Written ByRobert Moore
Marketing Manager
Rob has over a decade of experience in web and general marketing. He has extensive knowledge of the Insolvency sector and has helped many worried directors with their questions.
Rob is now working with the Board at KSA Group Ltd to develop strategic marketing programmes to support the business plan and drive more company rescues.
The Government backed loans were to help small businesses gain access to fast track, ‘emergency’ finance. Companies could borrow between £2,000 and £50,000. The loans could be used for;
The loans were interest free for the first 12 months and then have a 100% Government backed guarantee for lenders. Once the eighteen months are up, there is an interest rate of 2.5 per cent per year and repayments can be stretched for up to 10 years.
To protect directors from being made personally liable in case of default, lenders of such loans were not able to request personal guarantees. The company itself, is liable if it is unable to pay back the loan in the future, therefore protecting the director’s personal finances. So, you will not be personally liable for the loan if you cannot meet the repayments. Always providing the director has “acted reasonably and responsibly”.
The PAYG scheme provides three main ways for a company that has taken out a Bounce Back Loan to reduce their monthly payments if they are struggling to find the money to repay what they owe. If you are unable to repay your Bounce Back Loan, the PAYG scheme may be able to assist you:
If you know you are likely to default on your Bounce Back Loan then your company is most certainly insolvent. In this situation then the directors of the company must act in the best interest of the creditors otherwise they risk personal liability.
Our firm advice is this. DO NOT run down the bounce back loan cash until there is nothing left to pay creditors, wages or the cost of liquidation.
We do not expect that to be the case but we do know that may non-viable companies have taken out 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”. Who knew what length of time the Covid-19 crisis would last. If circumstances changed and you act properly there is nothing much to worry about. However, it is likely that if you do not pay back the bounce back loan then your credit rating may be affected at the bank and you are in effect insolvent if you cannot pay your liabilities. Be aware that sole traders could take out loans. In these circumstances the legal entity of the business is the individual so you would be personally liable.
What does not acting “reasonably and responsibly” mean. Well if you used the bounce back loan to repay yourself any loans that you introduced, or pay dividends or drawings when the company cannot pay normal suppliers or creditors, then this is called a preference and is actually against the law set out in the Insolvency Act 1986.
The PAYG plan gives some businesses more time to pay back their Bounce Back Loan, but it might not be enough for everyone. If a business has several loans and can’t pay them all back, problems can arise. What happens if a business can’t pay back the Bounce Back Loan, and can the owner be blamed for this debt?
One good thing about the Bounce Back Loan is that the government promised banks they’d cover the full loan amount. For businesses, this meant they didn’t need to offer a personal guarantee to get the loan. So, if a business can’t pay back the loan, the bank will ask the government to pay it, not the business owner.
But business owners should remember that the government will only pay if the business becomes insolvent. As long as the business is still running and listed on Companies House, the owner must pay back the Bounce Back Loan.
However, bear in mind that if you borrowed the money as a sole trader, not a limited company, then you are liable for the debt. If you can’t pay it then you will need to enter into a insolvency process such as an IVA or bankruptcy.
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.
The only way to draw a line under the issue is to go through an insolvency process. The bank will only get the money back from the government if the company is liquidated. The bank will either wind up the company through the court or you can instigate the process yourself by using a creditors voluntary liquidation. The latter is the quickest and safest way to close the company.
If you want to liquidate your company quickly and easily then why not visit our liquidatemycompany.com website. You can get a quote in minutes. Liquidations from £3000.
If a company cannot afford to repay the bounce back loan, yet the directors have previously used the loan to repay any other loans that you have provided, OR loans that you have given personal guarantees for, that is a clear preference under section 239 Insolvency Act 1986. You can be made personally liable for this repayment (in other word asked to PAY IT BACK!) by the liquidator of the company in future, or by a Court.
Although the Government had temporarily eased wrongful trading regulations in order to help struggling businesses, preference law still applies.
If businesses are unable to pay back their bounce back loan, then the declarations made at application stage will be reviewed by any insolvency practitioner and your actions carefully considered.
