This is a legitimate question to ask. The moratorium on winding up petitions came to an end on the 30th September 2021 which enabled banks, and other creditors, to compulsorily liquidate companies.
Why would they do this?
When the banks loaned money to companies using bounce back loans they were 100% backed by the government and they could not take any personal guarantees. As such, they were inundated with loan applications and pretty much approved all applications on a number of assumptions
- The pandemic/lockdown would be over in a few months and things would be back to normal
- Most people would be honest and realistic with their applications
- The government would pay out in the event of default so little risk
18 months on and the picture is different. Most obviously, the pandemic has hit companies for much longer than expected. People asked for the maximum they were allowed and were sometimes over optimistic in their turnover assumptions. Who can blame them partly because, like the banks, they assumed the problem would be short lived and they could make up any shortfall quickly. The government has said that it expects £20bn of defaults on the loans.
The banks are only going to get the money back from the government if they can demonstrate that they have done everything in their power to recover the loans. Realistically, only a terminal insolvency event can do that given the powers of the liquidator/administrator to investigate. This is why attempts to dissolve companies have not been successful if there is an outstanding bounce back loan.
What should directors do?
If they can't afford to pay back the bounceback loan then most importantly the directors should look at what they have done with the money. If they have paid themselves out of the business, commenserate with how they have paid themselves in the past, then there is really not much to worry about. That said using the loan to pay dividends was not allowed. In the event of liquidation that would result, almost certainly, in an overdrawn directors account which will need to be paid back to the liquidator.
If there is some money left in the business, and it is not viable going forward, then the best course of action is to do a creditors voluntary liquidation. This will mean a fast resolution and you will not have to go to court and be investigated by the Official Receiver. If the business has other debts but is viable, if the debts could be extended over a few years, then a company voluntary arrangement (CVA) might be an option. A CVA will work if the business has predictable work and cashflow into the future and the creditors are supportive.
Either way you simply must act if their is any hint that the bank might issue a winding up petition as once they have done that any rescue and/or avoiding personal liability will be much harder and more expensive!
Category: Bounce Back Loans FAQ