With the COVID-19 pandemic wreaking havoc on the global economy, the Bounce Back Loan Scheme (BBLS) was introduced in May 2020 as a lifeline to help struggling businesses.
The scheme was launched to help businesses struggling with debts incurred due to the coronavirus and essentially allowed businesses to borrow between £2,000 and £50,000 to cover additional costs, protect staff and customers and recover from coronavirus-related hardships.
Over £21bn was borrowed by UK businesses during 2020 as part of the Bounce Back Loan Scheme, helping to prevent a huge number of insolvencies.
But what exactly is a Bounce Back Loan, and what happens if, despite taking one out, you still need to liquidate your company? Read on to find out...
Here's what you need to know about Bounce Back Loans and company liquidation:
1. What is a Bounce Back Loan?
Following the criticism of the Coronavirus Business Interruption Loan Scheme (CBILS), the chancellor announced the Bounce Back Loan Scheme to help small businesses gain access to funds more quickly. Essentially, the scheme was designed to speed up and simplify the loan application process for businesses.
Under the scheme, applicants can apply for loans of up to 25% of their turnover up to a maximum of £50,000 with no interest of extra fees to pay for the first year.
One of the reasons the scheme has proven so popular is that there’s no requirement to provide a personal guarantee. Instead, Bounce Back Loans are 100% guaranteed by the Government - so if a company fails, the lender will get its money back from the government.
This is unlike the Coronavirus Business Interruption Loan Scheme, where the Government provides a guarantee for 80% of the loan amount.
2. What can and can’t Bounce Back Loans be used for?
The Bounce Back Loan must be used to provide an economic benefit to the business.
This could include a range of things, from boosting cash flow to paying bills and paying salaries.
The loan can even be used to refinance existing borrowing!
Because it’s so cheap compared to standard commercial lending, this could be an effective way to reduce business costs. However, due to the attractive terms of the loans, there have been rumours that some directors have been misusing the loans and are using them to buy personal assets, invest in property creating directors’ loan accounts.
If this is the case and the company fails, personal liability issues could arise - see below for more on this!
3. Do Bounce Back Loans have to be repaid?
The short answer is yes; if you take out a Bounce Back Loan, your business is 100% liable to pay the loan back. The finance providers and HMRC will expect you to pay back the loan if it’s possible to do so.
However, the actual protocol by which lenders will follow up on loan defaults is a little unclear - and whether it will be possible for lenders to pursue as many Bounce Back Loan defaults as are likely to arise remains to be seen.
4. So, will my Bounce Back Loan be written off if I can’t pay it back?
If your business is facing insolvency, then yes - liquidation means an end to all business debt, and as a result, the Bounce Back Loan will be written off along with other debt.
5. But can I liquidate my company if I have a Bounce Back Loan?
This is one of the most common accompanying questions to “what is a Bounce Back Loan” that we hear at McAlister & Co. And the short answer is:
Yes, you can. Sometimes, even with extra funds, it might be impossible to continue trading in the current climate - and if your business has become insolvent, recovery might not be an option.
You can still liquidate an insolvent company via a Creditors Voluntary Liquidation (CVL) if you’ve taken out a Bounce Back Loan.
6. So, what will happen to my Bounce Back Loan if I close my company?
In these circumstances, your Bounce Back Loan will become an unsecured debt. This means that the lender must wait in line to be paid by the insolvency practitioner in charge of the liquidation in order of priority.
Usually, banks and other financial providers have fixed or secured charges over particular assets when it comes to lending large sums of money, putting them first in line to be repaid.
However, with a Bounce Back Loan, this isn’t the case; because lenders were guaranteed their money by the Government, they didn’t need to secure their loans against assets.
If there is money from the realisation of assets the financial provider who made the Bounce Back Loan will therefore be repaid. If not, HMRC will repay the lender, as per the terms of the BBLS.
7. What does this mean for me as a company director?
Essentially, as a company director, you won’t risk losing personal assets as you would by a typical bank loans secured with a personal guarantee.
Anyone wiring within a limited company is automatically protected from having business debts spill over into personal finance. And since no personal guarantees are required for a Bounce Back Loan, there should be no personal liability.
So, with all debts coming to an end at the point of liquidation, you will then be free to start another company, look for another job, or become a director of another company - assuming there is no wrongful trading or misfeasance.
Which means you can liquidate your company, walk away from debt and start over. However, your ability to borrow money in the future might be affected as defaults on payments will be logged on your credit record.
8. So, I’m not personally liable for my Bounce Back Loan?
That’s right! Usually, when a company goes into liquidation, any personal guarantees will crystallise, and the director will become personally liable.
However, because Bounce Back Loans are 100% guaranteed by the Government, there are no personal guarantees - so directors won’t be liable.
9. Are there any exceptions?
The Bounce Back Loan Scheme doesn’t mean that directors can get away with fraudulent trading or abuse the terms of the scheme.
During liquidation, the directors’ conduct will still be investigated - and if you are found to have acted improperly, you could still be held liable. Directors who applied for bounce back loans were all asked to confirm that their companies were not insolvent at the time of taking the loan.
This clause was added to make directors aware that bounce back loans were not simply free money which could be used by companies already insolvent, but there to offer genuine support for struggling businesses.
However, if evidence is discovered that directors made false claims on their application and knew the company was already insolvent, or that the loan was used for personal gain, the liquidator will be required to declare this to HMRC.
What's more, the Bounce Back Loan must be used ‘to provide an economic benefit to the business’
If it’s not and the company cannot afford to repay the loan, there is a risk that company directors could be made personally liable for the repayment.
How to close your company if you have a Bounce Back Loan
As a company director, it’s imperative that you take action the moment you realise your company is in trouble.
If you fail to put the interest of your creditors first in insolvency, you could be at risk of wrongful or fraudulent trading charges. If you have taken out a Bounce Back Loan and believe your company is insolvent, seek professional advice as soon as possible.
Don’t bury your head in the sand; the sooner you act, the more options you will have available to you.
In conclusion...
... In answer to the question “what is a Bounce Back Loan and can I liquidate my company if I have one?” the Bounce Back Loan Scheme was introduced to help businesses facing financial difficulty due to the coronavirus pandemic. However, even with a Bounce Back Loan, some companies still might need to liquidate.
If your business is struggling due to coronavirus, contact McAlister & Co today for FREE confidential advice. Our experienced advisers have years of experience in liquidation and can offer impartial advice with no obligation. Don’t suffer alone; we’re here to help!
