the loan were extended to up to 10 years.  Remember, the loan may have been Government secured, BUT the responsibility for repayments lies with the company (you will not be personally liable as a director, but your company is as it is own legal entity).If you think you may default on the loan then the most important thing to do is to communicate with your lender. Inform them about any difficulties you are facing in meeting the payments (before they contact you!). This way, they are aware and may be able to help. If they cannot help then you know you must seek alternate options. However, more often than not, lenders will be fair and considerate if you communicate.The Office of Budget Responsibility’s Fiscal Sustainability Report 2020 predicted that the number of businesses with Bounce Back Loan defaults could be around 40% - we are unsure how this will play out,  but all in all you are not alone! What options can my lender suggest to help? Once you have got in touch with your lender – as suggested the first step to take, there are some options that can be explored together.Renegotiating the payment plan to help you maintain your account going forward. Pay as You Grow Scheme; taking a short payment holiday from the Bounce Back Loan. Extending the loan length from the standard 6 years, to 10. Switching the loan to an interest-only basis for a short duration.These options can give breathing space for your business’s trade and cash flow to improve. What if you are still struggling to pay? Get in touch with a licensed insolvency practitioner like us at Company Rescue. There may be deeper issues noticed or at least worth reviewing. A default may mean more serious financial problems – even the brink of insolvency!Speaking with someone experienced in helping others with similar situations can guide you through. Can I restructure my company with a Bounce Back Loan default? Of course! A Bounce Back Loan default does not mean that is the end for the company. There are various business help solutions to rescue the company and steer it through financial and operational struggles. This is why speaking to a licensed insolvency practitioner would be of use – they can go through this with you and explore your options and viability.Place the company into administration. This will allow you breathing space since a moratorium is put around the company stopping any legal action, whilst you focus on restructuring the company’s finances and operations, to rescue its viable aspects. Enter a Company Voluntary Arrangement / CVA. This involves a formal payment plan being agreed upon by the creditors and the company directors. It often lasts for 3-5 years, reducing the payments per month so the company can trade in the meantime, thus being able to have the funds to pay back.If your company cannot be rescued and has no chance of being able to pay back any of the debt then, winding up the business may be the most suitable option. If you want this process to happen quickly so you can get on with your life then the best option is a Creditors’ Voluntary Liquidation and you will need to appoint a licensed insolvency practitioner to start the process.Alternatively, you could wait for a creditor to wind up the company by going to court but this type of liquidation known as compulsory liquidation carries more risk, can be more stressful and can take at least a year. In both cases the insolvency practitioner will need to investigate the conduct of the directors and establish if the bounce back loan was used appropriately. Ultimately, in this case, the Bounce Back Loan and any penalties or fees associated, will be written off, as with any other unpayable debts for creditors.If you would like further information or some expert advice, get in touch with us today. Just remember all we have said in this guide and keep in mind the top tip - do not ignore defaults as this will just worsen the situation!

