Company struggling – what happens to Bounce Back Loan?

Can I strike-off with an outstanding Bounce Back Loan?

The Bounce Back Loan Scheme (BBLS) was one of several sources of emergency finance for companies struggling to deal with the challenges of coronavirus. The scheme enabled fast access to emergency financing when national lockdowns and ongoing restrictions were creating chaos in many sectors.

Loans of up to £50,000 were available through the scheme. With no payments for 12 months, no personal guarantees required from directors, plus a low fixed interest rate, they offered some reassurance to businesses dealing with unprecedented trading conditions.

As businesses attempt to recover from this period and look forward to a brighter future, however, many continue to experience cash flow issues. At the beginning of the pandemic nobody knew the devastating toll coronavirus would take on the business world, nor the length of time needed to return to some form of normality.

Companies that are still struggling face the additional cost of servicing their Bounce Back Loan now that the 12‐month ‘grace period’ has ended. So what happens to a Bounce Back Loan if they cannot repay?

What happens to Bounce Back Loans if a company is struggling?

The company remains fully liable for repaying their Bounce Back Loan, as the government guarantee extends only to lenders. The guarantee was offered by the government to encourage lending, and prevent mass liquidations at the height of the pandemic.

Lenders receive repayment from the government under the loan guarantee, but in recent times a worrying trend has emerged. Some directors are choosing to close their business via a process known as voluntary strike‐off, which is only suitable for solvent companies, even though their business has unpaid debts.

Voluntary strike‐off and unpaid Bounce Back Loans

Voluntary strike‐off, also known as voluntary dissolution, is an informal method of closing a solvent company, and does not involve investigation by the Insolvency Service. It is not intended, nor suitable for, companies that carry debt they cannot repay.

The correct course of action in this scenario is formal liquidation. Creditors’ Voluntary Liquidation (CVL) ensures creditor interests are prioritised – an important legal duty that company directors must fulfil.

The problem is that there has been nothing to prevent directors submitting an application for voluntary strike‐off, as the application can still go through if no objections are forthcoming. New legislation may change this, however.

New legislation to prevent voluntary strike‐off

The government is bringing in legislation to dissuade company directors from taking the voluntary strike‐off route, and instead, place their company into formal liquidation where applicable.

It is important to note that liquidation may not be the only outcome, however, as other options may emerge once an IP has assessed the situation, given the wide range of rescue and recovery measures available.

It might be possible to negotiate with creditors, for example, and put in place a formalised plan to repay the company’s debts over a longer period of time, so directors may have been closing down their businesses when they could have carried on.

The new legislation means directors of companies with outstanding Bounce Back Loans will be investigated by the Insolvency Service if they close their company by voluntary dissolution, in the same way as occurs following liquidation.

Creditors’ Voluntary Liquidation and unpaid Bounce Back Loans

When liquidation is the only remaining option, all company assets are sold to repay creditors. The liquidator then investigates the reasons behind the company’s demise, and can take action if directors have failed in their statutory duty.

Action can include disqualification for up to 15 years under the Company Directors Disqualification Act (CDDA). Personal liability for company debts is also a threat if wrongdoing is found during the investigation.

The government is also encouraging the banks to launch an objection to applications for strike‐off where Bounce Back Loans remain unpaid. Creditors’ Voluntary Liquidation is the process to follow under these circumstances, and ensures you fulfil your legal duties as a director.

Seek licensed insolvency advice if you cannot repay your Bounce Back Loan

Seeking professional advice is key when your company is struggling and you cannot repay your Bounce Back Loan. You will be able to minimise financial losses for creditors, and protect yourself from allegations of misconduct.

Begbies Traynor Group are insolvency specialists, and can provide the reliable professional guidance you need. We offer same‐day consultations free‐of‐charge, to quickly determine your best options. Please get in touch with our partner‐led team – we work from a broad network of offices throughout the UK.