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.
What Does Going Into Administration Mean?
Going into administration is when a company becomes insolvent and is put under the control of Licensed Insolvency Practitioners. The directors and the secured lenders can appoint administrators through a court process in order to protect the company and their position as much as possible. Going Into Administration - A Simple Guide Administration is a very powerful process for gaining control when a company has serious cashflow problems, is insolvent and facing serious threats from creditors. The Court may appoint a licensed insolvency practitioner as administrator. This places a moratorium around the company and stops all legal actions.The administration must have a purpose and the Government encourages the use of company rescue mechanisms after administration. The 3 purposes (or objectives) of Administration Rescuing the company as a going concern. (Note: this purpose is to rescue the Company as opposed to rescuing the business undertaken by the Company.)Company rescue as a going concern – this is usually a company voluntary arrangement. The company enters protective administration and is then restructured before entering into a CVA. The CVA would set out proposals for repayment of debts to secured, preferential and unsecured creditors. When the company has its CVA approved by creditors, then the administration process comes to an end after 28 days. Achieving a better result for the company's creditors This is as a whole than would be likely if the company was to be wound up (liquidation) See the differences between Administration and Liquidation. This better result is usually obtained by selling the BUSINESS as a going concern to one or more buyers. The company and the debts are “left behind”. The better result may include securing transfer or employees under TUPE, as well as selling goodwill, intellectual property and assets. Controlling and then selling property/debtors. This is called realising assets. Then the administrator makes a distribution to one or more secured or preferential creditors, in order of creditors priority. Usually the business ceases trading and employees are made redundant.Only if the first two options are deemed unattainable, can the administrator use this third option.Under the administration option, it is possible for the company and its directors (or a creditor like the bank) to apply to the court to put the company into administration through a streamlined process.However, the law requires that any finance provider (like a bank or lender), with the appropriate security, is contacted and the aims of the administration be discussed and approved. The finance provider must have a fixed and floating charge (usually under a debenture) and the charge holder will need to give permission for the process to go ahead. Five days clear notice is required. Be aware, though, that a secured lender can appoint administrators over a company without notice if it thinks its money is at risk. So communication with the secured lender is essential. How long does going into administration last? It depends very much on the circumstances. The administrators take on the employment contracts of the company after 14 days so it is desirable that the business is sold out of administration before that date. The insolvency practitioners are not allowed to run the business at a loss and so making the creditors position worse off. If there are large amounts of money to collect in or substantial realiseable assets then they may trade for longer periods. During this time they will need to report to the creditors at regular intervals.Who gets paid first if a business goes into administration? What is a pre-pack administration or administration pre-pack sale? The pre packaged administration sale used to be a very popular method of rescuing a business. However, there has been much media coverage of creditors' dismay at seeing their "debt dumped" by a former customer. In response there is now much increased regulation. How does it work? The company prepares itself to enter administration and sell its assets to a new company ("newco") or to an existing 3rd party company. This is a very powerful, far reaching process that can protect the BUSINESS and be a form of business rescue, however usually the old company (oldco) is liquidated afterwards. See our guide on Pre Pack Administration for more information. Alternatively call Keith Steven on 07974 086779 to discuss how a pre-pack administration may or may not work for your company? Alternatives to Administration As the principal purpose of administration is to rescue the business, the main alternatives are: Refinancing The shareholders, wanting to protect their investment, might be persuaded to provide further loans, equity or investment to the company to avoid administration, or new lending/refinancing/debt products may be required. Of course, raising new capital in the current markets may be extremely difficult, especially if the business cannot, over time, be returned to profitability and without fundamental changes. A Company Voluntary Arrangement A company voluntary arrangement or CVA for short is a legally binding agreement with your company’s creditors which allows a proportion of its preferential (HMRC) and unsecured debts to be paid back over time.The CVA period can be 6 months to 5-6 years. Once prepared the CVA proposal is put to all creditors and 75% of the preferential and unsecured creditors, by value, must vote in favour to ensure a successful approval of this voluntary scheme. It is hugely powerful too, for restructuring costs, reducing employment numbers, reducing overhead costs and improving cashflow. Once the proposal has been approved then all HMRC and unsecured creditors are bound by the arrangement. The company can carry on trading as usual, and the directors remain in control. Shareholders are not diluted and do not lose ownership. CVA can be a powerful alternative to administration and the process leaves the directors in control. Got questions on administration versus CVA and how each may work for your business? Speak to us free of charge now 0800 9700539 What is administration followed by CVA? Basically the company enters administration to get protection from creditors. The administrator then works with the company's directors to produce his/her administration proposals. Once these are accepted the administrator hands control back to the company's board using a CVA. This is powerful tool despite the fact that it is expensive and directors are not in control during the administration period. If you want to read more about the process then please see this page hereGot questions? For answers to all these questions read our guides or call us now on 08009700539. Our trained, high quality advisors will help you.
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What is Receivership?