Upon applying, business owners were actually asked to formally declare that COVID-19 was the cause of the negative impact their business was facing and, that prior to 2020 the company, was “financially sound”. If this information is found to be false, then again the director may be made personally liable for the loan, post liquidation.
The Bounce Back Loan was a loan to the company, not to you as an individual, even if you are director and sole shareholder. Consequently, if the company goes into liquidation or administration then the loan will be written off as well as the company ceasing to exist. However, be aware that if you have used the loan to pay off personal debts or you have made preference payments to your friends than, as advised earlier, this could be reversed by any liquidator and you may be held personally liable. The liquidator may well investigate where it went and conclude that it was “stolen” from the company. The veil of incorporation will be lifted and you will be personally liable for the debts. In addition you may well be disqualified from being a director of a company. So basically it is not worth it. If you are sole trader then the loan is personal to you. As such, it can only be written off in the case of personal bankruptcy.
This is an interesting question as it has been reported that up to 40% of companies/individuals will be unable to repay the loan. One idea that has been mooted by the Federation of Small Businesses (FSB) is to grant small businesses a time-limited amnesty under which Bounce Back Loans would be written off in exchange for all-employee equity stakes vested in EOTs – a vehicle defined by Schedule 37 of the 2014 Finance Act. The private lenders writing the Bounce Back lenders would write off and claim their 100 per cent guarantees in these instances.
John Glen who was, at the time, the Minister of State (Treasury) (City), The Economic Secretary to the Treasury on 16 February 2022 said:
There is no government policy to wholesale write off loans. Under the Bounce Back Loan Scheme (BBLS) all loans are liable to recovery action by lenders or – in the case of serious fraud or financial crime – law enforcement.
The Chancellor has extended the flexibility of the loan which will now be available to all from their first repayment, rather than after six repayments have been made. This will mean that businesses can choose to make no payments on their loans until 18 months after they originally took them out.
These Pay as You Grow (PAYG) options will be available to more than 1.4 million businesses which took out a total of nearly £45bn through the Bounce Back Loan Scheme. Businesses first began to receive the loans in May 2020 and the first repayments became due from May 2021 onwards.
However, if the inability to pay the bounce back loan is actually symptomatic of a deeper cashflow problem and other loans or creditors are building up, then it may well be necessary to look at options such as HMRC time to pay arrangements, BBL payment holidays, or in more severe cases a full restructure of the company’s debt and costs via an insolvency mechanism such as a company voluntary arrangement or an administration. If the company is no longer viable it must be placed into voluntary liquidation. You can read all about those mechanisms in our worried directors guide.
If you need a way to deal with personal debts then Debt Management Plans, an IVA, or Bankruptcy are the way forward!
Call one of our expert advisors today if you need any further advice on this emergency loan scheme among the others.
I am worried about not repaying the bounce back loan and I am a company director what should we do if already know our company cannot repay?
Our firm advice is this. DO NOT run down the bounce back loan cash until there is nothing left to pay creditors, wages or the cost of liquidation. This is likely to have personal repercussions.
