A question that just over a year ago no one would think to ask, but now it is a frequently asked question!
What is a Bounce Back Loan (BBL)?
The Bounce Back Loan was offered by the Government during the Coronavirus pandemic to help businesses get back on track, and gain access to emergency finance quickly. A plus point to this scheme being that the loans were interest free for the first 12 months and are 100% Government backed for lenders. In addition, you did not have to personally guarantee the loan. You can find out more about these loans on our page here.
Defaults and Bounce Back Loans
Remember, a bounce back loan is a LOAN. As with any debt you should know that ignoring them does not make them go away. It just makes the problem worse. So, try to not bury your head in the sand. If there is no action to chase you straight away, then it will come! So always follow the agreed terms. And if any doubts, talk to your provider.
However, be aware that the consequences of defaulting on a BBL are less severe than if the loan was backed up with a personal guarantee.
What happens if you I do not pay back the Bounce Back Loan?
Failing to pay back your BBL is a clear warning sign of company insolvency. When this happens, the company director(s) is at risk, unless there is reasonable behaviour exercised. Basically, creditors (anyone owed money) become a priority, and the directors have to act in the best interests of the creditors. If you fail to make the loan repayments then expect action to be taken by lenders in order recover the debt. So, expect the normal enforcement and chasing procedures i.e. letters, phone calls, court action, bailiffs.
What happens to my BBL in liquidation?
Liquidation is a quick way to close the company, it involves ceasing to trade and turning all assets into cash by ‘liquidating’ them. This money is then used to pay back creditors. There are two types of liquidation; creditors voluntary which is started by the directors, and compulsory which is started by creditors via a court procedure and overseen by a licensed insolvency practitioner.
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 shareholders must all be satisfied before the settling unsecured creditors and shareholders with their amounts. Now that HMRC are now preferential and in most cases are 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 my BBL during company liquidation?
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 upto 20 years after the payment was made.
So, be sure to use the bounce back loan appropriately. It is for companies which need emergency financial assistance through the unprecedented coronavirus pandemic. Using it the right way will protect you from any personal liability.
And in response to the initial question…
You can liquidate your company with a bounce back loan.
If you have further queries or need more help for anything Bounce Back Loan/Liquidation related then get in touch with us today. Our team of licensed insolvency practitioners can assist.
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