Over £21bn was borrowed by UK businesses during 2020 as part of the Bounce Back Loan Scheme.
Being a government-backed bank loan gave it added security along with the fact that it didn’t require any security from borrowers to gain access.
That said, the government has advised lenders to follow their usual protocols for chasing and enforcing loan defaults. This will mean threatening letters, court action and potentially bailiffs if one fails to pay. Banks will only be able to call on their government guarantee if they have taken every effort to recover outstanding debt themselves.
As Bounce Back Loan repayments fall due following the optional pause on repayments, company directors will need to brace company cash flow for additional outgoings. Currently, if this route is pursued by any limited company with an outstanding Bounce Back Loan, rather than a formal insolvency route, one will likely receive an “Objection to Company Strike Off Notice”. After the rules are approved, this will ring alarm bells and kickstart an investigation by the Insolvency Service.
What happens to your loan when you enter liquidation?
Many companies will not be financially viable as a result of the coronavirus pandemic. If your company has been hit hard by the outbreak and cannot afford to repay its debts, you will need to consult professionals to decide on the best course of action.
The best course of action could mean closing down the business – which formally is known as dissolving or striking off. It’s one of the most efficient ways of closing a business down but is only meant to be used in certain circumstances.
A creditors’ voluntary liquidation is the process of closing down a company with debts voluntarily. A licensed insolvency practitioner must be appointed to sell the business’s assets, repay the creditors in a prescribed order and close the company down.
If your company does go into liquidation, banks are usually secured creditors, as their debts are secured against company assets. That means they would be among the first creditors to be repaid from the funds generated by the sale of the company’s assets. However, this is not the case with a Bounce Back Loan.
When you enter liquidation, the Bounce Back Loan becomes an unsecured debt, as the loan is not secured against company assets. Unsecured debts are rarely paid in full on liquidation. In that case, as the Bounce Back Loan is secured by the government, the lender will pursue the government for repayment in full.
What can be the impact of strike off suspensions?
Creditors (including banks) can object to a strike off on the basis of outstanding debt. Banks and HMRC have geared themselves up to stop companies from closing down using the dissolution process whilst they still have outstanding debts. All company strike offs are advertised in the Gazette, and the banks and HMRC utilise software to check the proposed lists and cross reference them against the tax and their lending records.
Where a company has a bounce back loan, unfiled accounts or tax arrears, the banks or HMRC are filing objections suspending the strike offs, leaving the companies in limbo.
What are the repercussions of a Bounce Back Loan investigation?
The government have announced a new bill will be formed that will allow HMRC and The Insolvency Service to go after directors who dissolved their companies improperly leaving outstanding debts, including bounce back loans or tax. This means that for the first time, authorities will have the power to investigate company dissolutions and strike offs retrospectively to make sure they were completed properly and punish directors of those that weren’t.
Once an investigation is launched into director conduct, and if one is found guilty of abandoning duties as a company director or falling foul of the terms of Bounce Back Loan, one could face serious repercussions which could disable their ability to operate a business.
What steps can you take to avoid personal liability for Bounce Back Loans?
The Bounce Back Loan Scheme was intended to help small businesses that have been financially impacted by the coronavirus outbreak and were struggling to repay their debts. However, even with this additional funding, some companies would have still failed and company directors may be concerned about the potential implications of the loan.
Importantly, a Bounce Back Loan will not prevent directors from liquidating their company as normal. As long as the loan has been used correctly, the company’s debts will be repaid from the sale of assets and any remaining debt will be written off. An appointed insolvency practitioner will commence an investigation, but as long as you have fulfilled your director’s duties and the Bounce Back Loan has not been misused, you should not have any issues.
If your business is already struggling with its debt obligations including a bounce back loan then you should arrange a free initial consultation with us as soon as you can.
Our team at Middlebrooks will work with you on how to achieve the optimum outcome both for you, your business and your creditors.