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"A man in the pub said I cannot be a director of any other company if I liquidate my company. Is this true?"Actually, this statement is entirely false! Misconceptions like this frequently arise from individuals with limited understanding of the subject matter. Such misinformation can cause undue anxiety for directors considering liquidation, fearing it might personally affect them. Guess what? Listening to bar room experts, inexperienced accountants, or no insolvency specialist lawyers can stop decisions being made, this failure to make a decision is really what could land you in trouble. So how will liquidation affect me and how long does it take? Having a limited liability company means that the directors have little risk (or limited liability) if the company fails, as long as they have acted properly and acted in time. What is more, if as a director, you have been compliant and on the payroll for many years, you can actually claim redundancy from the government like any other employee. But, and it is a big but, if you fail to act in time, fail to act reasonably, fail to keep books and records, continue taking credit KNOWING that the company cannot possibly repay it, then you ARE at risk of personal financial loss or worse such as losing your house. So, act now and get help for your company and more importantly start reducing your own risks.Voluntary liquidation is the quickest most efficient way to deal with an insolvent company that has no future. As a director of an insolvent company, you are at risk if you do not act. This risk RISES the longer you don't act to put the company into liquidation.If you fail to act and the company is wound up by the creditors (compulsory liquidation) then the Official Receiver (OR) will be appointed to liquidate the business and he or she will investigate the activity of the directors and the business over the last 2-3 years. This is known as a conduct report on each director. If the OR can prove there was wrongful trading where, for instance, you have taken credit from a supplier or took deposits from customers when you knew that it was highly unlikely that you could pay them back, then you could be made personally liable.This is known as the "lifting of the veil of incorporation" that protects directors under limited liability. If this happens then you could made liable for PAYE, VAT and creditors monies from the time that you should have known the company had no reasonable prospect of surviving the problems it faced.Additionally, the directors may face disqualification proceedings under the Company Directors Disqualification Act 1986 for up to 15 years, they can be fined and may face the loss of personal assets like your home, or even personal bankruptcy.Look, if you as directors have acted naively you may not know that you have broken these laws, but now you do know, it is vital to ensure that you protect yourself as a director by acting quickly to cease trading and put the company into voluntary liquidation; or consider a company voluntary arrangement if the company is VIABLE if the problems are solved. What is Creditors Voluntary Liquidation and what does it mean for me? In short, liquidation usually means, the company's trading stops and it's assets are turned into cash or "liquidated".All other possible liabilities, like employment liabilities, landlord's rent or payments to lease companies are stopped. It really is the end of the company, but the "business" may survive if a phoenix is organised. Liquidation is a powerful way to END creditor pressure and let you get on with your life. What if I have signed personal guarantees? If you have signed personal guarantees or indemnities to lenders, then the liquidation could lead to them being called in if the bank cannot get its money back from the company. There is little that can be done about that, but you should not delay decisions on liquidation to try and prevent a PG being called in: just think what ALL of the company's debts landing on your shoulders would do. Also it should be noted that HMRC now rank ahead of floating charge holders in any liquidation since December 2020. Consequently, this may well mean that lenders that you have personally guaranteed will get less recovery hence exposing you more.All banks will agree a deal to repay the PG over time - provided you work with the bank to reduce their exposure.One great piece of FREE advice - always make sure that ALL tax returns, VAT returns and annual returns have been completed and sent in and that other "compliance" issues are dealt with wherever possible. These are important processes and will help protect you as individual directors. It shows that you have been acting properly. I have heard about directors being able to claim redundancy in liquidation If you have been employed by the company and made payments via PAYE then you will be able to claim redundancy from the government and this is in fact a very simple process (20 minutes to fill out a form and we can help with that) so there is no need really to employ a third party to make a claim. This process has been open to fraud so the HMRC are cracking down on operators that claim to be able to get money back when there is not enough "paperwork". It isn't worth the risk. If it sounds too good to be true then it probably is!You need to learn more about the options. This is clearly a general guide so, if you have any worries at all, please, just call us and we will talk you through the situation free and with expert guidance for your situation. Call one of our advisors or if you prefer, call our IPs (insolvency practitioners) now:Just one CALL will help relieve the stress and get you out of the mess.Why not call 08009700539 or 020 7887 2667 now?We could help you start the liquidation process today.(8.15am till 5.00pm; Out of hours call on 07833 240747, Wayne Harrison (IP) or Eric Walls (IP) on 07787 278527)Finally, please remember this: NO BUSINESS is worth losing your health, relationships, marriages or your children over. Act properly, take advice, get the problem sorted and then get on with your life. In a little while the stress will go and you can focus on other things that are more important.Want more information on liquidation? Get our new free 2023 Experts Complete Guide to Creditors Voluntary Liquidation that covers Bounce Back LoansWe are experts in liquidation, voluntary liquidation, administration, pre-pack administration, business rescue, corporate rescue and company rescue, we can help solve your problems but only if you talk to us. Call 0800 9700539 for help.or email us your worries at help@ksagroup.co.uk
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