What Options Are Available If A Bounce Back Loan Cannot Be Repaid? – 2020 Innovation
When Bounce
Back Loans were introduced in March 2020 at the height of the coronavirus
crisis, many companies seized on the opportunity to access the up to £50,000
offered on extremely favourable terms.
While this immediate
injection of cash was a lifeline to many businesses who were unable to operate
as normal, companies are now faced with having to factor in monthly repayments
towards the Bounce Back Loan at a time where trade may not have returned to
pre-pandemic levels meaning cash flow is still tight.
Who is
liable for the debt if it cannot be repaid?
Bounce Back Loans came with
a raft of appealing benefits; one of these was that the government provided
100% security to the lending banks. This meant that no personal
guarantee had to be given by the company directors or
shareholders.
While this may not mean much while the loan is being repaid as planned, should the borrowing company become insolvent, this government security is extremely valuable. As the loan is backed by the government rather than by a director personal guarantee, should the company find itself in financial difficulties and subsequently enter an insolvent liquidation process, the responsibility for repaying the Bounce Back Loan will fall to the government rather than the company director.
In the event that your
client cannot afford to repay the Bounce Back Loan, they will only be held
personally responsible for repaying the money if it can be proven that they
have misused the Bounce Back Loan funds.
Misuse
of Bounce Back Loan funds
Bounce Back Loans were not
designed for any one purpose; instead, they were offered to companies to use in
any way that would provide “an economic benefit” to the business. This could
include, strengthening its cash flow position, purchasing new machinery,
replenishing stock, or paying staff wages.
As long as the money was
spent in a way which was directly related to the business and its operations,
it is unlikely you will be accused of misusing the funds. However, if the money
was used to fund personal purchases, company directors could be personally
liable for the outstanding amount if the business company is not in a position
to keep up with the agreed monthly repayments.
If you are in any doubt as to whether your client may have spent the Bounce Back Loan funds in a way that they were not intended, you should seek the advice of a licensed insolvency practitioner as a matter of urgency. They will be able to assess your client’s position and advise whether personal liability for the Bounce Back Loan is something they need to be concerned about.
The
Bounce Back Loan cannot be paid immediately but I think the company has a
future
If your client is currently
unable to pay the Bounce Back Loan monthly repayments, it does not mean that
the company is beyond rescue. There are a number of business rescue and
recovery strategies that could help strengthen the cash position.
For those owing money to HMRC, a Time to Pay (TTP) arrangement may be able to be negotiated. A TTP arrangement functions as a payment plan between the business and HMRC, where the company promises to pay all the taxes they owe, and HMRC gives them additional time to do this. TTPs typically run for up to 12 months and must be set at a level which is affordable and maintainable for the business.
Alternatively, a formal insolvency process may be better suited if debts are more sizable and owed to a variety of creditors. If your client is experiencing threats of legal action, placing the company into administration could provide the time and breathing space needed while a way forward is planned. For those with mounting debts, a Company Voluntary Arrangement (CVA) allows them to consolidate their liabilities into one legally-binding payment plan which will see all included debts cleared within a determined period which is typically 3-5 years.
Both administration and
CVAs can only be entered into under the guidance of a licensed insolvency
practitioner.
The
Bounce Back Loan cannot be repaid, can the business be closed?
A business with an outstanding Bounce Back Loan can be closed. When it comes to liquidation, a Bounce Back Loan is not treated any differently than any other unsecured loan a business may have. this means that if the company becomes insolvent and needs to be wound up, the remaining balance of the Bounce Back Loan will be included in the process.
The voluntary liquidation of an insolvent company by way of a Creditors’ Voluntary Liquidation – or CVL – is handled by a licensed insolvency practitioner. They have a number of duties during the process, and one of these is to identify company assets before distributing the proceeds of these to outstanding creditors.
In the case of an insolvent
company, the value of creditors will outweigh the value of available assets. As
a result, any debt which cannot be repaid will be written off when the company
is formally and officially closed at Companies House.
Unless this borrowing has
been secured with a director’s personal guarantee, the insolvent company’s
directors/shareholders will not be asked or expected to repay any shortfall.
How
Begbies Traynor can help with Bounce Back Loan problems
If your client has missed a Bounce Back Loan payment, or you feel they may be in danger of doing so in the future, seeking expert help and advice should be a priority. There are a number of ways a financially distressed company can be turned around, however, taking this action at an early stage is vital in increasing the chances of success.