Directors may worry that they may not be able to pay back CBILS loans that have been granted to their companies during the pandemic. We discuss that here. But, first of all it is important to know what the loan was intended for and the conditions attached, so we begin with a loan overview. Coronavirus Business Interruption Loan Scheme (CBILS): This scheme provided facilities of up to £5m for small to medium enterprises who experienced cashflow issues as a result of the pandemic. Through the Coronavirus Large Business Interruption Loan Scheme which followed the initial CBILS, up to £50m is offered (£200m as of 26 May) for firms with revenues between £45m and £500m.CBILS were available for most business finance products such as;term loans, overdrafts, invoice finance asset finance.The scheme provided the lender with a government-backed guarantee potentially enabling a ‘no’ credit decision from a lender to become a ‘yes’. CBILS: Key FeaturesUp to £5m facility repayable over a period of up to 6 years (SMES) or £50m (£200m as of 26 May) for larger businesses 80% guarantee to the Lender Interest and fees paid by Government for 12 months Overdrafts and Invoice Finance for 3 years Security: At the discretion of the lender, the scheme may be used for unsecured lending for facilities of £250,000 and under. For facilities above £250,000, the lender must establish a lack or absence of security prior to businesses using CBILS. If the lender can offer finance on normal commercial terms without the need to make use of the scheme, they will do so. When borrowing up to £250,000, a personal guarantee is not required Companies taking out these loans are 100% liable for the debt and there are no restrictions on the interest rates banks charge A term extension beyond 6 years, up to a maximum of 10 years for existing CBILS facilities can be made in connection with the provision of forbearance relating to the facility, at the discretion of the lender if within its usual forbearance policies.Who was eligible for this loan? Smaller businesses from all sectors could apply for the full amount of the facility. To be eligible for a facility under CBILS, the SME must:Be UK-based in its business activity, with annual turnover of up to £45m (or up to £500m to be eligible for the Coronavirus Larger Business Interruption Loan Scheme) Have a borrowing proposal which, were it not for the current pandemic, would be considered viable by the lender, and for which the lender believes the provision of finance will enable the business to trade out of any short-to-medium term difficulty. Previously businesses which were classed as ‘undertakings in difficulty’ were unable to access CBILS because of EU rules. Now businesses in this category and which have fewer than 50 employees and a turnover of less than £9 million can apply to CBILS.Applications for CBILS loans closed on the 31st March 2021.  They have been superseded by the Recovery Loan Scheme What could the company use the CBILS loans for? You could use the loans to pay staff wages (directors included). It could also be used to help with rents and business rates, any monthly business costs or overheads such as phone and electricity bills. Finally, directors may have wished to use it to refinance other business debts to lower the interest costs related.CBILS loans could not be used to pay dividends or to pay into a personal savings account to accrue interest. It could not be used for any purposes other than those business related. To do so would not be “acting reasonably and responsibly” and you could be made personally liable if the company enters into voluntary or compulsory liquidation. What if we KNOW we can’t pay back CBILS loans? It has been reported that almost half of the emergency loans which the Government has provided during this pandemic, may never be repaid, which would cause a £26bn bill to the UK Treasury.Advice from us, as a company rescue firm, is this: DO NOT run down the CBILS cash until there is nothing left to pay creditors, wages or to cover the cost of a liquidation.  Same applies for Bounce Back Loans as well.We are aware that may non-viable companies have taken out these loans. In fact, the government loosened the criteria for these loans so that companies marked by lenders as "undertakings in difficulty" could apply for these loans. So ultimately, if your company is unable to pay back this emergency loan, it is not too much of a problem, if you have acted “reasonably and responsibly as a company director”. The government are aware and this was expected. But perhaps one thing that was not expected was how long the period of the COVID crisis would be!Companies that took out this loan and thought that after a few months of severe effects of the pandemic, it would be possible to start repaying the amount are now stuck. The issue of being unable to repay the loan is building up.Remember that if you are unable to pay back this emergency loan, then you risk your credit rating being affected at the bank which can limit your attractiveness to future lenders.CBILS loans in excess of £250,000 are often backed up by directors’ personal guarantees so unfortunately there will not be a way out of that. On the other hand, for loans below the value of £250,000 you may be held personally liable and the ‘’veil of incorporation’’ may be lifted on the limited company if you have acted unreasonably.If you are in a hole then the usual advice is to stop digging! Do not run away from the issue nor make it worse. Face reality and assess the likelihood…your business may well be insolvent. Check out our pages, complete the insolvency tests and read our warning signs – do these apply or sound familiar? The most important thing if you find yourself in this situation is to ACT. Especially given that the factors involved here, personal guarantees, insolvency, liabilities. So, reach out and get professional assistance today! Can I Just Dissolve The Company? No you cannot!  The Insolvency Service is to be given powers to investigate directors of companies that have been dissolved as set out in the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill. This will close a legal loophole and act as a strong deterrent against the misuse of the dissolution process.Extension of the power to investigate also includes the relevant sanctions such as disqualification from acting as a company director for up to 15 years. These powers will be exercised by the Insolvency Service on behalf of the Business Secretary.The measures included in the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill are retrospective and will enable the Insolvency Service to also tackle Directors who have inappropriately wound-up companies that have benefited from Bounce Back Loans.