At the height of the pandemic, the Government offered emergency loans up to £50,000 to businesses to cover their running costs at a time when trading was very difficult, if not impossible.
The loans were effectively interest-free for the first 12 months. After this period repayments of the loan and interest - at a rate of 2.5% - started. Businesses could extend the repayment period of the loan from six to 10 years or the loan can be repaid early without paying a fee.
The key feature of these loans was that they have a 100% government-backed guarantee for the lender.
What should I do if my company can’t repay the loan?
Firstly you need to look carefully at the viability of your business. If you are experiencing short-term cash flow difficulties then you should contact your lender. You may be able to move to interest-only repayments for a period of six months or even pause your repayments for the same period.
If there is not a future for your company then liquidation may be the best option. It is best to make this decision early when there are still funds in the company to pay for this process.
Can I dissolve the company to avoid the cost of a liquidation?
Dissolution is most appropriate for companies who have ceased to trade, filed their final accounts, all returns with HMRC and have paid all their liabilities.
An application to strike-off must be sent to all creditors, including the bank that made the Bounce Back Loan. Creditors can object to the striking off. Directors who use this process inappropriately can face a fine and possible prosecution.
It is worth mentioning The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill which is in the process of being introduced due to the Government’s concerns that the dissolution process was being misused as a method of avoiding repayment of government-backed loans. Once introduced, this Bill will give retrospective powers for the Insolvency Service to investigate directors of companies that have been dissolved.
Directors who dissolve companies with misappropriated government loans or without giving notice to creditors, face disqualification and possibly Compensation Orders, which can be used as a way of recouping monies from fraudulent directors.
Can I become personally liable for my company’s Bounce Back Loan?
If your company enters into an insolvent liquidation, then generally if the loan was taken out in the company’s name and there are insufficient assets in the liquidation, the bank will seek compensation from the Government.
However, it is likely that the declarations made at the time the bounce back loan was taken out will be examined. If directors falsely stated that the loan was required because the company was adversely affected by Covid-19 and that the company was not already insolvent or in financial difficulties on 31st December 2019, then actions can be taken to make directors personally liable for this fraudulent action.
Also, if directors took out the loan to put themselves in a better position they can find themselves being made personally liable. For example, if the loan was used to repay a directors loan account or another debt that the directors had personally guaranteed, then potentially they have preferred themselves. A liquidator can take action to get these funds back or the Government could apply to the courts for an order for compensation against a disqualified director whose conduct has caused loss to creditors of a dissolved company.
If your company is struggling to meet its bounce back loan repayments do not bury your head in the sand. Seek advice from an Insolvency Practitioner. They will advise on the viability of your business and what steps can be taken to give it a chance of survival. If this is not possible they will help you to close your company and achieve the best results for your creditors.