Understanding Receivership: Receivership, also known as administrative receivership, is a legally sanctioned procedure where an entity, typically a lender like a bank, appoints a receiver. The primary role of this receiver is to "receive" and liquidate the company's assets, if necessary, to repay the lender. This process is particularly beneficial to creditors as it aids in the recovery of defaulted funds, potentially preventing the company from facing liquidation The introduction of a receivership simplifies the lender's task of securing owed funds in cases of borrower default.Receivership should not be confused with administration and a receiver can only be appointed by a holder of a qualifying floating charge created before September 2003. Changes to this procedure were brought in by The Enterprise Act 2002 which promoted company rescue and saving struggling businesses. Why would a company go into receivership?The company requires finance for its activities and borrows from a bank (or other secured lender). In consideration for providing the loan, the bank requires security. Normally the company will sign a debenture with a fixed and floating charge. This offers the bank security over the assets of the company. If the terms of the agreement are breached or the company does not conform to the bank's wishes, the charge holder can:Appoint investigating accountants to ascertain how secure or not the bank's debt is and determine the best route forward (not always receivership). Demand formal repayment of the loans without notice. Appoint a receiver to administer and receive the company's assets.The receiver has a duty to collect the bank's debts only,they are not generally concerned with the other unsecured creditors or shareholders' exposure.Receivership - A typical appointment: Having borrowed against a business plan that has not worked, a company finds that it is suffering cashflow problems. In an effort to survive, the company reports its problems to the bank and the bank asks for more information on the problems the company faces. Struggling with the problems of firefighting, the directors find it difficult to produce the information. Often the accountancy and reporting systems are not robust and a lot of time is needed to work out where the company is going, what the depth of the problems is and the necessary reporting to the bank is delayed.As time goes by, the company's overdraft is constantly at its limit, because monies don't come in fast enough from customers. Clearly this should set alarm bells ringing at the company - it most certainly does at the bank. They call this ceiling borrowing, and take it as a sign that the directors are losing control. When this happens the bank will review the account and will typically take some or all of the following steps: What the Bank will doThe bank will ask for a reduction in its exposure. It will ask for increased security from the directors or shareholders. Usually this takes the form of personal guarantees to support the security that the company has given through the debenture. It may ask for new capital to be introduced by the shareholders. Problem is though, occasionally, this only has the effect of reducing the bank exposure as the bank takes this cash to reduce the borrowing. It can ask for a new business plan from the directors, along with regular reporting. It may ask for the company to consider receivables finance (factoring) to remove its borrowing and move to a factor. Often the bank's own factoring company. If they are still not satisfied that the directors are in control and if the bank is concerned about its exposure it will ask for investigating accountants (or reporting accountants) to look at the business. Normally this is a large firm of accountants who send an insolvency practitioner (IP) into the business to ascertain:Is the business viable? Is the company stable? Does it have a long term future if the present difficulties can be overcome? Is the bank's exposure sufficiently covered in the event of a failure? In this report the IP calculates what the assets of the business are worth on a going-concern basis and in a forced sale scenario (or closure basis). Investigating accountants often recommend that the bank sticks with the business, but that the bank should limit any further borrowing to the fully secured variety - in other words the directors must secure it personally against property for example. If the IP thinks that the company is in serious risk of failure and that the banks may lose money in that event, he/she will usually recommend to the bank that they appoint a receiver or administrator. Usually the bank (bizarrely) requires the directors to "request the bank to appoint a receiver". This is face-saving, and designed to deflect criticism from the bank to the directors.At Company Rescue, we believe that it is wrong that the insolvency practitioner that carries out the investigation could also be the receiver - We think it is essential that his/her role as investigating accountant is limited to just that. However, fortunately most banks now agree that this is not a good approach. Once they are appointed what is the receiver's role and powers?A receiver will quickly ascertain what the prospects for business are and decide whether to sell some or all of the assets, the business as a whole, or to continue to trade whilst a better deal can be achieved. Because of the rules and case law, he may wish to get rid of the assets and staff as soon as possible. (They will have to adopt employment contracts 14 days after the appointment). They may remove directors and employees without impunity. They ultimately decides the way forward and will (often) not take advice from the directors. They must pay the preferential debts (employees claims for arrears of pay and holiday pay) first from any floating charge collections. If a deal is to be done with directors the receiver must first advertise the business and its assets for sale. They must conform to the tight rules and regulations governing receivership and report to the DBEIS. A receiver must investigate the conduct of the directors of the business and file a report with the DBEIS.Disadvantages of Receivership The company is rarely saved in its existing form. Its assets will be subject to "meltdown" ( most people know that in receivership or liquidation assets are sold at a knock down price), often jobs and economic activity are lost.The directors will typically lose their employment and any monies the company is due to them, and the company may cease to trade. In addition the director's conduct is investigated.From the creditors' perspective, it is unlikely that any unsecured creditors will receive any of their money back and often they lose a valuable customer. Clearly the cost of receivership can be very high and the bank has to underwrite the receiver's costs. Advantages of receivership The bank can take control where directors have maybe lost control. The receiver also has power to act to save the business quickly. The bank can ensure that its exposure is (at least) not increased and hopefully recover all of its money. For directors, the advantages are that it mitigates the risk of wrongful trading and may crystallise a very difficult position allowing them to get on with their lives.Preferential creditors may see their debts repaid by the receiver.Still got questions? Click here for Receivership FAQs. If there are still unanswered questions contact us by email or call 08009700539.If your business is in trouble and the relationship with the bank is breaking down, we suggest that you look carefully at the guides in this site. Receivership may be an option. Work out the viability of the business - can you trim costs? Work out the problems, set out the position and have a meeting of directors. Decide if the business can continue but needs to be restructured or if just not viable then consider administration or if the company's lenders have a debenture pre-dating 2003 then receivership.Please call us on 020 7887 2667 (London) or 08009700539 to talk to an expert turnaround advisor if you would like to talk through your company's options.
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My Business is failing – What Are The Options?
The most common causes of business failure are; Poor financial management
Extending too much credit, struggling to collect on outstanding invoices, unexpected costs, sudden change in business environment and ineffective marketing.